Receiving Wide Coverage ...
Times Are a-Changin': Sort of. On the silver anniversary of the Oct. 19, 1987, Black Monday stock market crash, the New York Times and the Wall Street Journal make prominent note of the event. "A Repeat of '29? Depression in '87 Is Not Expected," declared the Journal in a second-day story that it resurrects on its web site this morning. The Times went even gloomier the day after. "Does 1987 Equal 1929?" it asked. "It did not," notes Times' columnist Floyd Norris. "What it did signify was the beginning of the destruction of markets by dumb computers. Or, to be fair to the computers, by computers programmed by fallible people and trusted by people who did not understand the computer programs' limitations. As computers came in, human judgment went out." Behind the 1987 panic was a whiz-bang financial innovation of the era known as program trading—an early ancestor of high-frequency trading, which was supposed to enable the "smart money" to stay ahead of the market. It didn't. Just in case things went wrong, sophisticated investors circa 1987 hedged their bets with hedges then known as portfolio insurance, early predecessors of credit default swaps that were supposed to protect them against calamity. They didn't. So what lesson, a quarter-century on, is to be learned from Black Monday? That we are destined to learn little, reform less and repeat our mistakes, appears to be Norris' take-away. His column cites an Oct. 20, 1987, Journal quote in which Nobel economics laureate George Stigler says, "I don't think the economy looks like it did in 1929. The most violent and urgent of factors in the great crash was the collapse of the banking system. That can't happen anymore because of the Federal Deposit Insurance Corporation" and other safeguards. Stigler explained that deposit insurance and limits on leverage meant "you won't get the pyramiding effect" that cracked the financial system in 1929. The pyramiding, of course, didn't occur in 1987, when the market snapped back quickly. It came in 2008. Since then, the biggest bricks in our shaky pyramid—the giant handful of banks that now account for over half the entire system's assets—have gotten far bigger still. New York Times, Wall Street Journal
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Morgan's Mess: The good news in Morgan Stanley's (MS) Thursday earnings release: it beat analyst expectations. The bad news: it still lost $1 billion dollars and had an anemic return on equity of 3.5%. The results "did little to assuage investor fears that the company, led by Chairman and Chief Executive James Gorman, is making halting progress in a makeover that aims to lessen its dependence on volatile trading revenue," notes the Journal. The problem for Morgan Stanley, along with the rest of Wall Street, is that it's being forced to reduce its risk appetite while scrambling for ways to compensate. It has scaled back everything from hedge-fund management to ownership in an Atlantic City, N.J., casino while trying to beef up retail wealth management, in part by acquiring shares from Citigroup (NYSE:C) in joint venture Morgan Stanley Smith Barney. The unit's net revenue rose slightly to $3.3 billion from a year earlier. It's a tough business in which to get much traction, with the likes of Bank of America's Merrill Lynch unit (BAC) and JPMorgan Chase (JPM) already well entrenched. Investors punished Morgan Stanley's latest results by knocking down its stock 3.8%. That's painful stuff for a company that recently suffered a big debt downgrade and is trading at a 30% discount to its tangible book value. As the Journal's Heard column put it, "Morgan Stanley has shown it can survive. It has yet to prove it can thrive." Wall Street Journal, New York Times, Financial Times
Wall Street Journal
It's a tough time to be in the money-lending business. That's the Journal's take-away from the earnings results produced by regional banks this week. The problem, as the paper sees it, is that ultra-accommodative interest rates have made life far easier for those who've borrowed to excess but made it increasingly tough to turn a buck lending. "Shrinking margins are increasingly plaguing banks as a result of the Federal Reserve's efforts to stimulate the economy by keeping interest rates low. The low rates have resulted in a mortgage-refinancing boom that has bolstered the bottom line at giants such as J.P. Morgan Chase & Co. and Wells Fargo & Co. (WFC), and to a lesser extent at other lenders. But the flip side of the central bank's policy is the shrinking profitability on new loans." At BB&T, the net interest margin dropped to 3.94% in the third quarter from 4.09% a year earlier. The company said the number will likely fall again in the fourth quarter. BB&T's shares promptly dropped 7%. Some regionals have outmaneuvered shrinking margins with help from pockets of economic strength. Ohio-based Fifth Third Bancorp (FITB), Huntington (HBAN) and Keycorp (KEY) "benefited from an economic recovery driven by manufacturers and export-oriented businesses," notes the Journal. KeyCorp CEO Beth Mooney added that natural-gas fracking in the Midwest is helping and that she's willing to do what it takes to benefit from the energy economy. "I used to live in Texas," she said. "If we have to adopt the accent, I am ready."
New York Times
Lloyd Blankfein & Co. can finally exhale. The much anticipated book by Greg Smith looks likely to land with a thud. Smith is the disgruntled Goldman Sachs exile who added the term "Muppets" to the Wall Street lexicon with a scathing op-ed in the New York Times in March. His full-length memoir reportedly does little more than detail the greed and bonus-mongering that even casual observers already know have made Wall Street what it is today. "While the book does repeat the allegations he [Smith] first described...insiders were relieved on Thursday after seeing bootleg copies of the book as it provided few new details of the 'toxic' culture that he said prompted him to quit," says the Times. The memoir, Why I Left Goldman Sachs, is scheduled for release on Monday. A spokesman for Goldman is quoted saying he was "relieved" upon reading the book, which was provided to Times by the firm.
