Thursday, December 20, 2012

A Quick Glance Back at 2012

How will 2012 be remembered in the annals of finance?
In the annals of finance, 2012 was eventful, but won't be remembered as remarkable. The year won't deserve a chapter in economics texts or finance history (like the years 1987, 1998, 2001, or 2008). The financial system didn't collapse, and equity markets, although sometimes unsettled by volatility and uncertainty, didn't fall through a sinkhole.

No major financial institution went bankrupt; many continued to improve their balance sheets and narrow their business scopes.  Deals got done, although at a pace still far below the torrid mid-2000s. China proved to be human--at least in economic prowess. Brazil was proclaimed a favorite emerging market. Interest rates remained near zero, and banks remained squeamish about the burdens of new regulation.

A few events, trends or phenomena, nonetheless, will stand out. Every year something unexpected occurs, a close-to-black-swan event (the large, breath-taking losses at JPMorgan). Every year something that was supposed to proceed smoothly hits a sudden, rough patch (Facebook's IPO, projected in 2011 to have a blazing 2012 launch).

Facebook's Fumble. Everybody who has anything to do with equity markets counted down the days  until Facebook's springtime opening day:  underwriters, traders, market-makers, brokers, investment managers, Facebook employees, financial consultants and hedge-fund traders. And then the company fell flat on its face out of the starting blocks. For weeks, fingers pointed everywhere at lead underwriter Morgan Stanley and at the stock exchange Nasdaq to determine what went wrong and why.

Facebook's stock price nose-dived initially and then bounced around thereafter for months. It has since settled near its first-day offering price. The industry continues to assess what happened and define the lessons learned from what appeared to be a botched underwriting. Morgan Stanley and its lead-underwriter team, many said, had over-priced the stock. Nasdaq, many thought, was clumsy in opening-day trading because of systems problems.

Morgan Stanley, this week, continues to feel some repercussion. Regulators in Massachusetts fined the firm on how it managed the IPO. 

(See also:
CFN: Facebook IPO: What Went Wrong?
CFN: Facebook's Underwriters)

JPMorgan's Whale of Losses. JPMorgan's senior managers didn't see the "big whale" coming last spring. The announced $4 billion-plus in losses turned out to be a financial sock to its face, if they didn't tarnish its reputation for a month or two.  In 2012, the big whale couldn't restrain himself, kept selling certain credit-default swaps uncontrollably.  It turned into the big trade that went badly awry.

The trade started off as a basic hedge against risks in its loan and bond portfolio, but exploded into billions in trading losses. It resulted in job losses for many, inquiries from regulators, and befuddlement from outsiders that had assumed that JPMorgan's CEO Jamie Dimon had a tight rein on all matters inside the JPMorgan machine--including risk management.

Once again, the misunderstanding of exotic financial instruments led to losses and red faces from bankers and traders who thought they had everything within grasp.

JPMorgan decided to come clean, rid itself of the positions, revamp the entire unit, and simplify the role of credit hedges in risk management. This week, it reported that it had off-loaded the positions to a hedge fund, which has sold down the whole portfolio.

A lesson learned for managers of credit and market risk. But is it? Is it a lesson that will have been forgotten when we hear about the next billion-dollar loss?

(See also:  CFN: Where Was the Risk Management Unit?)

A Resignation Heard Round the World. Remember Greg Smith? Frustrated with what he saw and experienced at Goldman Sachs, he announced his resignation in front of millions of New York Times readers. In an op-ed piece in early 2012, he described a client/firm culture that, he alleged, put the firm far ahead of the client. He was peaking in his career in equity-derivatives sales, decided he couldn't bear what he observed and submitted his reflections on resignation to Goldman and The Times' editors, who readily published it.

