Basel III: Becoming Real

For those who work in or work with financial institutions, it's nearly impossible to avoid discussions of financial regulation.  It's everywhere.  It can be the drudgery of banking, deal-making, trading, lending, and investing.  But in an environment that is hustling to rid itself of the stark memory of the financial crisis, it's inescapable. 

Financial regulation, Dodd-Frank and Basel III are hot summer topics this year, because it's time for the deliberation to stop and for the rules to become real.  Large banks, such as Bank of America, Goldman Sachs, and Citigroup, have sprinted tirelessly to get ahead of the 900-plus pages of Basel III regulation-- rules drafted by the Basel Committee on Bank Supervision, which includes 27 nations, and intended to have more meat than the rather languid rules of Basel II and Basel 2.5.

Basel III regulation consumes the minds of CEOs and global heads of legal, risk, and compliance.  Trying to gain a fierce grip around the Basel III monster requires resolve, patience, an obsession to detail and resources to hire people and invest in infrastructure to keep up with everything.

The essence of 900 pages of guidelines and rules is that capital is king, that enormous of amounts of bank capital act as a safe financial cushion in times of crisis, whether the crisis is caused by in-house failures or by system-wide troubles.  Basel III details explain the calculations banks must make to determine the precise amount of capital they must maintain for the level of business (measured by the level of assets--assets on and off the balance sheet) they are engaged in.  

To avert confusion of what is an asset and what comprises capital and to discourage banks from using financial tricks to circumvent the rules, Basel III painstakingly defines "assets" and "capital." It also permits other regulatory bodies (such as the Federal Reserve) to define assets and capital further and add their own pages to the existing rules. In other words, the Federal Reserve can choose to make the requirements tougher, as it did in early July.

Capital requirements differ for different kinds of banks, for banks of various sizes, and for large banks (like JPMorgan Chase, Wells Fargo, or Bank of America) that have what many say is extraordinary impact on the global financial system.

This month, the Federal Reserve took bold steps in the Basel III roll-out by tweaking the leverage rules, causing bank CEOs and compliance officers to squirm even more. The Federal Reserve proposed stricter leverage limits:  No matter how risk-averse a bank's balance sheet can be, the Federal Reserve proposes that the largest banks (those with assets exceeding $700 billion) must maintain $6 capital for $100 of assets, implying a maximum leverage (total assets-to-capital ratio) of 16-to-1.  (Basel III is more lenient at $3 capital/$100 assets, permitting leverage to rise about 30-to-1.)

What irks banks most nowadays are (a) the vast amounts of resources, time, and people they must deploy to comprehend and keep ahead of the rules and (b) the uncertainty of what's to come from further rules imposed by the Federal Reserve and other regulators. What has frustrated banks the past few years, until they begin to accept it as a matter of the way things are in the new world of banking, was the impact of increased capital requirements and reduced leverage on banks' returns on equity.  More capital and lower leverage, quite simply, imply lower ROEs.

Outside the offices of senior bank managers, what does Basel III mean to everybody else--bank shareholders, finance professionals, bank clients, and finance students pondering careers in banking?

1.  If there is another tumultuous financial crisis, most banks complying with Basel III will be better able to endure it.  Governments won't likely need to inject billions in new capital to give the banking system a spark.

2.  If one large major bank struggles and implodes, its collapse won't likely cause system-wide turmoil, won't threaten the global financial system, or won't cause hundreds of its counter-parties and clients to tumble with it.

3.  Regulators and market-watchers might forecast better which large banks are vulnerable and could be threats to cause damage to the financial system. They may be able to diagnose a sickness in the system before it causes a global plague.

4.  Banks, not able to exploit leverage and constrained by rules from taking exorbitant risks, must settle for returns on capital in the 10-15% range, if they even manage themselves efficiently and maintain large market shares.  Days of regular 20%-plus returns will be almost impossible to achieve. With relative higher amounts of capital on the balance sheet, they won't be able to use debt to get boosts in ROEs.

5.  Economists and business leaders appreciate concerns about risks, weak balance sheets, and burdensome leverage and debt levels.  Some fear, however, good banks might become too strapped by rules and will become less willing to take prudent risks--risks that include lending to corporations, small businesses and start-ups that provide swift thrusts to a lagging economy. 

