Bitcoins: Embrace or Beware?

A fad or the real deal?

Let's not beat around the bush about Bitcoins, the digital currency that has stirred up the financial world the past year or so.   

Bitcoins are a virtual currency, now accepted by some merchants and commercial enterprises as a form of payment for services or products. Because Bitcoins have a fluctuating market value, many try to exploit price volatility and treat Bitcoins as an investment--similar to investors who might purchase foreign currencies with hopes that volatile swings will result in handsome profits.

However, most participants are still not sure how Bitcoins came to be, who or what oversees the marketplace, and where all this is headed.  Let's be real. Any purchase or investment in Bitcoins is a speculative investment.  Uncertainty, volatility and mysterious (or mystical?) origins offset confidence prudent investors or users for payment purposes might have in its legitimacy.  As we saw in late 2013 when the Chinese government intervened to discourage its use, Bitcoins are enveloped by the unknown, and investors run for the hills when they sense something odd or peculiar in this marketplace.

This is a marketplace where even the most active participants are not sure the founder is one person with a vision for an online payment system or a horde of computer jocks out to amuse themselves. It’s a marketplace in its infancy.  As of mid-Jan., 2014, this is a $10 billion market with less than a million Bitcoins (BTC) traded or transferred daily.

Time will tell whether they will become a reliable currency for the long term.  Time will also tell whether this is a finance fad of the early 2010's or a landmark turning point in the history of monetary systems.

Transactions, trading and investing in Bitcoins are a global phenomenon now. A curiosity for some.  Just a year or so ago, the value of a Bitcoin was around $300. During the year, prices soared to $1,000, sank quickly to $500 last fall and then surged and stumbled again like laundry tumbling and churning in a dryer. (They were valued at about $780 in mid-Jan., 2014.)

Some argue Bitcoins (or their off-shoots or similar virtual versions) are here to stay. Bitcoin activity will be propelled by transactors attracted to a system that knows no boundaries, is not directed by government bodies or political systems, and allows for trades and payments in relative anonymity.  As with most financial trends or fads, this phenomenon is bound to stray in some direction--up or down, up and down, out of existence, or perhaps eventually into a nightmarish tangle of fraud, misrepresentation and legal quagmire.

For now, let's acknowledge what seems to be happening in early 2014:

1.  The price movements and upward, secular trend in value have attracted speculative investors around the world.  

Whether they believe in the system or are proponents of a politics-free, digital market for payments, they see opportunities to make money in the short term. If the price increased from $300 to $1,000, why wouldn't it increase to $2,000 over the next year or two--especially if popularity continues the current course?

Speculative investors may not care much for the algorithms and calculations that influence a Bitcoin's value. They see trends in growing demand and popularity, not always sufficiently explained, and a grand opportunity for a windfall.

2.  There appears to be a growing acceptance by some merchants and businesses to accept payment in Bitcoins (BTC).

Growing acceptance offers legitimacy and comfort to consumers who choose to participate in the system.  VirginAtlantic, the airline, joined this group late last year.

In some ways, an increase in participating businesses helps boost liquidity in the system and encourages other participants to join.  The growing number of participants may eventually cause a cry for more transparency and oversight--which exists today, but in veiled ways.

3.  A Bitcoin market depends on a class of participants called "miners," who act somewhat like "brokers" or "market-makers." 

In financial markets, brokers or market-makers facilitate and process trades. Rewarded with commissions or marked-up profit spreads, they have incentives to keep a market alive, active, and liquid.  In the Bitcoin world, miners act in that role.  Like many financial markets, Bitcoin "miners" have sprouted everywhere in surprisingly large numbers, partly because of the lure of rewards ("commissions") and partly because mining Bitcoins could be considered less risky than in investing in them.

Before others leap to join the ranks of miners, note the odd wrinkle in miners' responsibilities. Miners secure, confirm and report Bitcoin transactions. They are compensated by being rewarded with a special new supply of Bitcoins, but only after they have successfully solved a math problem that requires enormous amounts of computer power.

Think of a financial broker being rewarded with an incremental new issue of a company's stock.  Or think of the Federal Reserve rewarding big banks who confirm and expedite money transfers with new-money credits at the Fed. However, imagine being paid for the service only after solving a math problem that--by Bitcoin rules--will become more difficult to solve in the future.

Those who have access to such computing heft have opportunities to reap substantial rewards. Like market-makers and brokers in a financial market, they facilitate transactions without taking on significant amounts of investment risk. (Their initial investments are those in computer servers or in space that houses computers.)

Because they bear a little less risk than speculative investors, a cottage industry of miners (and related businesses) has surfaced in global corners everywhere--from California to Iceland. There are miners, but there are also companies that support miners by selling or leasing access to computers for mining purposes. There are investors (including private-equity firm Andressen Horowitz) that are now comfortable investing in "mining" operations.

4.  Bitcoin "money supply" is controlled, and growth is restricted, planned and charted, based on an initial algorithm. 

BTC coin supply is based not on economic policy or economic objectives, but on the complex math calculations miners are required to do with their high-power computers. 