The op-ed column eventually turned into a book, Why I Left Goldman Sachs, a book tour and an appearance on CBS-TV's "60 Minutes." Critics lampooned the book, not because he wrote carelessly of his experiences, but because they found no incidences where Goldman could be accused of illegal banking. While they found little they considered "juicy," the book goes onto the shelf alongside Michael Lewis' 1980s' Liar's Poker, which could have been titled Why I Left Salomon Brothers

What's next for Smith? Another book. Another career. Anywhere, but Wall Street.

(See also CFN: Greg Smith and His Letter to Goldman.)

Libor in Turmoil. Before 2012, most laymen outside of finance knew little or nothing about Libor--interest rates for corporate borrowers, pegged by a club of banks in London. Many in finance knew of Libor. Few could explain how it was founded, derived, and/or agreed upon.  Many knew that corporate bonds, corporate loans and mortgage-related securities and loans were tied somehow to Libor rates. A few knew how Libor determined values of interest-rate swaps and other interest-rate derivatives (including futures, caps and collars).

Nobody expected 2012 would be engulfed by a Libor-related scandal that ultimately sacked the CEO of Barclays (Bob Diamond) and led to calls for sweeping changes in how Libor is calculated or whether Libor should be replaced by something else.  As the year ends, Libor continues as an agenda item in 2013, and UBS has stepped up to pay a large fine, as Barclays did. Whispers suggest there is more to come.

(See also CFN:  Libor in Crisis)

Knight's Dark Day. JPMorgan's wasn't the only institution that was pummeled with sudden trading losses.  JPMorgan's "whale" losses eventually exceeded $5 billion, but never jeopardized the bank's existence.  Knight Capital, a market-maker in equities, launched a new electronic trading scheme with the New York Stock Exchange this past fall. But within an hour of unveiling it, it suffered technical glitches and had to absorb $440 million in trading losses that almost put the firm into bankruptcy. 

Knight's board, investors, lenders and counter-parties huddled all weekend to resuscitate the firm, inject more capital, and give it a second life.  Knight survived, but for weeks thereafter, the global debate on trading markets revolved around electronic and high-frequency trading:  Does speed-trading jeopardize the integrity of markets? Will high-frequency, electronic trades shove aside and discourage retail investors?  Should governments move rapidly to corral this activity?

Knight is humming along now; in recent days, the firm announced discussions with Getco, the high-frequency trading firm, to merge in the new year. The trading glitches forced eventual merger discussions, but the rationale is likely also two firms meshing together their counter-parties, systems technology experts, and respective market niches to make them even stronger, better in, yes, high-frequency markets.

(See also:  CFN:  Knight's Darkest Moment
CFN: What's Next for High-Frequency Trading)

Apple's Stash of Cash.  Apple survived the year with the absence of Steve Jobs.  Depending on the day of the week, it claims the highest market value of any corporate enterprise around. Throughout the year, it was flush with cash, billions on top of billions, not sure what to do with it:  Invest? Acquire something? Build more new gleaming, white stores? All of the above? Or pay dividends to dividend-starved shareolders? Or buy back stock?

A delightful corporate-finance challenge it had for much of the year.  It decided it was okay to reward shareholders (with Jobs not around to veto the move), as it contemplated and unveiled dividend and buy-back programs, while still being able to hold unto more billions in cash on the balance sheet.

(See also:  CFN:  Apple's Stash of Cash--What to Do With It?)

And for those aspiring for the grand old days of investment banking, whether they hark back to the 1980s of management buy-outs and bridge loans, the flurry of dot-com IPOs of the 1990s and early 2000s, or the exotic structures of mortgages or synthetic creations of Ph.d bankers of the mid-2000s, the signals everywhere were sour in 2012.  Week after week, big banks announced lower bonuses and significant layers.  The economy was in recovery, and markets improved. But new regulation is strangling the existing investment-banking business model.

UBS's Surrender. By late fall, UBS led the way with its huge-scale downsizing in investment banking. Others would follow later, from Credit Suisse to Barclays. Others, like Jefferies and other boutiques, will try to fill the gaps or capture market share where they can.

Investment banking and sales & trading at big banks will need to reinvent itself in 2013, and it's driving all crazy that they haven't figured out what that invention should be. 

