|Time for a mid-year review in finance. Any surprises?|
Much of early 2015 has been an ongoing and sometimes agonizing mulling over interest rates. Every analyst in all corners contends they will rise, but when, how soon, and what will be the immediate impact? Market watchers, traders, banks, and economists have looked for clues from the Federal Reserve and speculated on how to be prepared. Interest rates will rise, they argue, but, in fact, an upturn has been anticipated and discussed for years (since the early 2010's) and is now expected any day.
Now in late 2015, the probability seems certain. As a result, markets are occasionally jittery, corporations are winding up their rush to refinance long-term debt while there is an opportunity to tap cheap funding, and investment managers ponder what to do about massive portfolios with large bond positions (Reallocate and sell off now? Later? Be patient or act now?) Others sense that misbehavior in markets and panic striking bankers, traders and corporate treasurers could lead to a mini-crisis of sorts. A rise in rates will increase borrowing costs to companies that want to grow, expand and/or invest. A rise could cause a sudden slowdown in the multi-year recovery.
The Federal Reserve is policing it all, and most market participants are ready to act.
Equity markets, to date in 2015, aren't soaring as they have done the past two years. They haven't, however, collapsed. There are good days followed by sour days, much of the latter explained by interest-rate uncertainty, varying perspectives of a recovering economy, and interpretations of geo-political events. Most indices are up for the year (just a little bit), and financial advisers continue to be confident in the long-term. They counsel keeping most assets in equities. But it hasn't been unusual this year for 100-point drops in the Dow to be followed days later by 100-point rises, only to be followed by a similar drop the next week.
Even with some topsy-turvy market behavior, IPO's haven't evaporated. (Fitbit was the most recent highly touted offering.) With liberal new regulation permitting small companies to raise equity funding without cumbersome registration, new companies or old, small private companies have many options to go about doing it.
For many new ventures, the question these days is less about market timing (the best time to go public, based on equity-market behavior and demand for shares), but more about whether the new venture is willing to tolerate the unrelenting demands (reporting, shareholder expectations, growth projections, etc.) on a public company.
Think Uber. An IPO of Uber in the second half of 2015 would be popular, well-promoted, extensively analyzed, and likely successful. A 2015 Uber IPO would attract the same fanfare Alibaba's IPO did in 2014. But Uber IPO this year is not in any bank's deal pipeline. Not yet. Uber management is steadfastly focused on strategy and exponential early-stage growth, instead of SEC registrations, road shows, quiet periods, and unstable earnings reported to new shareholders. Uber still has a few more countries to penetrate.
Bond markets are feeling some pain. Investors and traders who maintain positions do so courageously. The expected increase in rates will reduce bond prices suddenly and could lead to earnings stumbles among traders and funds, even if they say they are prepared and hedged. New bank regulation has spurred banks, one by one, to reduce emphasis on fixed-income trading and market-making. The profit margins had become too slim, and the balance-sheet burden too great. The unintended consequence of bond-market restructuring is that these markets are now less liquid. And what happens when rates rise and funds, dealers and traders want to sell? Big banks won't be accessible or helpful.
The year has featured a handful of notable M&A deals and corporate restructurings: Charter Communications is acquiring TimeWarner and Verizon grabbed AOL, among others. GE caught may off guard by announcing it will sell off GE Capital, even while the finance unit contributed substantial amounts of revenues and earnings to the consolidated GE organization. This one was a decision based on long-term corporate strategy and long-term concerns about GE's balance sheet. GE Capital is overwhelmingly profitable, but it also overwhelms GE's balance sheet and makes it subject to meddlesome surveillance and oversight by financial regulators. GE made the earth-shaking decision. It had to push a favorite child out the door. And in doing so, few have criticized its move.
Financial institutions (banks, asset managers, hedge funds, insurance companies, and broker/dealers) continue to cry for relief from the onslaught of what they contend is burdensome regulation. In 2015, large non-bank financial institutions have done most of the crying, especially those that could be tapped with a label "SIFI"--strategically important financial institutions, a designation by regulators that subject non-bank organizations (including insurance companies, finance companies, and investment funds) to bank-like regulation of balance sheets and capital requirements. More than a few institutions (AIG and GE Capital come to mind) have hustled to craft rebuttals for why they shouldn't qualify.