By design, the more successful miners are in finding solutions to the calculations, the more difficult the next series of calculations becomes.  It becomes harder and harder to solve the problems to get the same reward. Miners will, therefore, invest in greater computing power to earn similar revenues. Today, miners are racing to grab revenues that might be near impossible to generate a few years from now. And racing like mad.

Those calculations have less to do with how central bankers manage monetary supply, more to do with the calculating power of their computers. Governments and central bankers, we observe, manage monetary growth based on objectives they have regarding interest rates, inflation rates, and expected economic growth.  "Money supply" is ultimately finite in the world of Bitcoins. Until supply reaches a determined maximum, it is now  determined by activity, participants, and computer power. 

5.  While "mining" helps ensure the Bitcoin market is an orderly market, nobody yet knows what will happen in the worst of cases.  

If there is a sudden crash in price --a sudden collapse or a widespread panic, who will oversee the marketplace? If there are crises or disruptions caused by technology, systems or deceitful miners, who will act to revive trading and transacting? 

6. The  system, which eased quietly into the global financial system within the past few years, will continue to attract participants--not because libertarians enjoy that governments have no part to play, but because of money-making opportunities.

A steady increase in legitimate participants may eventually force the system throughout--not just in segments--to provide a blueprint for how the system will behave in worst-case scenarios.  Furthermore, crises, disruptions and crashes will have inevitable legal implications, which of course will require governments or courts to intervene in the end.   

For now governments and central bankers have been shunted aside. The system is self-policing. But the greater the number of participants and the greater the likelihood for system mishaps, then the greater the push for order and protocol that would boost confidence in the system.

But will all that occur before the system's first panic crash, the shocking catastrophic plunge that will cause large numbers of participants to flee en masse with no confidence in ever returning?

Or will the system, supported by a phalanx of miners around the world, find ways to keep itself honest, fair, and relevant?

Tracy Williams

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

See also:

CFN:  The Volcker Rules, Here They Come, 2011
CFN:  Volckerized, 2010

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

See also:

CFN:  Apple's Stash of Cash, 2012
CFN:  What Happened at J.C. Penney, 2012

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

Now It's Twitter's Turn

Now it's Twitter's turn. It hesitated for the past year or so. This week (Oct., 2013) it bravely stepped into IPO waters, taking the first big step by sharing publicly its SEC filing and letting the financial world see its bottom line.

Twitter's hesitation, like all companies contemplating issuing stock to the public for the first time, results from trying to determine the optimal moment to sell stock in equity markets. That's often tied to market interest in the stock issue, supply and demand for the stock, and general equity-market trends.

Its hesitation may have also resulted from other factors: (a) its being shy about letting the world pore through its true financial performance and (b) its desires to avoid the IPO debacle Facebook experienced last year at Nasdaq with Morgan Stanley as the lead underwriter.

Twitter through the years has had to wrestle, too, with management and organizational issues. Some of those problems have been resolved, and the company has moved on to capitalize on its soaring popularity around the world.  In the filing, Twitter reports 218 million users on average each month this year, up 44% from a year ago.  Not quite Facebook numbers, but sufficient growth to get prospective investors interested and excited. Twitter might argue that the value or meaningfulness of ongoing usage is different than account activity in, say, Facebook or Linkedin. Hence, it's not how many use the site, it could argue as it sells new stock, but who uses it and how it's used. 

Because of the planned IPO, Evan Williams and Jack Dorsey, Twitter founders, can now calculate more accurately their fortunes (over $400 million each). A handful of venture investors will have a nice payday, as well.

Twitter in the filing divulged what many thought was the case. It continues to have losses with no signs those losses will turn into profits in the short term.  Investors in its stock, therefore, will bet that the company will continue to experience stellar growth in users, will find even more effective ways to generate advertising revenues, and will eventually turn losses into steady, growing profits by keeping costs under control.

The company will raise $1 billion in the IPO offering.  Investment bankers advising Twitter have suggested the company today has an implied market value of about $10 billion. How then does the company have such value, the corporate-finance novice asks, when the company reports losses with no expectations of profit in the short term?  SEC documents indicate the company lost $79 million last year and $69 million in 2013 to date.

Investors who will buy the stock are assuming profits are on the horizon. They will come because there are still vast opportunities to grow the number of users, grab more advertising dollars, and, therefore, increase total revenues substantially. They will buy the stock based on expectations, not based on history.

For now, investors and those who assess the value of the firm will value the company based on a reasonable estimate of growth prospects and based on refined projections of users and revenues. Revenues for the six months, 2013, doubled from the previous year, Twitter reports, while number of users continues to grow.

Investors and advising banks have Facebook and Linkedin as convenient benchmarks:  They study and compare current market values of those companies' stocks, their numbers of users, the activity in the millions of accounts and the level of sales and sales growth.  Investors will, too, assume the company, now under the guidance of CEO Dick Costolo, will invest in whatever technology is necessary from year to year to keep the engines going.

Twitter has few competitor threats. No other social network is about to topple it in doing what it does best in those 140 characters. But Twitter, along with Google, Facebook, and Linkedin, all chase after the same pool of advertising dollars. Companies seeking to advertise digitally must decide where they can get the biggest Internet bang without particular regard to the specific roles social networks play.

