Friday, December 20, 2013

Looking Back at 2013

An informal glance of the year just past
Years from now, a finance historian or a research analyst looking back at 2013 won't have a clever moniker for the notable financial events of the year.  The year was eventful, but may not even deserve a whole chapter in finance history.

And perhaps that's a good thing. It wasn't like 1987, 1994, 1998, 2008, years that conjure memories of crises, crashes, volatility, and uncertainty.

The year 2013 was not one of turmoil.  Markets behaved well. We saw equity upswings of the likes of the mid-2000's and mid-1990's, even while old hands suggested a bubble is near and we shouldn't get accustomed to double-digit percentage stock-market increases.

The fury and hoopla over BitCoins, that arcane, macabre digital currency, didn't rise to the surface until late 2013.  That, in fact, could be the bubble that bursts in 2014, and let's hope that damage won't cause debilitating financial ripples around the world.

The year 2013 featured big deals, badgering shareholder activists, headline court cases, and a few notable IPO's. One common theme prevailed, nonetheless:  financial regulation.  Regulators, politicians, and lawyers bickered about what to do, how harsh they should be, and when they plan to roll out new rules promised from Dodd-Frank legislation, now going back several years ago.

New regulation, they argued, must be at least a little painful to make up for late-2000s financial sins. But the unveiling of a new era of restraint and a new playing field has taken a long time. Basel III, Volcker rules and new rules governing derivatives and equity trading have trickled out slowly, to the pleasure of many banks still squeezing out profits from privileges about to go away.

Dodd-Frank, Volcker and Basel III are not favorite topics among bankers, but they are inevitable.  Banks paid lobbyists and waged campaigns to push back, but they know they aren't winning this tug-of-war and have begun to adapt. Compliance officers, lawyers, and business managers are combing through hundreds, thousands of pages of rules, guidelines, and capital and liquidity requirements, as they prepare for a wave of requirements set for 2014-15. Not fun, fancy tasks, but this is the new normal for the late 2010's.

Civil suits, criminal charges and legal indictments were abundant all year long, as federal prosecutors followed a determined agenda to punish those involved in insider trading.  A legal blitz on insider trading kept the mystical, aloof hedge fund SAC Capital on the front pages for much of the year--right until now, as prosecutors one by one investigate and/or indict various members of Stephen Cohen's trading circle. 

Shareholder activists charged out front and waged fierce campaigns, taking some of their battles to the front lines of the media. They pushed to get Apple to pay dividends, pushed to reshape and remake JCPenney, and battled over the legitimacy of Herbalife products--anything to boost corporate values, oust disagreeable management, wrest some value from out-dated business models, or cause fuss in equity markets. Names like Icahn, Ackerman, Einhorn and others--stubborn and persistent and sometimes irate--kept themselves busy chasing after corporate boards.

The public got used to JPMorgan Chase's billions--not quarterly profits, but a series of regulatory or legal settlements, pay-outs, charge-offs, and reserves.  A billion here, a billion there, until we saw a climatic $13 billion mortgage-related settlement that caused the public to gasp until it learned that the bank will still report handsome profits in 2013, still wields a heavy hand in banking, and its CEO  Jamie Dimon's job is not at all in jeopardy. (Recall the past springtime when a shareholder petition requested Dimon give up his chairmanship. Dimon and team, breathlessly but with confidence, waited out what was supposed to have been a close vote.)

Apple, Inc. continued to muddle over what to do with its billions in cash--billions on its balance sheet with a reluctance to reward shareholders. Investor activist Carl Icahn applied pressure, and others proposed innovative financial devices to pay shareholders. During the year, Apple relented, deciding to share the wealth via dividends with shareholders and then testing debt markets by borrowing $17 billion in a deal done mostly to show markets it could manage a debt transaction and debt payments.  Meanwhile, the company continues to amass billions more in cash from normal operations.

Twitter's IPO, in many financial circles, will be cast as the year's deal of the year. Nothing fancy about the transaction. And nothing unusual about it, even if Twitter has yet to show meaningful operating profits and long-term growth rates are uncertain (Will the fad run its course?).  Yet the deal was widely discussed and eagerly bought, if only because it signaled a comeback of sorts in the new-issue market or it proved that an IPO with high expectations can burst through starting gates without market turmoil or mechanical difficulty (like the Facebook IPO).

Other deals made headlines, too, contributing to a summer surge that flirted with bankers, who might have thought the M&A glory days had returned.  In one deal, Verizon borrowed a whopping $49 billion to make an even-more-whopping $130 billion acquisition of the portion of Verizon Wireless it didn't own. But as the fall quarter approached, banks realized corporate CEO's and strategists still harbor economic anxiety and are hesitant about making too many acquisitions too quickly.

During the year, we began to observe the slow death watch of Blackberry.  Losses continue, employees have been let go, and management--those who remain--has run out of ideas and imagination about products.  A Canadian private-equity firm had a long-running bet that things would turn around. During the year, it contemplated stepping up the bet to acquire the portions of the company it didn't own. Near the end of the year, it, too, had begun to change its mind about Blackberry.  The company stumbles, gets on its feet every few months when it announces what it perceives as a novel product offering or a strategy geared to corporates, but then it trips again.

