Financial Firms Taking More Risks With Their Own Capital / Economist

just read the news from the last days. almost every bigger deal has one investment firm putting own capital to work/at risk (alltel, etc...).

da braucht man sich nur die übernahmemeldungen der letzten tage ansehen. fast jeder größere deal hat zugleich eine kapitalbeteiligung der banken zur folge.


Relentless competition is forcing financial firms to take more risks with their own capital

INVESTMENT bankers would hate to admit it, but traditionally they have borne some resemblance to estate agents, matching buyers and sellers of financial assets instead of houses and land and taking a fee on the transaction. Yet investment banks have recently changed out of all recognition. These days, if they were estate agents they would not only suggest a suitable property to buy and offer to handle the transaction but also propose a loan, come up with sophisticated products to offset the risk of rising rates, provide help with the down-payment, sell you funky insurance products and, if they decided the property was a bargain, even buy it from under your nose.


In short, investment banking has migrated from an agency model towards a principal one. The industry is not just offering its clients a growing array of products to buy and sell; it is making bigger bets with its own capital, too. According to Merrill Lynch, in 2005 one-third of the industry's revenues came from principal trading of debt and equity and only 15% from the commissions business, once the industry's bread and butter....

At the same time private-equity firms and hedge funds have mercilessly fished in Wall Street's talent pool. Some, such as Citadel, a hedge fund, have ventured into market-making in securities, an old Wall Street role. Others have gone for niche markets. Star-studded boutiques such as Greenhill and Perella Weinberg compete with banks in M&A. In trading, margins on cash equities, which used to be Wall Street's signature business, have been hit by electronic platforms and by rules to increase price transparency, such as Regulation National Market System (known as Reg NMS) in America.

The result, according to industry leaders, is growing pressure to explore new sources of profit. “I don't know an industry that is more competitive,” says Lloyd Blankfein, boss of Goldman Sachs. “That is what is driving the innovation cycle.”....

Owners beware
Increasingly the firms are buying their own investment assets too. For years they have been using proprietary trading desks to take positions. Now they have ventured into private equity as well, putting a growing proportion of their capital into long-term, illiquid investments, such as property or companies. ....At Merrill Lynch and Goldman they accounted for about half of the firms' equity capital last year, up from just over a quarter in 2005. That could be alarming if markets dry up and asset values plummet.

thanks to http://www.itulip.com/

According to Dominion Bond Rating Service, all five Wall Street firms, Goldman, Merrill, Morgan Stanley, Lehman Brothers and Bear Stearns, almost doubled their equity capital between 2001 and 2006....


thanks to Kevin Duffy http://tinyurl.com/ytgwnt

Shareholders are not entirely sanguine either. Investment banks are mostly measured on their price-to-book value. Unlike the assets of a bank or an industrial company, most of the securities on their balance sheet have a book value that can be calculated daily and can be easily liquidated. That puts a floor under their price. Currently the big Wall Street firms are trading at more than twice their book value, reflecting last year's average returns on equity of about 25%, which is higher than their cost of capital. Their long-run average is 16% (see chart 5). Goldman, with a staggering 33% return on equity last year, has the highest valuation. But with so much more capital now deployed, the banks have to work harder to improve returns.

There is growing uncertainty about future earnings, however, pushing price-earnings multiples close to historic lows. This is partly because investment banking is a cyclical business, which may be peaking. It is also because their earnings are, to put it mildly, opaque. As Mr Hintz (a former chief financial officer of Lehman and treasurer of Morgan Stanley) candidly admits: “We can't be totally confident how they make money trading or how sustainable trading is.”

disclosure: long ubs, short gs

Credit Crunch Is a Sham...../ really? time will tell

this is a interesting report from Tony Crescenzi/the street.com. it shows that we have seen nothing yet. i´m pretty sure that the debt growth drivers have changed. from the private sector and real estate to the corporate sector. the monthly data that tracks the consumer credit shows clear sign of slowing down and is growing the least over the past years ( down to 2-3%.) http://tinyurl.com/2u545a . the party is over.

interessante daten. die treiber des kreditwachstum haben eindeutig gewechslet. die privaten haushalte können aufgrund der schuldenlast und sich verschlechternder kreditbestimmungen kaum noch weitere kredite aufnehmen. hier ist die party vorbei

we just have to look on our bloomberg or other newscreen to see all the leveraged buyouts that are fueling all stock markets around the world. the party is in full swing (i hope close to the peak.....) and as we have seen in the subprime market the u-turn caa happen over night....

ganz im gegenteil zum gewerblichen sektor der uns ja jeden tag mit neuen kreditfinanzierten rekordübernahmen überrascht und die aktienmärkte alleine am laufen hält. hier ist die party gerade kurz vor dem siedepunkt (hoffe ich zumindest...). und wie wir bei den subprimes gesehen haben kann sich die wende praktisch über nacht vollziehen......

and of course another source of credit is running amok. margin debt is hitting new highs. thanks to barry ritholtz. here are the details http://tinyurl.com/2pgnhh

und selbstverständlich darf da eine andere quelle des kreditwachstums nicht fehlen. margin debt läuft amok und erreicht neue rekorde (link oben)

i aslo wanted to highlight the leverage of all the hedge funds out there. here is one drastic example

ich möchte zudem noch auf die massive verschuldung der hedge fonds hinweisen. hier ein beispiel

Citadel trading costs hit $5.5bn http://www.msnbc.msn.com/id/15993706/ (must read)

More than 90 per cent of the investment expenses represent interests payments, including the cost of the roughly $100bn of net debt provided by investment and commercial banks

Right now, the hot topic is the subprime market. One of the biggest questions is whether this sector's problems will spill over into other areas of lending. In other words, will problems in the subprime market crimp overall lending and cause a credit crunch, which would then harm economic growth and potentially lead to a recession?