(See also:  CFN:  UBS Throws in the IB Flag)

Tracy Williams

See also:
CFN:  MBAs Gear up for 2013

Tuesday, December 11, 2012

MBAs Gear Up for Summer, 2013

Now is the time to prepare for interviews
Most MBA students know that to secure the right job in financial services, you can't stroll out of the classroom, jump into an interview suit, and glide into a round of interviews.  Preparation is critical. You don't secure the dream job with a few practice sessions of the elevator speech.

One of the best ways to gear up and prepare for the rigors of recruiting season is to have a useful framework, one that you can use to formulate a strategy, demonstrate expertise, and express a self-brand. The goal is to get from campus to a significant summer internship in finance in investment or corporate banking, investment management, private equity, asset management or corporate finance.  Indeed in the post-crisis environment of 2013, the world of finance has emerged from the abyss, but opportunities continue to be fleeting, segmented and scarce.  Approaching interviewing season with strategy, framework, optimism and unbridled confidence can go a long way. Not to mention a proven mastery of technical skills.

The Consortium Finance Network hosted its second annual fall webinar on "Internships and Recruiting" Dec. 11 to help first-year Consortium MBA students in finance plan for the upcmoing interviewing season and emerge with offers from their top-choice institutions.  CFN hosts Camilo Sandoval, D-Lori Newsome-Pitts and Tracy Williams welcomed panelists Eric Lane and Mark Santos, recent Consortium graduates and led an hour-long discussion to launch the 2013 recruiting campaign.  For the MBA students participating, panelists provided stories and advice from their own successful campaigns to win job offers.

Lane is an associate in M&A and equity finance at Loop Capital in Chicago, a mid-size investment bank. Santos is in corporate finance at Dell, the computer company. Both entered business school at the height of the crisis and were able to use effective strategies to get from campus to positions in finance during a time when it seemed as if nobody was hiring.
CFN's framework for approaching interviewing season revolves around the MBA student demonstrating competence, experience or expertise in five pillars:

(a) background, 
(b) interest, 
(c) drive, 
(d) capability and 
(e) insight.  

The financial institution, whether it's Morgan Stanley or Loop Capital, is evaluating the candidate, in most cases, in those five broad categories. The successful candidate demonstrates excellence across the board throughout the process. The process includes information interviews, first-round interviews, and call-back, on-site interviews.

CFN, during the webinar, showed how MBA students, in numerous ways, can show excellence in each area.  Knowing that interviewers, for example, are seeking to detect interest and drive, MBA students should seize the process, demonstrate interest and drive and do it frequently.

Lane advised MBA students to look beyond the better-known institutions, the bulge-bracket firms such as Citi and Goldman Sachs, and explore working, too, at niche firms, regional firms, and boutiques.  Loop Capital is an example, as well as such firms as Lazard, Greenhill, M.R. Beal, and Evercore. Opportunities may exist outside the well-worn paths and may afford visible, broad roles for first-year MBA associates.

Santos advised MBA students interested in finance to take steps even beyond financial institutions and examine roles in corporate finance, corporate development, M&A and strategy within client companies--the industrials, the manufacturers, and the technology companies, such as, say, Dell, IBM, Pepsico or Eli Lily.  The companies have critical roles in corporate finance and ultimately choose to work directly with investment banks for advice or financing.

The formal interviewing season for MBA summer internships usually starts immediately after fall exams. The process accelerates in January. Major financial institutions have already identified some candidates they covet and desire to see on interview lists. They will inform some of them they have been invited to interview on "A" lists.  Candidates not on these lists can still seek interview slots in other ways. Smaller firms and corporates proceed with a different recruiting agenda and timetable-- partly because they have fewer slots and opportunities. 