Meanwhile, from quarter to quarter, the large, familiar global banks reorganize, restructure, consolidate, and rationalize everything under the institutional umbrella. And in doing so, even some CEO's have been hustled out, as bank boards struggle to pinpoint the right overall strategy. Deutsche, HSBC and Credit Suisse are big banks in 2015 that have replaced CEO's or announced a series of corporate overhauls. Other banks have endured stand-offs with equity analysts and politicians who argue the biggest banks are better valued and less risk if they broke themselves up into their natural parts. (JPMorgan Chase seems to be the bank defending most of the break-the-bank arguments.)
Every year, global banks contend with the scandal du jour. Following years of litigation, write-offs and fines related to mortgage securities and LIBOR (interest-rate pegging), in 2015, the club of banks that dominated foreign-currency dealing for decades agreed to admit to wrongdoing in FX trading and pay big fines to regulators. In the process, they had to open up closed doors about how this enormous marketplace has worked and how banks colluded to make it unfair to other participants (smaller counter-parties and dealers, corporate and institutional clients, etc.). The big banks paid up hundreds of millions in fines, but their dominance in the trillion-dollar market continues.
In mid-June, JPMorgan Chase's heralded and consummate deal-maker Jimmy Lee died suddenly, and bankers and corporate clients around the country paid tribute to him. Some attribute the birth of the syndicated-loan market to him. He didn't invent this financing market, but he is likely responsible for its boom in the 1990's. He was instrumental in turning it into a major financing machine, a viable, reliable funding vehicle for large companies that all of a sudden became just as important to the corporate treasurer and CFO as the corporate bond, high-yield and equity markets.
When companies needed billions and wanted it quickly, a bank syndicate could step up more quickly, more efficiently and more assuredly than if companies wanted to finance themselves via equities or bonds. At JPMorgan, the syndication machine was big, visible, effective, responsive, and successful. In due course, it became efficient, aggressive and comfortable with stomach-turning deal sizes. If a corporate CEO in the midst of an acquisition wanted confidence over a weekend that it could finance a bid in the billions, Lee's syndication army could arrange the financing by Sunday evening.
In turn, Lee made syndicate lending the centerpiece of investment banking activity and, in many ways, turned the organization of an investment bank upside down. At traditional investment banks, M&A and equity and bond underwriting are core activities. At JPMorgan Chase (and later at other big banks), the syndication unit was the heart and core, around which competence in M&A, equities and bonds was built.
He was so successful in the machine he built that by the early 2000's, investment banks that were once indifferent to corporate lending (Goldman Sachs, Morgan Stanley, e.g.) quickly developed lending operations to compete for and retain traditional investment-banking business (M&A, equities and bonds).
Mid-year always means a flood of new graduates, including MBA's, many of which continue to march into lucrative positions in finance, trading, investing and research. In 2015, some big banks, knowing they now compete for talent that is distracted by more interesting or less-taxing opportunities in other industries, decided to raise base salaries for new analysts and some associates. This is an industry, remember, where if Goldman Sachs makes a human-resource move (hiring numbers, compensation levels, incentive payments, etc.), the rest of the industry watches and tries to follow, even if sometimes they lack the financial resources to do so. Hence, a bump-up base for many in entry positions.
Work-life issues, however, continue to surface. Banks don't manage them well, even after they announce serially new initiatives and new rules to ease the physical toil of working on Wall Street. (Underneath the finance headlines this year, two analysts jumped to their deaths in apparent suicides after having reported to others how they suffered from working long hours.)
Is a crisis around the corner? That's the question that must be asked. Some will say the probability is low. Some pinpoint signals (over-valued markets, under-capitalized banks, too much exuberance in new ventures, e.g.) and swear that a doomsday is on the horizon.
Others will say, despite probabilities, the more important question is whether the financial system (with new structures and new regulation and oversight) can exploit the millions of data points to detect tell-tale signs of the next crisis better and whether the system is better prepared for anything that can happen.
CFN: Banks and the FX Scandal, 2014
CFN: Banks and the Libor Crisis, 2012
CFN: Verizon Rescues AOL, 2015
CFN: Do Banks Have Enough Capital? 2015