The Next Real Estate Bubble?

Chinese regulators have begun restricting new loans in an effort to curb the incredible growth of the Chinese real estate market and to prevent a US style real estate meltdown in the future. Last year Chinese banks advanced 9.59 trillion yuan(1.4 trillion dollars) in new loans which helped increase the Shanghai Composite Index by 80% and cause real estate prices to rise to their biggest gain in 18 months. In reaction to government lowering the amount lending, the Shanghai Composite Index has slumped 7.9% since the beginning of the year. It is difficult to tell whether the Chinese government is preventing a future crises or a crisis is already brewing. The Chinese government exerts a large amount of control over its economy; with an almost fixed exchange rate of the yuan with US dollar and reported consistent economic growth in spite of the global financial crisis. Information supplied by the Chinese government needs to taken with a grain of salt and investors such as Jim Chanos of Kynikos Investments, who successfully bet on the fall of Enron, are already betting on a bubble bursting in China.

By: Jason Wu - WFU MBA 11'

For further information, please see full Bloomberg article:

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aBtIp8SjkXq4

Obama Unveiled $90 Billion Bank Tax With Sharp Words

President Barack Obama unveiled his proposed $90 billion bank tax on Jan 14th with some of his toughest rhetoric yet toward Wall Street, saying: "We want our money back, and we're going to get it." The president's tough line dovetails with a political push by Democrats to capitalize on anger over bonuses and profits from banks that benefited from taxpayer bailouts during the nadir of the financial crisis.

The White House pushed hard against opposition to the tax. The president spoke of "obscene bonuses" and the "twisted logic" of bank executives who oppose the tax. White House spokesman Robert Gibbs suggested the banks were trying to pass the tab for their woes to taxpayers. Democratic leaders responded cautiously to the proposal, mindful that the president's pledge last year to retrieve bonuses paid to AIG executives has yet to be fulfilled, according to senior leadership aides. One senior Democratic aide said the House wouldn't move forward on the tax proposal until leaders there were sure the Senate would follow suit.

While much of the banking industry is up in arms over the proposed tax, the impact would likely be a relatively modest dent to the companies' profits. The 10-year assessment on bank liabilities—dubbed the Financial Crisis Responsibility Fee—would fall most heavily on the nation's top six banking companies: Citigroup Inc., J.P. Morgan Chase & Co., Bank of America Corp., Goldman Sachs Group Inc., Morgan Stanley and Wells Fargo & Co. Each would likely face an annual bill of $1 billion or more, with Citigroup and J.P. Morgan facing the largest liabilities, likely more than $2.4 billion apiece.

If approved by Congress, the tax would force about 50 banks, insurance companies and large broker-dealers to collectively pay roughly $90 billion over 10 years. Under the plan, a 0.15% tax would be levied on liabilities and would apply to a range of firms that received taxpayer assistance, excepting the Detroit auto makers. The tax would be levied on total assets, minus a type of capital considered high quality, such as common stock, and disclosed and retained earnings. The nation's large regional banks would face smaller fees than their Wall Street counterparts, based on the composition of their balance sheets.

Industry officials warned that the new tax could constrain bankers' ability to make new loans, which could hurt the economy. However, the impact could be muted if the fee is tax-deductible, an issue that hasn't been addressed by the Treasury Department. In addition, some analysts cautioned that the plan could encourage banks, to reduce their exposure to the fee, to shift more assets and liabilities into the types of off-balance-sheet vehicles that helped sow the seeds of the financial crisis.

White House officials said the president was serious about his bank-tax proposal, which has been under discussion since August. A provision inserted in the legislation authorizing the Troubled Asset Relief Program required the administration to come up with a way to recover money spent to save the financial system. Still, it is the latest in a string of recent federal initiatives that could erode bank profits. In November, the Federal Reserve announced rules, set to take effect in July, that will bar banks from charging certain overdraft fees without explicit consent from their customers. And other changes that could be costly to the banking industry continue to work their way through Congress, such as legislation that would impose new restrictions on the trading of derivatives.

Article Provided by: Ajit Bhat - WFU MBA 11'

Source: The Wall Street Journal

More Trouble Ahead?

It’s been awhile since a country in the EU has defaulted on their credit obligations since Germany in 1948. Credit Default Swap prices have increased significantly on Greek Sovereign Debt and Fitch has downgraded the debt to below investment grade at BBB+. In reaction, the Athens Stock Exchange has lost 11% in the last three days. Why is this a problem? Since the events of last year with the bankruptcy of Lehman, the bailout of AIG, the nationalization of RBS and Lloyd’s in England, credit spreads have narrowed and world stock markets have come significantly off their lows. The possible default of sovereign debt of both Greece and Dubai signals that there could be more significant problems in the future and that the world economy is not in a true recovery. What does this mean for us at Wake Forest Schools of Business? Jobs, without free flowing credit, companies cannot meet short term obligations such as payroll and they will not hire new permanent employees. Although temporary hiring has increased in the past few months which is generally a precursor to an increase in permanent hiring, we all know this “recession” is different than anything many people have experienced. Restoring a functioning credit market is one step in the right direction to recovery. Let us hope that these credit events with Greece and Dubai are just ripples in the pond and not the signal of a new downward trend.

By: Jason Wu - WFU MBA 11'

For further information, please see full Bloomberg article:

Greece May Be First EU Country to Default, Former BOE Official Buiter Says

Opportunities: Where Are They?

Recall a year ago at this time, when we braced for a colossal collapse of the financial system and settled into a notion that the Great Depression could repeat itself. A year later, with Lehman Brothers receding into Wall Street history, there are breaths of fresh air and hints that in banking and finance, opportunities for growth, expansion and employment exist.