I closely follow data released every Friday at 4:15 p.m. ET by the Federal Reserve on the assets and liabilities of U.S. commercial banks

These data are an excellent gauge of whether any change in lending conditions is occurring. In this report, the Fed sums up the total amount of money extended by the nation's commercial banks to individuals, businesses and government entities via loans, leases and securities purchases. The data are comprehensive, meaning that if the problems in the subprime sector are broadening out, this will be obvious in the data.

The newest data released Friday squash the idea that a credit crunch is developing in response to recent subprime problems. The Fed's data show that bank credit expanded strongly in the week ended March 7, increasing $23.9 billion to $8.437 trillion. The rise follows other large gains over the previous five weeks, which saw bank credit expand at a 13% annual rate, which is faster than last year's gain of 11% and 2005's gain of 10%.

( the higher the dose the harder the ......../ je höher die doses desto kälter der entzug....)

Interestingly, recent increases in bank credit have been partly the result of steady increases in real estate loans, which reached a record $3.381 trillion in the latest week.

In addition to these data, it is notable that bond issuance has been very robust over the past two weeks, with issuance running several times the normal levels. Hence, many entities are looking for money (many of these have been financial companies), and investors have been very willing to give it to them


thanks to http://www.itulip.com/

here is more on this topic from russ winter http://tinyurl.com/233jpg

Speculation gets even loonier! / fleckenstein

feels like he is a little bit frustratet / sieht so aus als wenn er so langsam frustriert ist.

http://tinyurl.com/y9mo7p
The evidence grows that the unwinding of the asset bubble is liable to be rapid -- and brutal.

While out of the country recently, I did something I haven't done in 20 years. I ignored the markets. I did not read a newspaper. I did not check my e-mail. I did not check my voice mail. I left instructions for my office to call me only if something dramatic transpired. (I wasn't contacted.)

In praise of being unplugged Why do I bring this up? To make the point that being removed from all information granted me the perspective that's often denied to those in the trenches. Upon my return, it was more clear to me than ever that we are at a speculative zenith of major proportions.

It is truly remarkable how reminiscent the current mindset is of the 1998-2000 stock mania, when every week would see hundreds of upward price-target revisions. Having said that, in my opinion the current psychology amongst so-called professionals is even loonier.

In the previous mania, the bulk of the madness was concentrated in technology concepts, especially Internet-oriented ideas, where a company that boasted a handful of eyeballs viewing its Web site could be worth tens of billions. Today, the insanity is spread out in various different places.

A little freefall for Freescale Leveraged-buyout madness, for example -- where airlines and semiconductor-equipment fabricators are being leveraged up to go private. Meanwhile, it's worth noting that the bonds of Freescale Semiconductor have broken par -- and that after having been lustily sought after when they were originally issued.

Of course, the pinnacle of the lunacy resides in the financial-dark-matter arena, where all forms of financial exotica exist. The latest specimen? A leveraged-up version of the CDO (collateralized debt obligation) known as the CPDO (constant proportion debt obligation). Without going into all the details, this new product supposedly allows for people to get their money back (plus a bit of interest), if its architects are adept at selling more and more premium in the form of credit default insurance (swaps) as the prices go against them.... http://immobilienblasen.blogspot.com/2006/12/reality-check-bill-gross-pimco.html

Long-Term Capital, short-term memory
Turning to another example of folks having lost their minds, a willing crowd now apparently wants to lend $2 billion to hedge fund Citadel Investment Group.http://immobilienblasen.blogspot.com/2006/12/read-this-twice-hedge-funds.html

I have to ask myself, why would anybody lend money to a hedge fund when it has no assets to claim and its structure thwarts the processes of due diligence and monitoring of one's collateral? Doesn't anyone remember Long-Term Capital Management, which melted down in 1998 and had to be rescued by the Federal Reserve?

When discussing the madness of crowds, it's never possible to predict the outer limits of that madness. Nor is it ever possible to say that the psychology can't get crazier. But in my opinion, the psychology today is about as wild as it can get.

Regrettably, there is no "timing" in that statement. Inflection points -- like tops -- are hard to position oneself around. Change seems to take forever to occur, then happens, seemingly out of the blue. That certainly describes the dollar's serious break, on Nov. 24, for no proximate cause. In all likelihood, it finally sank under the cumulative weight of preceding events,......

Piercing shards 'neath a house of cards
But, whatever "turns" this asset-bubble structure -- and whenever it turns -- the unwinding is going to be brutal, and likely to occur at a rapid clip, given the degree of lunacy on the credit (versus equity) side of the ledger.

And to think that all of this is backed by a thin piece of paper called the dollar, printed at warp speed by the central planners at the Federal Reserve, who brought us the mindless misallocation of capital that created these asset bubbles.