Michael Dell had grand dreams of taking his computer company Dell private, where he could seize control of the company's strategy without the withering distractions of shareholders, research analysts, and whimsical stock prices.  Dell, however, didn't realize he had to ward off shareholder activists and prolong the process by addressing apparent conflicts of interest (with him leading both the public company and the private buy-out).

Goldman Sachs didn't make it through the year without headlines, no matter how much it preferred. It had a sideline seat in the civil trial of one of its employees (Fabrice Tourre), the one singled out as instrumental in structuring the large mortgage securities/derivative transaction that permitted hedge-fund investor John Paulson to earn billions. Goldman wasn't an accused party, but for Goldman, the trial caused headaches and reputation blemishes.

Outside courtrooms, Goldman made news when former employee Greg Smith's published his long-awaited book about why he left Goldman.  The book was widely awaited and carefully reviewed and read, although the author didn't stir up as much trouble as some might have hoped. Nor did he offer more than an insider's account of his decade working and watching Goldman drift slightly away from its firm principle of treating clients as kings and queens.

Banks, once every five or ten years, try to do something revolutionary to change the pressure-cooker culture of banking. In the past, they allowed for permissive dress codes (business casual, as it came to be) and tried to be tender-hearted about late nights and all-nighters in the workplace.  Goldman took a big step in 2013 when it announced it would forbid junior bankers (analysts) from working Saturdays t to instill a more civil, comfortable work environment.  The move was praised and appreciated, although skeptics know how little this might be enforced or how the new standard might be forgotten in the months to come. But Goldman is praised for daring to show empathy.

Cheryl Sandberg, Facebook's COO, published her  book Lean In and presented pages of advice of how women can aspire to senior roles in business and how women can confront difficult business settings with a more aggressive stance or posture. No book in business in 2013 was more talked about, tossed about, and debated than Sandberg's tome. Women on both sides of the argument of the effectiveness of leaning in weighed in. But was her book applicable to all groups under-represented in business?

An eventful year, but one that didn't leave the blood boiling or cause business and finance leaders to sink into an abyss of anxiety. With bits of the recession and crisis still haunting and reminding all how bad things can be, companies and capital markets proceed into 2014 with degrees of confidence. But they cling to appropriate amounts of worry, wondering if a devastating market blow looms over the horizon.

Tracy Williams

Friday, December 6, 2013

Volcker Rule: Point of No Return

Volcker's rules: Any day now
Three years have elapsed since regulators proposed new regulation to restrict proprietary trading at banks (more specifically, depositary financial institutions).  Three years of discussion, debate, rule-writing and re-writing, dissension, lobbying, and procrastination. 

And now the new rule, better known as the Volcker Rule and named for former Federal Reserve chairman Paul Volcker, who first proposed limits on bank trading during the crisis, has reached a point of no return.  Regulators--the SEC, FDIC, OCC, CFTC and the Federal Reserve--have promised to sign off before mid-December.

Banks aren't surprised. They aren't caught off guard. They knew an old era of gun-slinging, wild, volatile, frantic, but overwhelmingly profitable proprietary trading at the major banks was coming to an end.  While regulators and their lawyers sequestered themselves for years to write hundreds and hundreds of pages of rules, banks tried to push back and soften the blow. But they knew they wouldn't win much of this tuggle, although they poured resources and time into the effort.  They had already begun to scale down prop-trading activity. 

New rules will prohibit outright proprietary trading (trading for banks' own accounts using their own capital), but will permit trading for clients, trading for hedging purposes and limited hedge-fund activity. And therein lies profound complexity.   

Regulators have spent the past three years trying to define all possible scenarios of client trading, hedging, and hedge funds with such fine-tooth clarity that banks won't be able to exploit loopholes in the way they can do adeptly and profitably to their advantage--and, in the eyes of regulators, at the expense of clients and individual customers.  Regulators, worried about how banks can exploit omissions in the rules, have tried to cover every base in hundreds of rules-making pages. 

Despite regulators' attempts at clarity, banks now prepare for the burdens and chores to remain in compliance.  Banks know well that trades that look like, feel like and were booked as client trades might evolve into prohibited proprietary trading.  New rules will allow "inventory" (securities and derivatives on banks' balance sheets) to exist on banks' balance sheets as items on a shelf to sell to clients.  But Volcker rules might define inventory exceeding a certain level or inventory maintained for more than a certain number of days as illegitimate "proprietary activity" (and determine it to be out of bounds). 

Banks that choose to remain prominent in sales and trading will need to invest in an army of compliance personnel and significant amounts of infrastructure to ensure they stay within client-trading or hedge-trading boundaries. A nightmare for some banks. An onerous cost of doing business at others. 

Volcker proponents say the new rules will reduce the likelihood of another round of "Whale Trading" losses at places like JPMorgan Chase, which lost over $4 billion from credit-derivatives trades in 2012. Critics and JPMorgan argued that "Whale-related" trades would have been permitted by Volcker rules. (JPMorgan launched the first phase of these trades for hedging purposes--to hedge credit risks in its large loan portfolio. But the trades piled on top of each other and the massive positions turned into something very "proprietary.")

