Morgan Stanley Analyst Discusses Ways for JPMorgan Chase to Recover

June 25, 2012 by · Leave a Comment
Filed under: General 

Amidst additional disclosures regarding its $2 billion loss and subsequent investigations, Morgan Stanley analyst Betsy Graseck painted a slightly brighter picture for the banking giant, noting that investors could see an “upside surprise.”

Although banking regulators, the United States Securities and Exchange Commission (SEC), and, reportedly, the Federal Bureau of Investigation (FBI) have opened inquiries into JPMorgan Chase’s hedging activities surrounding the loss, Graseck believes that answers to three questions could be “key to getting investors back into [JPMorgan Chase].”

First, “who knew what and when?” asks Graseck. This information is “critical to understand who in the organization” was aware of any accounting changes related to the loss.

Second, Graseck would like to see “more specific details on the components of the trade, size of the trade, strategy employed, and how that strategy was executed over time.”

Lastly, Graseck feels Dimon and JPMorgan Chase should provide “more detail on the latest mark-to-market of the position, size, max loss, and color on how analysts can potentially better forecast [the] ultimate loss.” The mark-to-market positions taken by JPMorgan Chase were seen as exceptionally risky for such a large bank, thus troubling investors.

HBR: Set Appropriate Company Policies to Mitigate Risky Behavior

June 22, 2012 by · Leave a Comment
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In the wake of the JPMorgan Chase $2 billion loss and fallout, Harvard Business Review writer James Lam lays out various rules and guidelines for managing risky behavior.

As noted by Mr. Lam, “If risky behavior can happen at the house of Morgan under the watchful eyes of Jamie Dimon, it can happen anywhere,” and companies should have policies in place – at all levels – to protect from deceit.

Setting clear policies is one of Lam’s five most important rules for managing risky behavior. “For enterprise risk management, key policies include a statement of risk appetite and explicit risk tolerance levels for critical risks,” says Lam. But, “the right people have to be setting the rules,” he says.

As an example of unclear policies designed by those set out to deceive investors and regulators, Lam offers up the case of former Enron Chief Executive Officer Jeffrey Skilling.

Skilling, upon his hire, insisted upon mark-to-market accounting for Enron’s balance sheets. As a result of marking the company’s financial positions to market, Enron’s actual cash generated was a mere 3% of reported income. “Appropriate risk, compensation, and financial policies will set the incentives and boundaries for employee behavior,” Lam concludes.

Capital Requirements for Banks an Ongoing Battle

June 20, 2012 by · Leave a Comment
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Nobel prize-winning economist Robert Engle has said that American banks, as a whole, are short $500 billion in capital, despite Basel III requirements that have increased capital requirements and tightened capital rules. In the Reuters “Counterparties” email, Ben Walsh describes the situation as laid out by Engle.

To make matters worse, European banks are even more capital-deficient according to Engle’s calculations. This is the result of derivative accounting rules that differ in Europe, notes Walsh.

Due heavily to the fallout surrounding JPMorgan Chase’s $2 billion hedge accounting loss, “there’s something of a bipartisan consensus for stronger bank capital requirements for America’s banks,” says Walsh.

Against the requests of banking officers like JPMorgan Chase’s Jamie Dimon, new capital regulations proposed by the Federal Reserve are likely to require that banks hold more equity. Additionally, with the Federal Reserve proposing mark-to-market accounting for banks’ securities portfolios, capital requirements are likely to climb even higher.

Federal Reserve to Issue New Capital Rules

June 15, 2012 by · Leave a Comment
Filed under: General, Market News 

The United States Federal Reserve is proposing new capital rules for banks. These rules, which are capital requirements put in place by the Federal Reserve to mitigate volatility, would set a standard for how much cash and capital a bank must keep on hand to offset its debts and loans.

Almost immediately, large U.S. banks and lenders like Citigroup and Wells Fargo have decried the proposal, saying that “the net effect of the change will force them to hold more capital over and above the stated requirements,” according to an article by Shahien Nasiripour in the Financial Times. Additionally, “because of different accounting treatments, their foreign peers will have their capital levels protected from changes in the market value of some securities holdings,” Nasiripour continues.

The accounting treatment that concerns U.S. banks involves those portfolios designated as “available for sale.” These holdings, according to U.S. accounting rules, are to be booked using mark-to-market accounting.

European banks, as Citigroup and others have noted, are not required to mark these portfolios at market value.

Bain: Mark-to-Market Helped Bolster Private Equity Gains

June 13, 2012 by · Leave a Comment
Filed under: General 

In a contribution to Forbes and in Bain’s Global Private Equity Report 2012, Bain & Company said that the private equity industry’s recent positive returns were a result of a transition to mark-to-market accounting rules.

Private equity firms, says Bain, “promptly and aggressively wrote down their portfolio company net asset valuations” when equities took a tumble in late 2008. But following that, portfolio companies continued to be conservatively priced despite a public recovery. Meanwhile, portfolio values marked at market value continued to rise, helping boost quarterly gains throughout most of 2010 and 2011 for the private equity industry.

Currently, private equity is facing a new set of challenges, says Bain. “With private equity assets now appraised close to their intrinsic value, returns will become more volatile as they more closely track the ups and downs of the public markets,” the article reads. “Gross Domestic Product (GDP) growth, multiple expansion and leverage,” says Bain, “do not look nearly as favorable in the current recovery as they had in past ones.”

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