New Era of Regulation or Business As Usual?

After decades of expansion and high returns, the past handful of years following the global financial crisis have been uncertain at best. Whether its been JP Morgan, Goldman Sachs, or any major firm in between, every week it seems like there’s another settlement in the papers breaking into 10 figures. Today’s victims/villains: Morgan Stanley settled its bond suit with the top U.S. Housing Regulator to the tune of $1.25 billion. In 2011, the Federal Housing Finance Agency filed suit against 18 major financial firms concerning the firms’ roles in the selling of over $200 billion in subprime securities, in addition to misreporting the quality of the loans backing those securities. The sum represented the largest financial crisis related legal settlement for the Morgan Stanley. Of the 18 firms, Morgan Stanley is now the eighth to settle these particular claims. The sum ranks third in worth, behind only the $1.9 billion and $4 billion Deutsche Bank and J.P. Morgan Chase paid in the fall, respectively.

J.P. Morgan CEO Jamie Dimon (R) and family pictured in their Christmas card, which has been called "tone-deaf" for its opulence; a sign of generous compensation amidst regulatory struggles and accountability concerns

Despite the evident tightening of regulation and supervision in the industry, the legal expenses surrounding the major firms come in sharp contrast to the executive paychecks and bonuses. In 2013, Morgan Stanley CEO James Gorman received a stock bonus of $5 million, double that of the previous year. Perhaps most shocking was the executive compensation given to J.P. Morgan’s Chairman and CEO, Jamie Dimon. Last week Dimon took home his base level salary of $1.5 million, coupled with board-voted addition of $18.5 million in restricted stock. This was a raise of nearly 75%. Critics have been quick to condemn the decision, alleging that the raise reflects the continued lack of accountability on Wall Street. The board has various reasons behind the decision. Namely, Dimon’s leadership in guiding the firm through the legal mess, as well as J.P. Morgan’s stock beating the S&P 500, which climbed 30% on the year. Perhaps more polarizing is notion, popular among J.P. Morgan executives, that the firm is receiving unfair treatment for the wrongdoing of other firms, specifically Bear Stearns. Nevertheless, the executive compensations reflect the general idea that, despite record legal settlements, business is indeed running as usual.
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Arthur Gosnell

Culture Shock at Goldman Sachs

On Early Wednesday morning, Greg Smith, a 33-year-old midlevel executive at Goldman Sachs resigned, citing concerns that the company’s culture has gone haywire. About 15 minutes after his resignation, an op-ed article that he had written explicating his criticism was published in the New York Times. The article - containing statements such as, “it makes me ill how callously people still talk about ripping off clients", reignited the debate about corporate greed on Wall Street that had largely begun to to subside after the industry’s behavior in the financial crisis in 2008. CEO LLoyd Blankfein expressed his frustration with the article, saying that there were many outlets within the firm - such as its detailed and intensive employee feedback methods, and independent, public surveys - through which Smith could have made his concerns known. The release of the op-ed article attracted negative attention from the media worldwide, and Goldman shares fell by 3.4 percent. Evidently, the public nature of Smith’s discontent has produced a ripple effect for the firm.
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Editorial Staff

M&A Activity Review

TNT Express Rejects Bid by U.P.S. 
TNT announced on Friday that the company turned down a bid from UPS that valued the company at $6.4 billion. However, U.P.S., United Parcel Service, is continuing talks with TNT. The U.P.S. offer valued TNT at 9 euros a share which is about a 46 percent premium to the closing price. This potential deal would represent the largest merger in U.P.S. history. As a result of the talks about a deal, shares of TNT rose 2.6 percent on Friday.

Advent and Goldman Agree to Buy TransUnion for $3 Billion 
Transunion accepted an offer to sell the company to Advent International and GS Capital Partners, two private equity firms. GS Capital Partners, a branch of Goldman Sachs, and Advent bought the company from Madison Dearborn Partners and the Pritzker family. The buyout is the largest private equity deal of the year.

Mitsubishi Buys 40% Stake in Encana Shale Gas Assets 
Mitsubishi invested $2.9 billion in Encana’s holdings in British Columbia. Encana, a Canadian natural gas producer, owns about 409,000 acres in British Columbia. The $2.9 billion investment was made in exchange for 40% of the company. This deal represents another investment made for shale gas assets. Shale formations and fracking, a method of extracting natural gas and oil from sedimentary rock, have prompted new and increased investments.
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Editorial Staff

Market Recap (Oct. 24)

Dow industrials bounced back from a rocky start to ride a Friday rally to a 1.4% gain for the week. This week is the fourth straight that the DJIA has seen overall returns, a mark not matched since January of this year. The S&P 500 rose by 1.1% while the NASDAQ 100 dropped by the same amount. Trading opened down this week as investor confidence was shaken following pessimistic comments made by German Chancellor Angela Merkel’s spokesperson Steffen Seibert. Seibert indicated that an agreement on a solution for the European sovereign debt crisis would likely not be reached at the EU summit planned for October 23. Markets remained volatile over the course of the week as new information was leaked on prospects for the summit. The euro recouped the losses it sustained earlier in the week on Friday as German finance minister Wolfgang Schaeuble contradicted Merkel and said that he hoped for a resolution.

A number of S&P 500 companies released third quarter earnings reports this week. The tech sector as a whole generally reported losses and missed earnings targets while a recent spate of mergers and acquisitions in the energy industry has boosted that sector. Bank of America (BAC) reported a profit of $6.2 billion while Goldman Sachs (GS) reported only their second quarterly net loss since the company went public in 1999. The market reaction to BofA’s report was mixed, however, as much of those profits were due to accounting methods and a one time sale of China Construction Bank stock.

McDonald’s (MCD) stock price rose to record heights following third-quarter earnings gains of 8.6% on the back of same-stores sales growth. By and large, big corporations returned healthy profits and are maintaining healthy balance books. Demand is still sluggish in the US market where the economy is still stagnating but many S&P 500 companies are offsetting this by increasing their exposure to overseas markets. Ultimately, while this is good for the S&P, small business owners are left at a huge disadvantage moving forward.

Bottom Line: the markets are currently in flux, waiting for any potential resolutions from this weekend’s summit. Investors are seeking clarity on recapitalization for European banks and how much Greek bondholders’ losses will affect those banks.
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Editorial Staff