Now big banks across the U.S. must decide (and have decided) whether (a) to stay in the game of securities and derivatives trading and eke out profits from client-driven flows or (b) to retreat, withdraw or just get out.

The bulge-brackets, such as Goldman Sachs, JPMorgan, and Morgan Stanley, are fully invested, have been adapting to a Volcker world. The big banks have resigned themselves to declines in trading revenues as much as 10% (25% at Goldman, one analyst contends). They hope to turn their once-magnanimous trading desks into humming, full-throttle plays on volume and flows.  Their desks have been reorganized and restructured.  They've shuffled talent, shut down some desks, invested in automated trading systems, and allowed many traders to seek employment at hedge funds.

Other banks have withdrawn and expect to engage in a token amount of trading at modest levels and minimal volumes--all client-related or tied to risk-management hedges.

In 2014 and beyond, critics, proponents, and regulators will watch banks closely.  Some say liquidity in certain sectors of capital markets will diminish, because large well-capitalized banks won't be able to buy, sell, and hold in large amounts of securities in the way they could before.  Some (municipalities, for example) say rates on bonds may increase because of diminished liquidity, because banks will nudge margins up to account for lack of liquidity, and because banks won't be to rationalize holding any inventory. 

(Imagine scenarios where banks can rationalize economically holding large amounts of securities/derivatives in inventory even for eventual client sales, but will choose not to build up inventory for clients to avoid the risk of penalties of not complying with Volcker restrictions.) 

Some say the best talent for managing trading volumes, risks, portfolios and positions will no longer reside at banks. Some say new rules will discourage financial innovation, because banks often trade and make markets in new products in large volumes to generate interest and liquidity. (Banks don't push new trading products if the profit dynamics don't make sense.)

Yet others contend we won't see those periodic billion-dollar trading losses because banks' "prop desks took a view" of the market or tried to guess interest-rate trends, commodity prices, or economic indices in their efforts to make gobs of money from proprietary positions.

At least for a while in 2014, banks will routinely convene troops of lawyers, traders and compliance officers to figure out this new world. It won't be easy. What happens if a bank amasses a position with intents to sell to a client, but the client decides not to pursue the trade? Will a regulator slap the bank's wrist right then and there? What happens if the bank purchases certain derivatives to hedge a portfolio, but volatile markets abruptly change the hedged position into an huge, unhedged derivatives position?   

Somebody within the banks' troops will be required to spend all-nighters trying to determine the  section in the hundreds of rules pages that cover these scenarios.

Tracy Williams

Thursday, November 21, 2013

At JPMorgan Chase, Is $13 Billion a Lot of Money?

The $13 billion: It can handle it.

A question has lingered for much of the past week, one that hasn't been asked often out loud or asked pointedly. Is $13 billion a lot of money for JPMorgan Chase? 

Will it crush the bank's growth plans and business opportunities in the periods to come? Will it strangle a banking empire and cause it to retreat into a shadow of its post-crisis self?

Announced in business headlines everywhere, the $13 billion is the total amount in the bank's settlement with the U.S. Department of Justice, all related to the bank's mortgage-securitization business in the 2000's and the businesses it inherited from its acquisitions of Bear Stearns and Washington Mutual. 

The government claims JPMorgan and affiliates improperly and unfairly structured mortgage securities, leading to billions in losses to investors who had purchased the securities. The settlement puts an end to one chapter in the bank's efforts escape the mortgage nightmare of that decade. 

For a financial institution with market value and book value in the hundreds of billions and with billion-dollar earnings announced every quarter, is $13 billion a lot? Let's decide.

Of the $13 billion, about $7 billion is tax-deductible.  Hence, the bank will have a benefit on its tax books (reduction in tax liability, e.g.) of some kind for about $2-3 billion, effectively reducing the "pain" of the settlement by that amount. 

Of the $13 billion, about $4 billion is slated for mortgage relief for homeowners.  Banks and investors who hold those loans or hold securities backed by those loans have likely written them down, charged them off, or set aside significant reserves.  If JPMorgan continued to hold some of those loans and securities on its books, the settlement amount captures assets that the bank had previously written off or planned to write off. In effect, the settlement number acknowledges and accounts for write-offs the bank already took (related to mortgage securitization).

The rest comprises payments to state regulators and to investors who bought mortgage securities and suffered substantial losses.  In the $13 billion, the net cash payments due to organizations, regulators, and investors amount to something less than $8-9 billion (estimated). 

In 2012, the bank (consolidated) reported $21 billion in earnings. It operates at a pace of generating about $6-7 billion each quarter (or about $24-28 billion/year). Hence, a gross $13 billion settlement doesn't result in fiscal-year losses (comprising about half of expected annual income).  The bank will continue to be profitable, expecting to report profits above $15 billion in 2013 and above $25 billion in 2014. 

Even more, the bank indicated it has already set aside reserves (and adjusted financial statements) to account for the entire $13 billion--including about $9 billion in legal reserves (including write-offs and loss provisions) in the third quarter in anticipation of various legal settlements. 

