It's a Dirty Bird Which Fouls Its Own NestJuly 6, 2012 @ 8:19 AM EST
(There are many less polite versions of the title for this report, but we think that will suffice.)
We were reminded of that old saying on the 4th of July after tuning in for a bit on the televised “hearing” over Barclays’ “Libor” scandal. (Yeah, we know, get a life).
And according to Reuters, “More than a dozen other banks are being investigated in the long-running global probe of rigging of a key interbank interest by authorities in North America, Europe and Japan, including Citigroup, HSBC, UBS and Royal Bank of Scotland.”
And you likely saw the item last week on JPMorgan Chase (JPM), broken by the NY Times, where they reported that, “JPMorgan Chase sold its in-house ("proprietary") mutual funds to clients, even when competitors had better-performing or cheaper options." Of course that is really nothing new in the industry as such practices first kicked up a firestorm back in the 1990’s.
Oh, and we almost forgot Tuesday’s headline from Bloomberg Business Week, “JPM’s refusal to turn over e-mails in a federal probe of potential energy-market manipulation is the latest challenge for Chief Executive Officer Jamie Dimon as the bank faces multiple investigations.”
And these stories are just a few of the many items coming on the heels of Goldman’s “Muppet-gate”, Morgan Stanley and others “withholding material information” on Facebook’s IPO, record levels of insider trading prosecutions, MF Global, mortgage foreclosure abuses, Madoff, etc., etc.
It has really gone past the point of simple eyeball-rolling and disbelief. And we don’t think the oft-used phrase, “you can’t legislate stupidity” really covers what is going on these days.
But what we really started to think about is the impending 2nd Qtr. earnings season, where the financial sector will as usual be under close scrutiny.
And the comments we heard during 1st Qtr. earnings from many heads of major financial firms bemoaning the drag on earnings from lower trading-related revenues.
For example Goldman Sachs’ 1st Qtr. earnings statement cited, “lower management and other fees and lower transaction revenues, decreased assets under management, and net outflows in money market, equity and alternative investment assets.”
And despite Goldman only having “one losing trading day” in the first quarter, there was a 14% decline in trading revenue versus 2011, and 2011 in total was down -21% versus 2010.
Not long ago, CNBC had a major story with the lead, “It’s one of the biggest mysteries on Wall Street. How can stocks be in their fourth year of a bull market and trading activity be so low?”
Why does the media, but more importantly, the dirty birds of the financial sector, think anyone, anywhere, has a shred of confidence left in the integrity and transparency of the dealings in the financial markets and the treatment of clients, institutional or retail?
But we were happy to see some comments coming out recently, from someone other than the Occupy Wall Street movement, which acknowledge quite strongly the image issues facing the financial services industry.
"Every time people begin to gain a little confidence, something else comes up," said Randy Frederick, managing director of active trading and derivatives at Charles Schwab. "If it's not Europe, it’s a troubled IPO, or JPMorgan or Barclays. Something new blows up and people say, 'I knew it was rigged.'"
No less an authority than Richard Grasso, ex-head of the NYSE (and who was not without controversy himself), gave an interview last week to Mario Bartiromo of CNBC (loosely paraphrased):
“A string of Wall Street crises, including the 2008 stock market crash, the collapse of the mortgage market, the botched Facebook IPO and the scandals at JPMorgan Chase and Barclays have meant some very heavy body blows experienced by the public. It's been a real tough time for consumers who want to get back into the market. After the crash, we were supposed to see the industry clean up its act but it seems just the opposite has been happening.”
And we are finally starting to hear some commentary on CNBC, Bloomberg and Fox Business on how these repeated “scandals” just continue to erode investor confidence.
In any event, it will be very important to see how the financial sector reports on trading-related revenues for the rest of the year. We think it is no coincidence that the sector, as measured by the XLF ETF, has gone essentially nowhere since the summer of 2009.
As professional traders, we all are becoming rather immune to the insider trading cases, the accusations of firms misleading clients, the trading blow-ups and subsequent cover-ups, the HFT and dark pool messes, and a variety of other unpleasant facts of trading the markets these days.
But it doesn’t mean we have to like it. And we truly get annoyed when we see what look to be suspicious trading activity in front of major news events. Now this might just be institutions with well-informed sources and faster computers, but sometimes we just have to wonder.
And we have little sympathy for major investment firms who are publicly crying over lower trading revenues from clients.
Because even Big Bird knows you should not foul your nest and expect anything good to come from it.
David W. (aka The Underground Trader)
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