Financial institutions have resumed practice and protocol in recruiting in b-schools and in hiring in mid-career positions. The big banks launched "redeployment" efforts, re-hiring into growth areas those it may have dismissed in declining units. Opportunities exist, but institutions are proceeding cautiously and carefully.

The ramping back up may not be as rapid as the ramp-down. After the dot-com collapse of the early 2000's, firms subtracted and eliminated quickly, but as soon as business and markets bounced back, they added and hired just as fast. This time, they may take baby steps first.

Many students and alumni are asking, "If things have picked up and there are hopeful signs, where then are the opportunities?"

They may exist at specific institutions. As the media note prominently, firms such as JP Morgan and Goldman Sachs are setting near records for quarterly performance (buoyed by investment-banking and trading revenues). Scattered opportunities exist in many spots at these firms. They are focused on building the "stable, sustainable" businesses (private banking, investment management, and retail banking) and supporting the businesses (investment banking and trading) that generated the incomes that put them in the headlines.

These firms are hiring at all levels, but are being careful not to overdo it. Hence, they are not about to double the number of bankers they bring on board in the next year or two.

Firms such as BofA-Merrill, UBS, and Citi are aggressively working to rebuild their brands and balance sheets. They have made progress, although they may need take the occasional, substantial asset write-down. They are presenting a confident, we-expect-to-be-around face to the marketplace, including their faces to prospective bankers. They are visible in recruiting, hiring and convincing top talent to come their way.

Others such as Morgan Stanley, Deutsche, and Credit Suisse know that in a period of recovery, they can't afford to take a back seat to peer firms. It's in the abyss of a business cycle when firms ably strategize to pounce on opportunities to take them to the top of a finance sector (mergers, equities, fixed-income, retail banking, syndicated loans, etc.). Hedge fund Citadel (even after its crisis-related trading losses) is daring to start an investment bank from scratch.

Firms like Barclays Capital and Jefferies are poised and eager to pick up trading and banking business left on the table when Lehman collapsed. BNY Mellon survived the crisis untainted, partly because it emphasizes stable, unsung businesses as securities processing, clearance, and custody. It aspires to be the industry leader in those segments.

Nonetheless, careful, methodical steps in expansion is the common theme.

What about opportunities in specific sectors, Consortium alumni and students ask?

In investment banking, many banks tend to wait out the cycle, wait for M&A to return, wait for an inevitable rebound in equity and debt underwriting. They follow historical paths. The business collapses, but it bounces back.

Others take advantage of new business in select specialties. For example, some firms are doing a brisk business in advising corporations in restructuring their debt or their organizations. Some are advising parties (creditors, debtors) in bankruptcy. Banks with financial-institution clients (FIG) are thriving by helping clients (banks) raise capital or sell assets. M&A bankers see opportunity when an industry wants to expand, but a different opportunity if that industry needs to reorganize, consolidate or reconfigure itself. Healthcare bankers are waiting in the wings, as the nation confronts healthcare reform.

In sales & trading, opportunities are fleeting, sometimes momentary. Right now, many traders and hedge funds are focusing on distressed assets (mortgages, bonds, loans, e.g.), trying to take advantage of mis-pricing of assets or assets (bankrupt companies, e.g.) that are unfairly under-valued. Fixed-income traders have been taking advantage of low interest rates all year, although some think those opportunities will dim in time.

Financial institutions took a beating last year because they took on too much risk (credit and market risks) or they didn't know how to manage it or compute it (or all of the above). Many are now hustling to beef up their risk-management units. Smaller firms are hustling to launch risk units where they hardly existed before.

Large banks are evaluating their approaches to risk-taking, their tolerance for large balance sheets, large trading exposures, or gigantic loans to large corporations. As a result, some are looking to expand businesses that are less volatile and promise stable, predictable revenues. They are prepared to trade occasional home runs for frequent singles. Private banking, asset management, cash management, securities processing and custody offer such stability, and many banks want to grow those areas. Hence, opportunity.

Other firms simply want to stick to the niche they know best. Growth and opportunity will be slow, steady, assured. This includes the banking boutiques (Lazard, Greenhill, Evercore, e.g.), the trading, dealing, market-making boutiques (Knight, ITG, MF Global, Liquidnet, e.g.), or the retail-brokerage boutiques (Raymond James, Charles Schwab, Edward Jones, TD Ameritrade, e.g.).

A year makes a difference. Most of us were too scarred or scared to even mention "opportunity." Today we dare to highlight them, but that's opportunity with baby steps.

By: Tracy Williams from CFN

Bank of America makes first TARP payment

Bank of America, based in Charlotte NC will begin paying pack the Troubled Asset Relief Program (TARP) for money loaned to it during the financial turmoil last year. The total amount owed is 45 billion dollars with 19.3 billion being paid back on December 3^rd with a preferred stock sale. Bank of America purchased troubled Merrill Lynch last year during the height of the financial crises amid some controversy. The purchase of Merrill is already paying off with Bank of America having more of an international presence in investment banking as well as a large, well regarded army of retail brokers. By beginning to pay back TARP, Bank of America will soon free of government restrictions on executive and bonus pay and is a signal to the market that it is a healthy institution. After the announcement of the preferred stock sale, BofA shares rose .7% in NYSE trading. Being one of the largest employers and internship providers to Wake Forest Schools of Business students, the repayment of TARP should bode well in terms of increased full time offers and internship positions.

By: Jason Wu - WFU MBA 11'

For further information, please see full Bloomberg article:

http://www.bloomberg.com/apps/news?pid=20601087&sid=a6BxeAIQBh.k&pos=1