JPMorgan's equity base exceeds $206 billion, an amount that has already netted out much, if not all, of the $13 billion. A $13 billion settlement comprises less than 7% of equity, if it had not already made equity adjustments for such charges. As massive as the number appears in headlines, $13 billion won't put the institution in financial peril. 

Has the bank's market value (share value) suffered because of the settlement?  In recent weeks, as the public heard rumors and eventually learned about a finalized settlement, the bank's share price didn't plummet and even flirted with record levels.  That's because the market, whether it's partly or fully efficient (depending on which finance theorist you believe), had already accounted for all possible losses related to the settlement.

Equity markets, too, like companies that flush out losses and start anew.  Markets like companies that erase vast amounts of uncertainty (especially related to lingering legal issues).  Markets appreciate and value companies when they clean the slate and eradicate such hangover. 

Then there are regulators, who have applied an increasing burden of capital and liquidity requirements to big banks. Does the $13 billion jeopardize regulatory compliance? Not really.  The bank had already begun to retain, boost and increase capital to comply not only with capital requirements of today, but the progressively increasing requirements over the next few years.  Its regulatory ratios were in good shape.

New regulation has certainly annoyed JPMorgan (and its peers) and has stifled business activity in certain segments (trading, the best example).  The bank continues to grapple with new rules regarding trading, leverage and liquidity.  But the settlement hardly influences the scenarios the bank confronts on these fronts.

Still, $13 billion is still a mind-boggling total, so it has to hurt somewhere, if capital ratios, earnings, balance sheet, and stock price have not felt pain.  Moody's, the ratings agency, in November downgraded the holding company a notch, but the downgrade had little to do with settlement figures, more to do with systemic issues and how Moody's suspects big banks can manage through crisis scenarios. 

Some "hurt” or injury should exist, contends the Justice Department, which wants the bank to comprehend the impact of its past actions.  The bank has weathered public embarrassment, glaring headlines and threats to gilded reputation, but all that could be short-lived, as regulators and the media move on to the next big issue plaguing financial institutions. 

For now, the "pain" of the settlement is not financial. Could there could be a cumulative, damaging effect from having to ward off the slings and arrows of many legal issues at once? They include (a) the time commitment and distractions involved in legal wrangling and legal negotiation, (b) the possibility, even if remote, of criminal charges arising from any of the past activities, and (c) other legal issues (including any related to last year's "Whale trading" derivatives losses that exceeded $6 billion. 

Don't forget, too, the expected "pain" of explaining to senior managers, deal-doers, and business leaders how inappropriate it might be in 2013 to pay eye-popping bonuses in the wake of a $13 billion shakedown, an internal corporate message that always results in the risk of losing talent. 

And $13 billion is an amount of missed opportunities--new investments in business expansion, product growth and new technology that the bank could have made, but didn't.  The bank, nonetheless, would counter that it has ample resources, people and capital (from retained earnings) to make all the investments it needs in the post-crisis era. 

At JPMorgan, the "pain" will be bearable.  CEO Jamie Dimon will sleep at night. The $13 billion was, well, not too much money. 

Tracy Williams

Wednesday, November 13, 2013

MBA Students: An Eye on Summer '14

CFN hosted its annual webinar to launch interview season
Most MBA students today, including Consortium students across the country, will argue there is no one segmented part of the calendar for "recruiting season."  Every aspect and experience of business school is "recruiting season," from the time students declare their intentions to attend a certain school until graduation. Every day, not just a few weeks in the fall, MBA students contemplate where they want to be and what they should do to secure the right job.

Students today, and their career-advisory specialists on campus, say there is seldom a time when an MBA student is not absorbed in thought about information interviews, mentors, alumni connections, career choices, or a specific post that awaits after graduation. Nonetheless, late fall usually signals the formal start of interviews:  information interviews,  first rounds, lottery interviews, interviews earned from being selected by companies, second rounds, technical interviews, and follow-up sessions to decide whether to accept an offer or go elsewhere.

The Consortium Finance Network hosted its third MBA recruiting webinar Nov. 13 for Consortium first-year MBA students to launch interview season for those interested in finance and financial services.  Panelists included Consortium graduates in a variety of finance roles, working for financial institutions and industrial, entertainment, and consumer-products companies. CFN steering-committee members, D-Lori Newsome-Pitts, Camilo Sandoval and Tracy Williams, moderated the presentation and subsequent discussion. Consortium students logged into the webinar from schools around the nation.

Panelists included Consortium alumni Abijah Nyong from Dow Chemical (Indiana-Kelley business school), Christina Guevara from Goldman Sachs (NYU-Stern), Stephanie Rosenkranz  from ESPN-Disney (USC-Marshall), and Brace Clement from Starbucks (Wisconsin). Some were recent graduates, fresh from the experience of going through the process. 

Nyong from Dow Chemical set the tone for the evening.  "When it comes to talent," he said, "good talent comes off the shelf.  Even if the business prognosis is not good, we take good talent."

To guide students, CFN presented a general recruiting outlook in several segments of finance. Opportunities in finance fluctuate and take assorted, unexpected turns from year to year.  In 2013-14, the outlook is generally upbeat, as banks, investment firms, and companies have become confident enough to open their doors for more MBAs.

