Levine on Wall Street: BofA Battleship

De-bank the banks

Ken Griffin, who runs Citadel, told the DealBook conference yesterday that "if I could wave a magic wand, I'd break up the banking system." Citadel is an interesting business in that it is part hedge fund and part occasional entrant into businesses -- market-making, securities underwriting -- that have traditionally been done by investment banks. And investment banks these days are mostly wrapped in the warm embrace of bank holding companies with Fed, FDIC and too-big-to-fail advantages not available to Citadel. So you could see why Griffin would think that's unfair. And, I mean, he's not wrong; there's no particular reason why market-making or securities underwriting need to be done by Fed-regulated-and-backstopped banks. For most of the last century they weren't, and the new regime comes with regulatory headaches as well as funding advantages. “I would, in a sense, de-bank Goldman Sachs or Morgan Stanley,” Griffin said, and these days Goldman and Morgan Stanley might take that deal. Since they're banks, unlike Citadel, they don't get to run giant hedge funds any more.

Everyone else stayed in character too

Bank of America also had a financial conference yesterday and it was a good showcase for bank chief executive officers being themselves. Here you can read about Bank of America CEO Brian Moynihan calling his bank an unwieldy battleship but promising to get it out of drydock any day now. (Here is the webcast.) And here you can read about Goldman Sachs CEO Lloyd Blankfein taking not-quite-subtle potshots at Morgan Stanley and patiently explaining that Goldman's strategy is to be so awesome that it never needs to change its strategy. (Here are his presentation text and slides). So that's pretty much BofA and Goldman for you.

De-government-sponsor the government sponsored entities

I don't know about you but I'm pretty excited for this brewing investor effort to buy back Fannie Mae and Freddie Mac from the U.S. government. They're not really for sale, but they're also not exactly a comfortable fit with the rest of the government's businesses, so you could see the strategic appeal in divesting them. The story is still a little vague but seems to involve raising up to around $25 billion in new private capital. A quick look at Fannie's and Freddie's balance sheets finds some $5.26 trillion in combined assets and $45 billion in combined equity, so this deal would raise Fannie and Freddie's total equity capital from around 0.9 percent to around 1.3 percent. Would that be sufficient to privatize the mortgage system and make everyone confident in Fannie and Freddie even without a government guarantee? Umm.

Never reason from a price-earnings ratio

Stephen Gandel at Fortune has a post about how Wal-Mart can give its workers a 50 percent wage increase without affecting its stock price. Now, maybe Wal-Mart can give its workers a 50 percent wage increase without affecting its stock price, because improved employee morale would lead to more sales (or because employees would have more money to spend at Wal-Mart and that would lead to more sales). But the argument is wrong, with a pristine Euclidean wrongness unusual in financial commentary. The method is:

  1. Take WMT's stock price.
  2. Do some manipulations -- ratios! dividend yields! -- to conclude that the stock price reflects a certain level of investor expectations about net income.
  3. Notice that Wal-Mart's actual net income is above that expected net income that you just calculated.
  4. Just give the extra money to employees.

But this cannot be right. There are simple models that will tell you what returns investors expect given a stock price, but they'll all tell you that they expect the returns they're expecting. Not lower returns. No matter how you manipulate it, you cannot use a stock price to prove that shareholders think that the world is different from what it is. The stock price exists in the world that exists. It reflects the present value of investors' expectations for the future cash flows to them. If you suddenly, exogenously change those cash flows, ceteris paribus, the stock price will change. Maybe ceteris aren't paribus and the stock price won't change. But you can't prove that from the stock price!

Banking MD wants his analysts to work harder

Here you can read the Epicurean Dealmaker criticizing Goldman Sachs's new effort to treat junior bankers more humanely, and praising the 24/7-misery model of investment banking as essential to good client service. You won't really find anyone else praising 24/7 misery so you might as well read this.

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