Saturday, June 02, 2012

New Misdeeds, Same Street

President Obama must be in a bit of a quandary whether to say anything about the new round of recent screw-ups in our biggest bank/investment houses. He needs their money for his Super PAC, and this time around, it's going to be harder to win them over, but it must be so tempting--and fitting with his Romney-bashing attacks on "vulture capitalism" (Rick Perry's phrase referring to Romney's business activity, to be fair), to say something topical and incisive about J.P. Morgan Chase's so-stupid-it's-almost-criminal screw-up and the gross inequity around the Facebook IPO. It's probably better if one of his surrogates connect the Wall Street dots and put Mitt in the center of the box.

The Leviathan, Beached 
As I read somewhere, and the writer was correct, Jamie Dimon of JPM-Chase "had a good crisis"--of the major banks, his came out of the 2008-09 disaster looking the best.  Morgan/Chase swallowed up a failed mortgage company, Washington Mutual, but did not choke on it (like Bank of America did with Countrywide), and it repaid its TARP money fairly quickly and resumed profitability. Dimon had been a major critic of Dodd-Frank "over-regulation" and of the "Volcker Rule", which was designed to prevent big banks like Dimon's from taking big chances with its funds.

Then, three weeks ago, Dimon had to eat his big words. His trading office in London  had run huge trading positions (so large, their trader was internally referred to as "the Whale"), supposedly hedging against possible investment losses with the company's capital, but these turned sour and he had to acknowledge some $2 billion in losses (the number has since grown, and the company has compounded its errors by selling too many of its profitable holdings to help maintain the profit record).  Dimon survived bitter shareholders' attempts to get even and reduce his compensation or remove him as chairman, but the aura of professional competence he had cultivated over decades is pretty badly shot, as is his argument that the big banks don't need such restrictions.

In fact, the Volcker Rule is not yet finalized, let alone effective (that would be a couple years down the line, to allow a transition), but JPM's maneuvers apparently would not even have violated it--in the form legislated, banks were allowed to "hedge" with such poisonous concoctions. 

My conclusion is that these big, ugly monsters are "too big to manage"--basically Dimon admitted that he didn't know what they were up to in London, even though formal approvals are on record.  Chase, Citi, and B of A should be broken up into two large shards each:  a commercial/investment bank--allowed to have trading operations houses and trade for its own account--and an international consumer bank, which, because of the FDIC insured deposits and brokerage/mutual fund operations, should not.   One would be high risk/high return, the other would be very large, with more predictable, though cyclical, profitability.  The alternative would be to require penalty-level FDIC premiums and Tier 1 capital requirements at such high levels that the big monsters would choose on their own to split up.

Facebook's IPO:  Should the Deal Have Been Face Down?
Facebook's stock was over-hyped, over-distributed, and over-sold, but worst, it was privately trashed by its lead managers to key institutional investors in the days prior to the Initial Public Offering (or in this case, it should be called "Insiders Peddle Offal").  With IPO's, especially tech stocks, we are used to the hype, the excessive number of shares offered, the price being unsustainably high, but we still expect that the lucky ones holding the shares on Day 0 will be able to take profits on Day 1 (unless they are blocked from doing so).  There was a period of a few hours when it was up from the initial price, but it didn't last through the first day, and has gone down since. So, a few who got the secret word--that Facebook's future revenues will not be all they were cracked up to be--managed to dodge a bullet.  I hope they're grateful.

CEO James Gorman of the lead investment bank Morgan Stanley has been quoted this week as saying that investors who expected Facebook to rise were "naive".  He is right, but I would classify his comment as defecation in  the same place he feeds. I don't think there will ever be another IPO of this magnitude;  from now on, there will be the semi-public offerings to insiders, but the mass offerings are a thing of the past:  having been bitten, the public won't bite.

There will be ramifications for Morgan Stanley, or for others who may have provided information that was not publicly distributed.  I'm sure Mark Zuckerberg has reason for litigation against those who were supposed to be serving his interests; dozens or hundreds of second-stage investors (after the venture capitalists, before the IPO) got the shaft and will be looking for revenge.

That Facebook's business model is a bit lacking is not too surprising, though.  It's not a place to go shopping; and the curse of the Internet is that those who use it most are basically just looking for what they can get for free. Still, I figure any medium that has access to some 1 billion eyeballs has to have some value; the question is what that should be.  Not the IPO per share offered price, though; that was the truth that was not dealt out face up, which is what the "public offering" part is supposed to require.


Anonymous said...

Salute folks! I wrote a nice article here Please check it out if you want and sorry for possible off-topic )

Chin Shih Tang said...

June 12, 2015: Looking at this post a couple of years later, I don't feel that I was wrong (that Facebook's initial business model generated huge numbers of participants, but not a sustainable source of revenue); however, I have to give them credit: with all the money from the IPO, they were able to buy out a bunch of other companies that help them generate $$, and their stock, after the initial burst and fall, has done quite well. Still don't want any part of it, or of Twitter: as my venture capitalist friend would say, "I'm not close enough to it to want to participate." You're either on the inside, or you're trotting along with the cart, trying to keep from getting run over. I still can't see why companies would want to "advertise" on Facebook--of all the things that I ignore on it, the ads have the highest priority (to be ignored).
As for my comments about Chase and the other "too big to manage" banks, so far most of them are taking the hit with higher capital requirements coming from the US regulators (who have been more cautious than those required by the international Basel agreement). One company that got the memo and is getting out is GE, and it has been rewarded by investors. Personally, I felt that GE Capital was actually their business that made the money, so as a long-time shareholder (in trust; my father's shares gifted to my children), I am just looking for a good time to get out, too, and it is going to be soon.