But as most experienced finance professionals know well, it helps to be cautious, careful, and forewarned.  In finance, the tide and sentiment of recruiting can turn on a dime. Some years, companies hire more than they need. In other years, companies are sour on economic prospects and hire fewer than they should.  More than ever, however, financial institutions and companies are serious in hiring summer interns, since most hire interns with hopes of offering them full-time employment when the summer is over.

In corporate finance and corporate treasury, as the economy grows and improves, companies are growing and expanding and will, therefore, have financing needs and investment opportunities.

Nyong said companies like his employer are looking for outstanding candidates and are increasing hiring. "We want to ramp up to try to make sure good employees are in the pipeline."

In investment banking, whether it's M&A, FIG, real estate, energy or health care, all depends on the industry segment, expectations within that industry and general business trends. M&A, for example, had shown signs of starting to soar this summer, but experts now can't figure out why it stalls from time to time.

FIG investment banking has benefited from the capital requirements and restructuring initiatives of banks everywhere, in the wake new regulation and reforms. Equity finance is patting itself on the back after renewed confidence from IPOs (think Twitter) and investors' comfort in stocks.  Debt finance has been bolstered by low interest rates.

In private banking and wealth management, banks will continue to emphasize growth, because they like the fee-based businesses without having to build up their balance sheets.

"Banks have pushed to build out (in private banking) because of the sticky assets," Guevara said. "They are focused on growth."

In corporate banking, opportunities exist because big banks, which had swooned toward the high returns and headlines of investment banking, have learned to appreciate the stable returns and bread-and-butter benefits of corporate lending and cash management.

Sales & trading opportunities at financial institutions are limited, because regulation and reform will restrict what they can do--if not now, then over the next few years, as SEC and Dodd-Frank rules are written and become clear.

Banks everywhere have restructured trading desks and trading roles. The best opportunities, if any, for MBAs interested in trading will be at asset managers, boutiques, specialty trading firms and hedge funds. Others will remind us, however, how significant aspects of trading are now directed by computers, algorithm, client flow, and trading schemes--not requiring as many desk traders (or people).

For years, MBAs overlooked opportunities in risk management and didn't know much about the role. Financial institutions seldom tapped business schools for risk managers. After the crisis, financial institutions have learned lessons or have been forced to beef up emphasis, add professionals and become more attuned to all forms of risks. Regulators, too, in these times are always in the vicinity and insist that banks devote resources and attention to risk management in the way they may not have done so in years before the crisis.

Clement from Starbucks said, "I wish I took more classes in risk management (while in business school) and learned more how to manage (market) risks."  He described ways in which his company must hedge the complex risks of costs of commodity products. Business schools have responded in recent years to offer courses in risk management (for credit and market risks). 

Opportunities in venture capital, private equity and hedge funds are fleeting or uncertain, partly because these firms often recruit beyond the eyesight of business schools and tend to have opaque recruiting procedures. There exists, also, possible fall-out from recent insider-trading scandals (think SAC) and industry-wide hedge-fund shake-out.  Hedge-fund returns, believe it or not, trail that of equity markets in the past year or two, and more than a few hedge funds have closed their doors in the last year.

In venture capital and private equity, some industry observers say too much money might be chasing too few good deals.

Sandoval presented CFN's framework for approaching interviews.  The framework encourages students to examine and polish themselves in five areas:

(a) personal background,
(b) personal interest in the industry and company,
(c) personal drive and motivation,
(d) capability (expertise, knowledge, understanding of industry) and
(e) insight.

Nyong said, "I did a lot of informational interviews to find out what (industry segment) felt natural to me." He instructed students, "Look at the spectrum of positions available.  Seek out alumni."

Panelists emphasized the importance of being aware of current events, topics and issues, because interviewers will refer to them and being informed can help students make decisions about what they want to do. Guevara advised that students should make sure to "study markets and current events and have a sense of what's going on."

Rosenkranz recommended that students register and subscribe to, a website that aggregates news stories and headlines, based on specific business areas (finance, accounting, marketing, etc.) or specific topics (derivatives, currencies, digital advertising, etc.). A student can tailor the website aggregation to his specific interests and can see the updates he needs to see.

Panelists emphasized frequently the importance of conveying interest, drive and enthusiasm in finance-oriented interviews. In interviews, Sandoval explained, "We forget to talk about our general interest and passion for finance."

Clement summed up, "You want them (the companies) to believe you can do this job."

"You have to know who you are and where you want to go," Nyong said. "If you can't buy it yourself, you can't sell it."

As panelists presented the CFN framework, Sandoval reminded students, "You are in the driver seat.  You design the framework that works for you. You control the questions."  

Year after year, finance students fear the technical interview, where financial institutions try to gauge what candidates know and how they describe finance scenarios on their feet. To prepare for what they perceive as stressful exercises, students study market trends and refresh themselves in principles of finance, markets and accounting. Beyond that, candidates seldom know how that interview will evolve.

Investment banks may require candidates to present a detailed deal strategy or advise in valuing a stock offering.  Hedge funds or asset managers may require candidates to  explain trends in interest rates or derivatives pricing. Corporate-finance managers may require candidates to evaluate a balance sheet.