Second-round interviews, where MBA candidates are brought on site, can occur from mid-winter until early spring. Many MBA graduates have told legendary stories about their interviewing experiences--often unique, sometimes memorable--to convince a Goldman Sachs, Credit Suisse, or Wells Fargo to hire them. Some have told about enduring sessions to show how they "think on their feet," how they would manage a trade or deal transaction, or how they would respond in a market crisis.

Throughout it all, successful candidates in the past had a few things in common:  a clear goal, a workable strategy, and a useful framework, all on top of networks, mentors, and special ties inside some institutions. Most successful candidates also had a passion for finance, boundless knowledge about markets, trends and products, and glowing confidence.

During the webinar, panelists and hosts reminded students of the importance of demonstrating knowledge and polishing it with rational viewpoints about markets, past transactions, and economic trends. An informed opinion shows candidates have thought about the topics of the moment and conveys leadership potential. Panelists also reminded students to concentrate on how to stand out and differentiate among others vying for the same spots. Demonstrate excellence, but distinguish yourself. However you look at it, it's a competition.

The webinar presentation and recording will be available to students who registered for the event and to others upon request (through the CFN's Linkedin page).

Tracy Williams

See also:

CFN:  Internships and Recruiting, Fall, 2011
CFN:  MBA Job Hunting, No Need to Panic Yet, 2012
CFN:  The Toughest Interviewers, 2012
CFN:  Mastering Technical Skills, 2010

Thursday, December 6, 2012

Bring on 2013: Cliffs, Reforms, Recovery

What lies ahead in finance?
After a long haul and after markets watched and studied the results, we've jumped the hurdle of the presidential election. We now head toward a year-end where sound bites and gurgles of noise from Washington scream "fiscal cliffs" and a possible end-of-world scenario if legislators don't reach an agreement and unveil a fiscal plan before January 1.

Often in an election year, capital markets and finance managers go through pauses, starts and stops. They gauge the political winds that will affect economic recovery, interest rates or the tendencies for companies to invest in growth, merge with others, borrow long term or issue new stock.

The election is done, and it's time to bring on 2013, of course, after legislators cease jousting with each other. What lies ahead for professionals in finance? What is the outlook for those who manage portfolios, trade derivatives, underwrite securities,  borrow funds, invest in big projects, advise clients on retirement planning, and advise companies pondering a merger?

In the post-financial-crisis era, finance professionals are accustomed to volatility and uncertainty.  The two terms are portrayed as variables, statistics and concepts in theoretical finance. Today, they are a way of life. Just when signs point to a full-fledged economic recovery, from around the corner come a momentary slowdown or unsettling gyrations in markets--caused by factors or events previously unaccounted for:  Mideast uprisings, Greece, bipartisan politics, Spain, Italy, China, and the lingering reluctance of U.S. Congressmen to agree on anything. Markets become volatile because they can't handle, measure or project uncertainty or the impact of unforeseen events.

It has become the new normal for finance professionals, complicating how they manage portfolios, assets, balance sheets, funding needs, and foreign currencies. To be prepared, they must brace for the next startling event that unleashes itself to cause havoc in capital markets.

Some events, nonetheless, aren't uncertain in the year to come. They will occur, and bank managers and traders will spend much of 2013 and beyond wrestling with them.

New bank regulation and reform is for real. It's about to happen. The politics, debating and fretting over Dodd-Frank and Basel III are diminishing. The implementation has become. Large banks, broker/dealers and trading firms are hustling to prepare for a new world of restrictive rules of capital requirements, leverage, and trading.

Hence, new regulation will dictate how financial institutions do business, generate revenues, organize their global operations, and expand.  Most of the new rules require banks to hold more capital now, more capital next year, and even more capital in the years to come.  The new rules restrict proprietary trading and require extensive vetting, analysis and approval of new financial products.  Gone are the days when banks could amass large trading positions in options or commodities or when a coterie of bankers with math doctorates could design a derivative one month and trade it profitably with hundreds of counter-parties the next.

