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Goldman Goosed: Goldman Sachs' fourth-quarter profit dropped by more than half, but its stock climbed on the news because the investment bank beat analysts' forecasts by trimming expenses, primarily in compensation. Average pay per employee dropped 15%, to $367,057, and the total amount set aside for compensation and benefits fell 21% to $12.2 billion. But the pay cuts are insufficient, say financial commentators, who note that revenues and profits fell more than compensation. "Deeper compensation cuts would show some respect for its public shareholders," chides "BreakingViews" in the Times, which calls Goldman's full-year return on equity of 3.7% "sad." The Journal's "Heard on the Street" suggests the firm is clinging to the idea that the downturn in trading and advisory work is cyclical rather than secular. Despite CFO David Viniar's vow that the firm won't "cut our way to prosperity," the column says, "revenue growth is proving elusive in the current, challenged market environment. Should trading and investing activity eventually rebound with less vigor than Goldman is expecting, both noncompensation and compensation costs may need to come down further." The FT's "Lex" acknowledges that there's still a "war for talent," so any financial institution that slashes pay risks losing good workers to shadow banking outfits like hedge funds. Still, the writers say, "banks also support a thick layer of second tier executives, as well as legions of pen-pushing, meeting-loving, middle- and back-office workers who are paid multiples of their worth and contribution. … If the whole financial sector started paying less, the bargaining power would fall for even star employees." The line about pen-pushing incensed one FT reader, who writes in the comment thread that "it is the accounting, legal/compliance and operations teams who daily prevent all manner of investment guideline-busting or illegal actions proposed by traders or fund managers. It is, in fact, these middle office types who protect shareholders' interests. …These middle office staff, who do not receive the big front-office bonuses, are the voice of reason in financial institutions. … If their views had prevailed in the past 5-7 years we'd all be in better shape than we are now." On the cyclical-or-secular question, the FT has a broader feature story that says the tough times for investment banks may well be "more than just a blip," given regulatory changes like higher capital requirements and the Volcker rule. There's also straight coverage of Goldman's earnings in the Wall Street Journal, Financial Times, and New York Times.
A True Pal: Coverage of eBay's earnings emphasized the heavy contribution from its PayPal unit. "EBay's future growth will continue to depend on the success of PayPal, and particularly its new mobile payment business," according to the Times. That will make it especially important to find a worthy successor to former PayPal president Scott Thompson, who recently left to take the CEO spot at Yahoo. Financial Times, New York Times
Earnings Potpourri: In the world of what some would call real banking, there was more evidence that demand for credit has returned, as US Bancorp and PNC both reported strong results, including loan growth and dividend increases. Meanwhile, the bottom lines of the custodian banks (BNY Mellon, State Street and Northern Trust) suffered from investors’ growing preference for cash and from low interest rates.
SEC Suits: The Securities and Exchange Commission brought civil fraud charges against BankAtlantic Bancorp and its chairman and chief executive Alan Levan, saying the company made misleading statements about its troubled real estate loan portfolio and “schemed” to hide losses by not recording assets as held for sale. BankAtlantic flatly denies the charges. “We're not settling, we're not paying, we're not negotiating,” the company’s attorney tells the Journal. (Given BankAtlantic’s history, we wonder if Levan will countersue for defamation.) Meanwhile, Bethany McLean at Reuters compares the SEC’s suits against former top executives at Fannie Mae and Freddie Mac to the agency’s 2010 settlement with Citigroup and its managers, and finds the regulator is being “much harsher” on the former for “what appear to be similar infractions.” The reason may be that the GSEs are “a political punching bag” these days (deservedly so, she’s quick to add), whereas an SEC inspector general’s report suggested that Citi used its “leverage,” including a personal pitch from then-chairman Richard Parsons, to get the agency to soften the penalty for one of its executives and refrain from charging others. McLean also notes a big problem with the SEC’s argument that Fannie and Freddie should have classified more loans as “subprime” and “alternative-A” in their disclosures to investors: “There is no single definition of what constitutes a subprime or Alt-A loan.” This is something we’ve been pointing out for years.
Vexing Volcker: Cursory scans of the Journal and Times stories on yesterday’s House Financial Services committee hearing of the Volcker rule would give you very different impressions of what regulators said. “Regulators Go to Bat for the ‘Volcker Rule’” is the Journal’s headline in the print edition, yet the Times’s says “Regulators Concerned About How to Apply Volcker Rule.” What’s the deal? Turns out it depends which “regulators” you mean. In the Times article, the OCC’s John Walsh raises the interpretive challenges and warns of damage to U.S. competitiveness; the most prominent quote from an agency head in the Journal piece comes from the SEC’s Mary Schapiro, who assured lawmakers that the rule can be put into practice “in a rational way.” Wall Street Journal, New York Times
Standard & Poor’s: Doug Peterson, the rating agency’s new head, defends its downgrades of U.S. and European government debt in an interview with the Journal. But can this former Citigroup executive hope to match the rhetorical skills of Bernard Henri-Levy? The French philosopher and writer (in that order, says his bio) decries the influence on public policy of S&P’s subjective assessments of national creditworthiness. “I am not mentioning the austerity plans, the massive series of layoffs, the fairly brutal measures that will automatically follow,” he writes. This is surely the first article about credit rating agencies we’ve seen that contains words like “nihilism” and “ubuesque.”
Wall Street Journal
Well, that was fast. BankUnited has given up on its attempts to find a buyer, anonymous sources tell the Journal. The bids that came in were lower than expected, apparently.
HUD Secretary Shaun Donovan claims the long-awaited robo-signing settlement with the mortgage industry’s top servicers is “very close.” He knows better than to give a specific date, as Iowa attorney general Tom “By Christmas” Miller did.
The title of this op-ed almost says it all: “Trust no one with your money is the tragic legacy of the crisis.” Satyajit Das writes that the loss of confidence in governments and banks alike on both sides of the Atlantic is encouraging developments like the creation of community-based alternative paper currencies, the growth of peer-to-peer lending, the rise in the price of gold and vote-with-your-feet protests like Bank Transfer Day. What, no mention of Bitcoin?