Nyong advised, "Read the company's 10-K to prepare.  It offers a vision of their market and shows contrasts with competition."

Rosenkranz said, "Listen to the (company's) investor calls to see how management responds.  Listen to the kinds of questions (analysts) ask during the calls."  She added that for technical interviews, companies want to "see if you have intellectual curiosity." And she suggested that candidates can learn much about the company's structure, management and culture by referring to the website

"How does the company make money?" Rosenkranz asked, recommending candidates study closely the company's business model.

Clement saw the benefits of understanding thoroughly a company's income statement.  "You'll want to understand the P&L from top to bottom, understand the balance sheet," he said, because interviewers will be familiar with this financial information and will want candidates to show familiarity, as well.

CFN panelists, now experienced and entrenched in finance positions, shared other observations and advice.  However, while satisfied with their efforts to get from the classroom and case study to roles in finance, is there something they would have done differently in the recruiting process?

"I would have gotten a better sense of other roles (in the company)," Nyong said. They would include roles in operations, marketing, manufacturing and other functions, because finance touches so many important activities in an industrial company.  "I would have gotten a better understanding."

"I would have found somebody to act as a blueprint," Clement said, explaining the importance of connecting with a school alumnus, an experienced mentor,  or a senior manager to learn more about the recruiting process, the industry, and the ropes for converting dreams into strategies into meaningful job offers.

Rosenkranz said she understood the importance of showing intellect, expertise and general knowledge about the industry, but wished she examined more carefully companies' work environment and culture.

Panelists concluded that most MBAs, especially ambitious Consortium students at top schools, will find opportunities and take advantage of some of them.

"You want to be intentional," Clement offered. "You shouldn't just want to find any place to land. You shouldn't be fishing for just any place."

Tracy Williams

(A recording of the webinar and the accompanying written presentation will be available to CFN members in Linkedin.)

See also:

CFN: MBAs and the Summer of 2013
CFN:  Is the MBA Under Attack? 2013
CFN:  MBA:  Remaining Relevant, 2011
CFN:  Mastering Technical Skills, 2010
CFN:  Who's Headed into Finance? 2013
CFN:  How Mentors Help, 2009

Thursday, October 31, 2013

Goldman Sachs and Work-Life Balance

Goldman Sachs announced this week that it had instituted ways to improve the work experience of analysts (in its BA program) and reduce the number of hours they work each week. It's the lore of investment banking to hear stories of analysts and MBA associates, too, who work long hours that stretch through the weekend and through holidays and vacation time.

Goldman acknowledges that it is missing out on some top talent, when recruits have selected other finance jobs or industries because of work-life-balance issues. Talented BA's and MBA's will express an interest in corporate finance, will have the aptitude and drive to work on deals and with important clients, but, as Goldman sees it, they back out and accept offers elsewhere. And they may whisper to Goldman and other major banks that it wasn't about the compensation.  Thus, they choose pathways that take them to the shorter hours and better lifestyles offered by hedge funds, smaller boutique firms, and the finance or strategy departments of non-financial companies.

Goldman, for its part, will discourage analysts from working weekends.

Big banks have tried to address these issues over the past 13-15 years, going back to the times when banks risked losing talent to dot-com opportunities. But the slope is slippery. They implement programs and try to change the culture. They make promises to recruits and junior bankers.

Yet in the trenches, old managerial habits surface, and analysts and MBA associates are pushed to extremes to help in deals, to do extensive modeling and research and to participate in elaborate client pitches. No matter how hard banks try to tweak and twist the work culture, mid-level bankers face unbearable pressures to win deal mandates, generate revenues, manage risks and comply with new regulation--without regard to firm rules about working weekends or until midnight. For some middle and senior bankers, there is a little bit of "because I did it, they ought to, too."

Often the messages of improving work experiences, coming from senior managers far removed from deals and clients, are lost in execution or not enforced fairly or properly. The deal, the pitch and the demands of the client becomes the modus operandi.

Still, because this is Goldman, the industry will watch how this unfurls. Goldman has said that, if necessary, it will hire more analysts to compensate for work not getting done during weekends.

The reports, at least what has come out, don't address work-life issues for MBA associates. Therefore, although the firm likely wants to improve work experiences for the older group, it wasn't ready to say they (the associates) can have all weekends off, too.

Tracy Williams

See also:

CFN:  Delicate Balance:  Long Hours and Personal Lives, 2010
CFN:  Is I-Banking Still Hot? 2011
CFN:  Summer-Internship Experiences, 2010

Friday, October 18, 2013

MBA Recruiting: Working the Game Plan

Cornell's Johnson School: Ready, set, network, interview
When recruiting season rolls around, MBA students in finance (including Consortium students in finance around the country) toss the books on the shelves and roll out the details of a game plan to secure a job for the summer or for full-time employment after graduation.

Student sentiments always seem the same year after year.  They never realize how much time, energy, effort, focus, and discipline the process entails.  Often recruiting season is launched right in the middle of midterms and just before first-semester exam season.

