Randomly Noted

J.P. Morgan reported some strong earnings today. But what this bloggers eye were some of the sub-numbers in the earnings report. The bank booked $1.8 billion in investment banking fees. But don’t be fooled – that wasn’t from big M&A advising. But $429 million was in advisory fees. Instead, that $1.3 billion + remaining fees number came from equity and debt underwriting, with the big piece coming from debt – a quarterly record of $971 million for the bank.

Grouped under the investment bank is also trading – and fixed income once again ruled the day. Of the $6.6 billion of revenues from “fixed income/equities,” $5.23 billion came from fixed-income. The bank didn’t offer a break down i.e. how much was from FX trading, for example.

Finally, the investment bank (trading and traditional IB) contributed about 43% of the firms net income ($2.37 billion of a total $5.5 billion).

A quarter where the investment bank didn’t carry the whole day, er quarter, but carried a lot of it.

In the Financial Crisis Inquiry Report issued today, there is a fair amount of criticism lobbed at Wall Street and the complicated securities it created that fueled the explosion of toxic mortgages. It also notes that there were quite a few hedge funds that figured this out and entered trades that would make them profitable if “the entire market crashed.”

The FICC report says it surveyed more than 170 hedge funds and a found a common strategy to be one where they went long the equity (extremely risky) portion of a collateralized debt obligation but used credit default swaps to take offsetting positions in different ranches of the same CDO.

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One of the fascinating elements of the story of General Motors returning as a publicly traded company (for those who follow Wall Street) is the way the offering is being sold around the world. As part of its registration papers with the Securities and Exchange Commission, the company has listed 20 banks that are part of its selling group. And there appears to be one eye-opening new member of the club and one eye-opening admission.

Listed in tiny print in the lower left-hand corner of the registration statement is an underwriter called “CICC.” That appears to be China International Capital Corp. That’s an interesting statement of where we are in the world today – GM and the U.S. government (a big owner of GM stock because of the government bailout of the automaker), have turned to the Chinese to help take public one of the most American brands you can find (the other two being Mom and Apple Pie). This blogger can’t recall a Chinese bank being involved in such a high-profile transaction here.

On the omission front – UBS. The U.S. government had gone after UBS in recent years to get its hands on the names of thousands of U.S. citizens who parked money offshore to evade taxes. Interestingly, another Swiss bank, Credit Suisse, is part of the GM underwriting.

A look at Morgan Stanley’s earnings report today is yet another example of how the not-very-sexy businesses can be good ones to be in. When people think of Wall Street, they think of investment bankers and traders. And often we hear about the larger-than-life deals and money these folks make. But the banking and trading business can be very volatile, whereas the wealth management business may not grow as steadily but is, well pretty steady.

At Morgan Stanley, the firm reported wealth management revenues in the most recent quarter were $3.1 billion. The quarter before (this year’s 2Q): $3 billion. And the year-ago 3Q was $3.0 billion.

Institutional securities had $2.8 billion of revenues in the most recent quarter. It was $4.5 billion last quarter and $5.0 billion the year before.  In a sense, Morgan has created a hedge against the volatility brought on by sales and trading by being in the wealth business.

Three major financial institutions reported earnings today (GE Capital, the finance unit of GE, along with Citigroup and Bank of America) and while all were profitable, one sore spot stuck out when you dug through the mounds of data each company reported: Commercial real estate remains a big drag.

GE Capital had net income of $830 million – and that was after it lost $524 million in its real estate portfolio. The unit said it wrote off $186 million of bad commercial real estate debt and had $1.6 billion of non-performing assets. It placed at $6.3 billion its unrealized real estate loss.

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How about this -  a synthetic CDO that allowed one to go long or short the U.S. Senate Permanent Subcommittee on Investigations hearings today into Goldman Sachs and its role in the subprime mortgage meltdown. Something tells me there would be more people looking for the short position than the long position.

This subcommittee has spent 18 months looking into Goldman and its mortgage operations. A good six hours into the hearings, and in this blogger’s view, there have been no smoking guns. In fact, if anything, you come away with the feeling that these senators don’t understand what they are looking into.

For example, Chairman Carl Levin repeatedly asks the executives of Goldman if the firm had a significant short position. And they keep saying, yes we did, to offset a long position (something called hedging, Mr. Levin). And Levin replies that’s not what he asked (the long position answer).

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Investors looking for an arcane  way to play the shortage in natural gas storage may have just gotten that opportunity. PAA Natural Gas Storage L.P. filed with the Securities and Exchange Commission to sell roughly $200 million of limited partnership units that would trade on the New York Stock Exchange.

The deal may be attractive to investors beyond the reasons connected with the natural gas business. There haven’t been many master limited partnership deals like this one in recent years. In fact, MLPs are pretty much limited to the energy world. The advantage of owning a partnership interest: partnerships aren’t taxed. They distribute income to partners who then pay taxes. In a traditional corporate structure, earnings are taxed before a distribution to investors is made. And then the dividend received by investors is taxed once again. So, one layer of taxation for the MLP.

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Wall Street has always been associated with trading. And volatility in trading revenues can have a huge impact on the earnings of a particular firm. As the first quarter earnings reporting season comes to a close for Wall Street’s biggest banks, we thought it would make sense to see if there were any interesting trends that developed. And boy there was: fixed-income trading fueled very strong trading results across the board. As the above chart shows, fixed-income (lumped in with forex) was on a roll for the major Wall Street banks. At Morgan Stanley (MS in the above chart), fixed-income accounted for 65% of the trading revenue. At Citigroup (C), it was 82%. The others: Goldman Sachs (GS) was 75%, Bank of America (BAC) was 77% and J.P. Morgan (JPM) was 78%.

What was interesting was that some of the banks noted that volatility in the fixed-income market had declined and that spreads had narrowed. That usually spells an environment for reduced money-making opportunities. But instead, there was heavy customer order flow. Sustaining those strong trading gains will be the challenge for the banks.

The SEC alleges Goldman's work on a CDO enabled something else

It’s hard to say that the structured financing transaction at the heart of latest Wall Street scandal was what ultimately led to the credit crisis. But this transaction did involve a number of banks with financial ties to the deal that ultimately had to be bailed out.

This latest Wall Street drama has also dragged into it two of the biggest players on both sides of the financial markets – Goldman Sachs and hedge fund Paulson & Co.

The Securities and Exchange Commission today charged Goldman with fraud because it said the firm and an employee knowingly created a deception that allowed Paulson to make a billion dollars. The story involves some other favorite bad guys – subprime mortgages and complicated structured financial instruments. Paulson wasn’t charged.

The question is what this case might ultimately mean for both Goldman and Paulson.

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It’s all about the risk, stupid.

You want to grab these bank executives around the shoulders and shake some sense into them, especially after reading about their latest efforts to hold off any reform aimed to prevent another financial crisis like the one we just went through.

Today’s WSJ has an article that explores the different moves here and overseas to tax banks. The idea is to raise money that can be used to bail them out in the future, rather than use taxpayer money to do so, if any crisis comes upon us.

Predictably, the banks are crying foul. A trade group cautions the wisdom of a tax because it would remove capital from the banking system – capital that then couldn’t be lent.

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