With increased amounts of capital set aside to support the same business, they can't generate or reach targeted levels of return on equity. If banks have an ROE (NPAT/Equity) target of 15%, then new capital above the old capital implies (a) they can't borrow as much to support existing business levels and balance sheets, (b) they must squeeze out more revenues from the same business model and/or (c) they must wring out costs from existing businesses.

This week, with revenue growth uncertain, Citigroup decided it needed to slash costs to address the same issues. It announced major plans to cut businesses and trim staff by 11,000--partly to bolster its ROE while meeting the growing capital requirements. 

With the new normal of uncertainty and the periodic slowdowns in recovery, like Citi, other financial institutions, too, are zooming in on cost control and business efficiencies to meet ROE targets. No business line or activity, it seems, is exempt from a revamping, a re-engineering, or a shut down. Some are selling off or closing businesses to meet performance targets; some are choosing to redeploy resources, attention and hiring toward business units already above ROE targets.

Fixed-income.  These business units (corporate bonds, mortgage bonds, structured finance, public bonds, high-yield debt, leveraged loans, etc.) at many financial institutions are under the gun right now. With thin profit margins on trading and lending activity and low fees from underwriting, some banks can't rationalize existing business. Not being able to make it work, many are withdrawing from fixed-income businesses or reducing their scope or capital deployed to support it.   

UBS announced this fall that it was virtually shutting down activities in this sector, while it contracts in investment banking overall. Other banks, too, are painfully making fixed-income decisions. A few more will persevere with hopes of gaining market share from banks exiting the business.

Asset management. New regulation won't overwhelm asset-management sectors as much.  They don't require substantial amounts of new regulatory capital (not much beyond the capital required to support infrastructure).  Financial institutions are, therefore, swarming to the apparent benefits of this sector:  less-onerous regulation, stable revenues, and everybody's projections regarding savings habits among consumers or corporations hoarding cash.  Even this month, Goldman Sachs announced plans to push this segment harder in global frontiers.  

For these reasons asset management--and variations of it (from private wealth management to investment management and institutional client management)--will get attention from bank senior management. Because of such attention, financial institutions will find ways to expand, grow assets under management, offer new products and hire researchers, investors, portfolio managers and client managers.

Risk management. In the years after the crisis, financial institutions everywhere beefed up their risk-management units to prepare for the next black-swan event or Lehman-AIG-Bear-Stearns collapse.  Many had units, people and systems in place, embedded in much of the trading and banking organization.  Risk managers were already detecting, managing, approving and projecting risks (and the exposures, defaults, non-performing assets that arise from those risks).  In recent years, however, financial institutions have tweaked governance and increased the authority of risk managers--given them more institutional power to act, make impactful decisions, raise flags and stop bad banking behavior. 

In the last year or two, risk management now incorporates a bit of compliance, arguably a growth industry in finance these days.  Banks and broker-dealers, now more than ever, require professionals who must interpret the thousands of pages of Dodd-Frank, decipher Basel II and III, and help build systems to monitor capital, leverage and liquidity. Opportunities abound for those who can master the rules, have the discipline to monitor them, and can explain their precise impact on business activity.

Compensation for experts in risk management and compliance sometimes lags that of those on the glamorous front lines.  Some institutions have taken proper steps to close these differences. Others need to. 

Equities.  Equity units aren't suffering as much as fixed-income units, partly because profit margins and fees on equity activity (trading, market-making, underwriting and investing) are higher, despite the worrisome volatility in markets, the anxiety of retail investors and the hesitancy of some client companies to issue new stock. Higher margins and fees explain how banks with equity prowess and market share can rationalize the business and keep in humming--in hopes volumes will once again reach pre-2008 peaks.

Corporate Banking.  Renewed  emphasis in corporate banking has surged in recent years, as major banks see value in old-fashion corporate lending, corporate cash management, custody and processing.  Managing corporate relationships from day to day results in satisfied clients, who provide a steady flow of business and revenues--in good times and downturns. Corporate banking, if risks are managed and harnessed, can meet the ROE hurdles, even with Basel II and III rules keeping tabs on corporate-loan volume.