MBA students rejoice in the chance to dream of the opportunities presented to them and the chance to drift smoothly into a wonderful job in an ideal industry, making substantial impact, having meaningful experiences, and accumulating their fair share of sums of money.  That's summer-time luxury.  When recruiting season starts, the real world smacks right in the face.  There is time, but the game plan must be in place.

By the time information interviewing, networking, and corporate presentations are in full swing, the MBA finance student needs to have started the process of narrowing choices.  For most, it's not easy. When November approaches, it would be naive for a student to proclaim interests in investment banking, equity research, community banking, and derivatives trading (all of the above) and then be prepared to handle the tough interview process of three or more different finance segments.

Most MBA finance students at top schools know and understand the game.  They are surrounded by peers and career counselors. They discuss timetables, networking events, opportunities and career choices every day, throughout the day, in between classes and at wine receptions in the evening.  Most are open to advice, hints, and help from school advisers, alumni and contacts at major firms and companies.

Most understand and appreciate the value of information interviews and networking.  Students listen and learn and decide on corporate cultures, compensation incentives, work-life balance, and self-fulfillment on the job.

Many, however, under-estimate the importance of keeping up with current markets, deals, transactions and business and economic trends.  Case studies, projects, and exams often get in the way of knowing and understanding what's going on in current markets: recent deals, recent trends, recent regulation, or important discussions of corporate strategy and growth expectations in industry segments.

It becomes almost impossible to juggle preparing for a finance midterm with finding time to learn about Yahoo's latest earnings results, comprehend the interest-rate leanings of the Federal Reserve, or figure out why there were swings and dips in equity options markets.  But corporate interviewers and committee members who make selections tend to weigh heavily around the topics, transactions and activities they are involved with or familiar with.

Opportunities in finance are broad, and the hopelessness, fears and anxiety coming out of the crisis have receded. Finance students today have a buffet of choices.  Still, they must have a game plan ready, a fierce resolve and determination to go through the process, a refined idea of what they want to be and do and an in-depth awareness of what's going on in the financial headlines.

Tracy Williams

See also:
CFN:  First-year MBAs and Recruiting, 2011
CFN:  Gearing Up for Summer Internships, 2012
CFN:  MBA Job Hunting:  No Need to Panic Yet, 2012 

Apple, With All That Cash: Revisited

Billions and billions in cash, still
In corporate-finance circles,  Apple presented a delightful dilemma in much of 2012.  What should it do with its billions of cash, sitting on the balance sheet, earning paltry returns in safe markets, causing restlessness among shareholders who felt entitled to special dividends to get access to it? Should it use cash to repurchase some stock, a few shareholders pressed?

Shareholder activists clamored for cash pay-outs and even devised ingenious financial maneuverings and new equity instruments to get to it.  The current generation of Apple managers, with Tim Cook at the helm as CEO, grew up with Steve Jobs' abhorrence of debt markets and his clinging to a security blanket of hoarded cash if only to endure tough times.

Apple has often countered--in carefully worded ways--that much of the cash it maintains appears in foreign subsidiaries, cash that couldn't be efficiently repatriated back to the U.S. into the hands of shareholders without the company paying onerous taxes on it. This argument may make sense to corporate-finance managers, but wouldn't sit well in the public media.

After shareholders fussed enough in the past year, Apple decided to tap debt markets and borrowed $17 billion to use some funds to give shareholders a gift (via dividends and share repurchases). Apple wasn't desperate for new funding, but appeased shareholders while taking advantage of low rates in the marketplace.

Often at established companies, new-debt funding is channeled into new investments, new acquisitions, or aggressive expansion or into replacing old, more expensive debt.  Apple's borrowing helped quiet teeming shareholders and proved to capital markets it could get comfortable with the process of taking on new loans and issuing corporate bonds, if it ever needed to.

With the debt now in place, what is the flavor and look of Apple's balance sheet today?

1.  Cash reserves.  Funds from the new borrowings might have been a gift to shareholders, but Apple continues to be a formidable cash-generating machine in its global operations.  By late summer, Apple's cash accounts (including some liquid short-term investments and excluding much of what's held abroad) had almost doubled over the past year to amounts above $42 billion.

With debt proceeds, it provided gifts to shareholders, but cash will continue to climb as the company continues to be profitable. The company is operating at a pace of generating about $7 billion in new cash every quarter.

2.   Debt on the balance sheet.  For once, there is long-term debt on its balance sheet, $17 billion. But it's still insignificant.  The closely watched debt-to-equity ratio is still so low (0.13) that it would hardly cause a blip on the analytical screens of ratings agencies and investors. Every bit of that debt could be paid down within days with cash on hand, if it chose to do so.  No need to wait for cash generated from operations.

3.  Debt capacity.  Is there any room for more debt (to help increase ROE, if not fund new projects), now that it has gotten a first bite of it? With cash flow of that magnitude, the company has lots of room to borrow more if it needed to or wanted to.  Interest expense on the new debt each quarter will total less than $200 million--having no burden on a company generating $6-7 billion in new cash quarter after quarter and already with over $40 billion more sitting aside with little agenda.

The company could arguably borrow another $50 billion before investors and ratings agencies might start fidgeting. This assumes Apple will continue at a modest growth pace and the whole globe is at least somewhat infatuated with its product offerings.

