Editor's note: Morning Scan will not publish on Monday, Feb. 15 in observance of the Presidents’ Day holiday. We’ll be back on Tuesday, Feb. 16.
Receiving Wide Coverage ...
AIG Makes Deal with Activists: It looks like American International Group will live to see another day – and without activist investor pressure. The insurer formed a pact with activist investors Carl Icahn and John Paulson: In exchange for two seats on the board, Icahn and Paulson will stop pushing AIG for a break-up. The concept of splitting the company was long rejected by AIG chief Peter Hancock, but he had bowed to some of the pressure, including making plans to reduce the company's size in the future. For Icahn at least, there appear to have always been another incentive. He has lost recent financial bets – on companies like Chesapeake Energy and Cheniere Energy – and needed a victory.
Dimon Buys JPMorgan Shares: Jamie Dimon has taken action to attempt to reverse the course bank stocks have been taking. Yesterday, amid a notable sell-off of bank shares, Dimon purchased roughly half a million shares of JPMorgan stock for a total of $26 million. Like most other banks, JPMorgan's shares have fallen sharply in value, down 16% from the start of the year. Dimon likely hopes investors will see the move as an indication the sell-off was an overreaction. Also notable, Dimon's purchase is his first big buy since the "London Whale" scandal hit the bank roughly four years ago, causing stocks to fall after the revelation of billions in losses. Dimon "has never sold a single one of the common shares he has been granted during his career at JPMorgan," according to the Financial Times.
HSBC Bows to Employee Pressure: HSBC has reversed a decision to freeze salaries this year, after facing immense pushback from employees. The pay raises will come from the bank's variable bonus pool. Of course, not all employees will get a raise – still it represents another expense for the company at a time when it has taken on significant cost-cutting measures. Investors will now look to UBS to see if employees take similar umbrage to the Swiss bank's choice to freeze pay levels until midyear. HSBC did leave a hiring ban in place.
Fearing the Doom Loop: Banks have been at the forefront of the overall market rout as concerns have mounted regarding a multitude of factors. And though there are signs Friday of improvement in Europe, stocks generally remain down worldwide. But now, as some observers have begun to fear a recession sparked by the markets, central banks have gone to seemingly extreme lengths to spur growth – in particular, cutting rates to negative levels. Even the Fed has discussed a negative rate model. The problem is that employing negative rates could make the problem worse, especially for banks. In Europe banks have good reason to worry. Regulations have made banks much simpler companies, meaning they are less affected by downturns like these. But they also have seen their revenue streams dry up as low rates have put a damper on interest income. And JPMorgan has signaled that banks may stock up on cash and reduce lending if negative rates become more commonplace – though that's yet to happen where they've been implemented. So, as a result, banks could see their shares fall even further in a negative rate environment, which could just perpetuate the problem.
Wall Street Journal
While the Bank of Japan has moved toward negative rates, the country's largest bank should be able to weather the storm. Mitsubishi UFJ Financial Group has suffered, as most banks worldwide have. Its shares have fallen 40% this year, and the company now trades at its lowest tangible book value in a decade. But the company's fundamentals will keep it treading water – a lesson that banks could learn from. The company's common equity tier 1 ratio rests at 12%, and even when accounting for its investments in other Japanese companies that have resulted in unrealized gains, the ratio still comes to 10%. Energy exposure is also only 3.3%, and exposure to China is even lower at 1.3%. That makes the company a real bargain, given its apparent staying power and the rise of the yen, meaning it could find a place in more investors' portfolios soon.
As more investors begin to eye the possibility of negative rates, gold has become a major beneficiary. Gold futures spiked 4.5% Thursday to $1,247.90 an ounce, the highest level in a year and 18% above where they were at the beginning of 2016. That's a major reversal for the metal, which had shed 40% of its value in the previous four years. The move toward the metal also has more dire implications: it shows some investors are afraid the central banks may not be able to stop an unfolding crisis. Consequently, they have fled to "haven assets" – the Japanese yen, Treasuries and, of course, gold. But gold mining companies may not want to start sitting too pretty – if economic growth picks up, this turn of events will likely come to an expedient end and return the metal to its previously depressed trajectory.
France's Société Générale is facing a tough crowd. The company has attempted to gain favor with unhappy shareholders by increasing its 2015 dividend by two-thirds and raising its payout ratio by 10 basis points. The response, as the paper described it, was "bared teeth and a vicious slap around the chops." In actual terms, it was a 13% decrease in its share price. SocGen isn't alone though – fellow French banks BNP Paribas and Crédit Agricole have also had their share prices fall more than 25% since the start of the year. To some extent though, with SocGen, it's a game of appearances. The French bank touts a tier one capital ratio of 10.9%, lower than German rival Deutsche Bank and the European average. But that figure is deflated because the bank now carries more assets than it did years ago, while other banks have sought to deleverage. Plus, the company's global commercial and investment banking division saw a major decline in income during the fourth quarter. Ultimately, gestures such as the dividend increase likely won't be successful until the sector itself improves.
New York Times
A group of four former whistle-blowers formed Bank Whistleblowers United. The group seeks to improve the treatment of Wall Street whistle-blowers and generally improve regulation of the financial services sector. One of their top goals is to strong-arm presidential candidates into agreeing to not take donations from financial firms that have been charged with "legal elements of fraud" or accept more than $250 from any of their officers. As the paper puts it, that's "virtually all of them." The group also wants rules put in place to end the pipeline between Washington and Wall Street and to stop deferred prosecution agreements. The group is composed of famous whistle-blowers: former Citigroup senior executive Richard Bowen 3rd, former SEC lawyer Gary Aguirre, former Countrywide Financial managing director Michael Winston and economics and law professor and former regulator William Black. The group was inspired, in part, by the way in which many regulatory settlements with financial services companies gloss over the input received from whistle-blowers in raising the allegations.