Derivatives.  "Derivatives" has been the ugly word of finance since the finance crisis. Since then, derivatives have resurfaced in different forms and ways.  They (interest-rate swaps, credit-default swaps, options, warrants, etc.) are still useful corporate hedging tools and weren't legislated out of existence by new reforms.  New regulation now requires that most of them should no longer be traded "over the counter," "by appointment" or at the whims of large institutions.

New reforms will require they be traded and cleared more transparently on exchanges and at approved clearing organizations, so trading participants can see prices, volumes and counter-parties. This upends the trading and market-making models at big banks, which for years gushed at high margins and their ability to strong-arm markets in the way they could. New reforms will slash those margins and profits.

The new trading schemes for derivatives are still under review and subject to vast restructure. Banks, trading firms, broker/dealers, hedge funds, exchanges and clearing firms remain at the drawing board planing how interest-rate swaps and credit-default-swaps and other derivatives will trade going forward. Nervous, they are still unsure how they'll generate sufficient profits to meet ROE targets.

Some banks and firms will retreat; others will try to pick up the slack and make money from volumes and technology efficiencies. For most, it will still be a question mark for 2013 and forward.

Hiring and recruiting.   Financial institutions still hire with the same recruiting habits--massive hiring when the market picks up, massive reductions when threats of a downturn appear. Amidst the profitability challenges and cost-control campaigns, there will be reductions or limited recruiting in some segments (fixed-income, sales/trading, e.g.). They are offset by opportunities in areas where banks are confident earnings will be stable and expansion less risky:  asset management, corporate banking, consumer banking, e.g. Better opportunities exist, too, for those willing to go abroad (Southeast Asia, Brazil, e.g.).

In good times and bad, amidst market bubbles or threats of a system collapse, financial institutions still make their appointed rounds on campus at top business schools. They make their corporate presentations, identify students they covet, and hold interviews. Actual hiring tends to be erratic, but they maintain relationships, always hoping for that sustained market turnaround.

Compensation.  Compensation is always tricky, sometimes bewildering, often one grand puzzle. Media stories dare to project compensation in financial services (bonuses, first-year base salaries, total packages for senior bankers, etc.). Often the stories reflect the sentiments of one or two institutions and are based on quick interviews with a handful of executive recruiters.

For the most part, bonus packages in current times tend to (a) be as volatile and as uncertain as markets, (b) reward those designated as top performers, and (c) be a grab bag of cash, stock, deferred arrangements and even debt securities these days. Many large banks in the past five years have reduced bonus payouts substantially, but have offset that with significant increases in base pay.

Compensation overall may have trailed off, but most packages have been and will likely continue to be attractive for the best of the lot.


Markets are volatile, and so is the emphasis financial institutions place on diversity--whether that's diversity at entry levels or diversity at the most senior rungs.  Most institutions devote more attention at the lower professional levels and neglect it at the senior levels. At levels above vice president, they tend to allow the numbers to be whatever they are.

As 2013 approaches, diversity (no matter how it is defined or what it encompasses) has forged its way back onto corporate priority lists at most financial institutions.  During the crisis, diversity initiatives, programs and targets became a forgotten agenda item shoved into the back of the drawer. Today, with a bit of optimism, the major institutions see and feel the benefits of a more inclusive organization. Smaller firms (hedge funds, private-equity and venture-capital outfits, e.g.) haven't quite bought the benefits.

In 2012, diversity highlights culminated with Goldman Sachs' fall announcement that 14% of its new partners were women. Even in 2012, people applauded the 14%, a figure that hints at notable progress when compared to numbers from other years. But 14% still suggests that we still have a long way to go.

In all, whatever is happening in Washington will keep the industry from storming out of the starting gates, as 2013 launches. But most in the industry sigh and feel comfortable 2013 won't be 2008 or 2009.

Tracy Williams

See also:

CFN:  Approaching 2012, Dec-11
CFN:  Opportunities in 2012, Dec-11