These transactions in 2013 were all about tests and gifts for Apple--a test to see if it can become accustomed to debt markets and a gift to get shareholders off its backs. It passed the debt test. Shareholders, however, will become spoiled and will continue to look for more dividends and repurchases, as Apple piles on $5 billion or more of new cash quarter after quarter.

Tracy Williams

Sunday, October 13, 2013

The Verizon Deal: Big Numbers, Big Debt

When the deal was announced, some surely gasped.  The fact that Verizon Communications decided to purchase all of Vodafone's stake in Verizon Wireless was not a surprise.  Vodafone had decided to sell its stake and units in mobile phones.  What likely caused market observers and headline writers to turn their heads in wonder was the size of the deal, the big numbers. They were huge.

Deals and big numbers excite investment bankers and can spur them to pant and salivate. In the Verizon case, they certainly will, once Verizon gets around to handing out advisory and underwriting checks for fees. Deals and big numbers tend also to cause hiccups and coughs among some investors, research analysts and bank risk managers.

This deal is big, one of the largest ever. Perhaps it sends too many hopeful signals that an era of super-size deal-making has returned.  Verizon Communications announced it will pay a whopping $130 billion for Vodafone's stake. To raise $130 billion to pay Vodafone, it will issue about $60 billion in new stock and tap various other accounts and reserves for billions in cash. It will borrow another mind-boggling $49 billion in bank and debt markets in one of the largest debt deals ever.

While some industry experts applauded this announcement, the stock market gulped, trying to figure out the true impact of Verizon digesting all this new debt onto its balance sheet. Verizon's stock value fell 3% on the day of the announcement.

The deal will probably be approved by regulators, will likely be executed, and will just as likely work--meaning, shareholders will gain value because of it and debt-holders, while crossing their fingers, will receive the regular cash interest payments due to them each quarter.

But some flags emerge. They send signals to investors and credit-risk managers that the deal is not a no-brainer.  It must be assessed carefully.

1.  Verizon already has over $40 billion in long-term debt.  Now add $49 billion in more debt, and that sums up to over $90 billion in total debt.  To manage this mountain of debt, Verizon must generate over $3 billion of year in cash flow to handle just the interest expense.

Is the company capable of handling this burden?  The company operates at a pace today of generating about $10-12 billion/year that can be used to handle debt obligations.

That translates roughly into a Debt/EBITDA ratio equal to about 9.0. MBA finance students know well how this ratio can be used to compute a back-of-the-napkin analysis of whether debt levels are manageable.  It suggests that for Verizon, while the debt is manageable, there may be little wiggle room if cash flows from Verizon businesses fluctuate, as they easily can.

Routine business operations must generate the flow of cash to manage this extraordinary debt load. But there may be periods when something else must take a back seat:  Shareholders, for example, in one quarter may not get all of their entitled dividends, something they've grown accustomed to.  And when substantial new investments are necessary, they will likely be funded by issuing new stock.  The existing financial framework couldn't bear more debt--at least for now.

2.  Verizon's balance sheet spurs a few questions, too.  This is a capital-intensive business, so its nearly $90 billion in plant and equipment is no surprise.  This is also a technology business, so its nearly $100 billion in intangibles and goodwill (from acquisitions, copyrights, patents and more) is not a surprise.  But those assets are supported by "only" $34 billion in equity capital.

After the Vodafone deal, equity capital will increase substantially, but so will the amount of intangibles and goodwill---legitimate assets in the eyes of accountants, but assets that can't be touched and felt, in the eyes of investors and debt-holders (assets that also don't generate a steady flow of cash flow from quarter to quarter).

When analyzing a company, analysts prefer to subtract out intangibles/goodwill when computing the book value of a company (equity account). At Verizon, net tangible equity is computed to be a negative amount before the deal and after the deal. That often implies that debt funds all activities on the balance sheet, and there is little room for error, if the company runs into economic headwinds, and earnings (and cash flow) start to bounce around.

3.  Unlike other large companies with significant cash reserves,  Verizon may not have a comfortable stash of cash to meet unexpected cash shortfalls or required investments.  It would rely on external markets, sometimes in times when external markets wouldn't be kind.

What do ratings agencies think? They are in the ballpark.  Moody's and S&P currently rate the company Baa1 and BBB+, respectively--about what you would expect when there is already a significant debt burden and if bad times could jeopardize paying what's due on debt. With "stable" outlooks, the ratings agencies also observe that Verizon will be able to make investors happy.

Why would investors buy the debt? It's all about the interest-rate returns that investors can't get in other fixed-income investments. One tranche or segment of the new debt will yield 5.22% to investors over 10 years, a return that's not easy to obtain in a low-interest-rate era (even with recent interest-rate volatility and spikes, given uncertainty in Washington). That yield is enticing, and in the eyes of some, worth the risks described above.

Tighten up your belts.  This is a corporate-finance deal that can work, but there could be some bumpy moments along the way.

Tracy Williams 

See also:

CFN:  Libor in Crisis, 2012
CFN:  Why Is Dell Going Private, 2013
CFN:  Merger Mania, Boom Times Ahead, 2013