Goldman Sachs, winners of the investment-banking shoving match, will be the lead underwriter and will be assisted on the front lines by Morgan Stanley and JPMorgan.  The challenge they have as advisers, besides setting precisely the price of a single share, is to form a view of markets in the face of October's U.S. Government shut-down and recent equity-market uncertainty. But that's why they will be paid tens of millions of fees. They must step up and make such decisions and, especially after last year's rough launch, avoid a 2012 Facebook near-catastrophe.

Tracy Williams

See also:

CFN:  Facebook:  The Lucky Underwriters, 2012
CFN: Facebook Stock:  What's Going Wrong? 2012
CFN:  Did Goldman Overpay for its Facebook Stake? 2011

August: No Time for Doldrums

Market events mean no time for rest?

If history repeats itself or if tradition rules, then the waning days of summer in finance and markets should be marked by doldrums, inactive markets and dreading Labor Day.

But once again August has thrown a soft curve ball--with market volatility, big institutions confronting legal issues, and a band of activist shareholders causing havoc in boardrooms. Nothing that has caused market nightmare, but enough to cause a little upheaval in what should be dull days before mid-September.  The Augusts of 2011-12, recall, were upended by disgusting debates in U.S. Congress about government deficits and debt. 

The tale of the "Whale" and the $6 billion in trading losses at JPMorgan from 2012, events we thought had faded from everybody's attention, plopped up again when government regulators and law-enforcement officials decided to place criminal charges against some banks officials for hiding information about the losses and acting in deceitful ways.  The irony is the "Whale" himself, the JPMorgan trader in London who presided over the disastrous trading positions, is not a target.  JPMorgan likely suspected some action of this kind would occur, but it didn't expect the whole matter would resurface in late-summer business headlines, forcing the bank once again to rehash, review and remember the whole dreadful episode.

William Ackman, the tenacious shareholder activist whose bold charges and boardroom moves attract constant media attention, raised his surrender flag this month with J.C. Penney.  Ackman and his Pershing Square Capital fund were instrumental in implanting Apple-groomed CEO Ron Johnson, who was supposed refashion JCP into the retail-industry version of Apple-like merchandising. The Ackman-backed experiment failed miserably, the JCP CEO resigned, and Ackman became a pariah in that boardroom.  He gave up in August, resigned from (or was shoved off) the board, and resumed his shareholder fights elsewhere--at Herbalife. 

Ackman has charged that company (Herbalife) in running a Ponzi scheme in selling its product, and various sides have taken up the debate:  Is Herbalife a legitimate company, a reasonable growth investment? Or is it administering a fraudulent marketing scheme? The skirmish continues.

Commodity activities have plagued big banks Goldman Sachs and JPMorgan this summer, and unexplained volatility is not the reason.  Business reporters (first at the New York Times) discovered questionable practices by Goldman in aluminum markets, where Goldman receives fees for warehousing aluminum before final sales to end-users. Goldman is alleged to conduct a practice of delaying the transport of aluminum by transferring it from warehouse bin to bin for no apparent reason except to prolong fee collection.

The wreckage of mortgages and assembling mortgage securities won't go away for many top banks. This summer, Bank of America, still being knocked over for acquiring Countrywide in the midst of the crisis, is wrestling with legal accusations and possible settlements--in the tens and hundreds of millions. 

Elsewhere, regulators accused JPMorgan for deceptive pricing behavior in West Coast electricity markets.  Energy regulators accused the bank of unfair mark-ups in electricity prices in related trading activity.  JPMorgan and regulators agreed to a settlement, but the entire episode was enough to spur the bank to move quickly, reorganize and rethink its commodities-trading business. It opted to withdraw from physical-commodities businesses--businesses it had inherited from Bear Stearns.

After a remarkable first-seven months run, equity markets have begun to rumble and shudder, mostly because market-moving investors prefer to pay much attention to hidden messages coming from the Federal Reserve.  Every hint that the Fed plans to stop purchasing bonds that will keep interest rates low leads to gyrations in stock markets. That's the way the markets move these days.

And while it was transforming itself into a model citizen for regulators, JPMorgan was pummeled once again when the SEC announced it was investigating the bank for nepotism, hiring sons and daughters of well-connected Chinese executives and government officials.  No doubt senior bankers in CEO Jamie Dimon's circle are puzzled about a finance-industry practice that has taken place since, well, stock-market traders consummated transactions around a tree in downtown, 19th-century Manhattan.

Perhaps these days, it's all  the new normal--abetted by the Internet, technology, immediate access to market updates and everybody's ability to reach out to anybody anytime.  There might have been a time when all bankers, traders, compliance officers, deal-doers, and research analysts escaped en masse in August.  But nowadays regulators and enforcement officials don't take a break.  High-frequency traders and hedge-fund managers don't let up in summer.  Shareholder activists don't ease the pressure, and board rooms, CFOs, and investment-managers don't have the luxury of summertime doldrums anymore. 

Tracy Williams

See also:

CFN:  Delicate work-life balance, 2010
CFN:  Market volatility: Can you stand it? 2011