Others fear an irony.  Banks limited from growing balance sheets with debt will try to book as many high-risk, high-return loans and activities as possible to boost returns.

6. Banks will hire and might be willing to pay a premium for expertise in compliance, reporting, risk management, and systems.  Complex regulation will require experts to interpret rules, gather data, calculate requirements and report to regulators--in real time, all the time, for the rest of time.

Banks would have preferred to hire new people for revenue-generating businesses or deploy capital for new businesses and expansion. But they have accepted they must build stronger compliance and risk-management structures and show shareholders, regulators and politicians they are taking new regulation seriously. (In 2012, JPMorgan Chase reported it would take 3,000 employees and nearly $3 billion in costs to comply with new, ongoing regulation--over 14,000 different rules from all forms of regulation, not just Basel III rules.)

6.  Senior bank managers will spend more time acting as arbiters among business units scrambling for a precious piece of the bank's balance sheet.  There will be more defined rules for capital allocation:  Who will get to use increments of capital for business purposes? And who will be able to maximize the amounts allocated to them?

7.  Banks will obsess over their capital numbers.  They must develop strategies for how to comply with rules today and in 2018-19, when most rules take effect.  Should they  issue more equity in large amounts now to increase capital and proudly show excess amounts before rules are in effect? Should they maintain excess amounts to show markets, shareholders and regulators they are flush with capital, amply above requirements?  Or should they not raise capital, but choose to scale down businesses, assets and risks, based on current levels of capital? 

8.  Bank boards, sector leaders, subsidiary heads and senior managers will knock themselves out, figuring out how to squeeze more return from the balance sheet, how to nudge ROE upward one more percentage point. They face monstrous challenges to do so without increasing risk levels and credit exposures, without the privilege of growing assets any way they could in years gone by. Solutions to this problem won't come easily.

Basel III has rumbled into town. Many rules go into effect in 2014. It's a reality, no longer an academic concept or a discussion paper in volumes by professorial types in Europe. Banks knew these days were coming and have been preparing them, but they still know it will be a constant, everyday struggle to tame the impact of 900 pages of guidelines.

Tracy Williams

See also:

CFN:  Basel III and Capital Cushion, 2010

CFN: 2013 Outlook:  Reforms and Recovery

Georgetown Becomes The Consortium's 18th

Consortium Gets DC Footprint

On deck is Georgetown's McDonough School of Business.

This week The Consortium selected Georgetown's business school as the 18th Consortium school. Georgetown will join the other schools formally in July and start admitting Consortium students in the fall, 2014. Consortium Executive Director Peter Aranda made the announcement June 24, marking The Consortium's first new school in three years. Over the past five years, besides Georgetown, The Consortium has added Cornell, Yale, and UCLA and invited back UC-Berkeley after it departed in the early 2000s. 

Georgetown follows the footsteps of other prominent business schools affiliated with The Consortium, including such schools as Emory, USC, Yale, Texas, Dartmouth, Wisconsin, and North Carolina. 

What does Georgetown bring to The Consortium table? It gives the organization an immediate footprint in the Washington, DC, area.  Consortium business schools, often known nationally as top schools by just about anybody who ranks, rates or evaluates MBA schools, are scattered about the country with imprints in major metropolitan areas (e.g., New York, Los Angeles, Atlanta) and with a presence in most regions in the U.S.  But The Consortium had not had a representative school in Washington. The closest business school is Virginia's Darden School.

That attractive location is another plus for a prospective MBA student. Strong MBA applicants have well-reasoned criteria when they choose among top schools.  They examine and choose schools based on course offerings and curriculum, based on a school's strength in certain concentrations (finance, marketing, international business, e.g.), based on faculty and staff they meet in the wooing process, and based on a general vibe, a comfort feeling they are well-suited for the school.

They also may select a school based on geography.  Most strong applicants visualize their lives after school and try to determine where they want to launch careers, where opportunities will be plentiful and where they want to reside over the next decade.  Opportunities and lifestyle in Atlanta will, therefore, make Emory's business school attractive. Opportunities in technology entrepreneurship and Silicon Valley will make UC-Berkeley attractive. The lure of the Midwest will drive Indiana and Wisconsin to the top of lists. For years, NYU has benefited from being a long stone's throw from Wall Street.


Opportunities in international business and Washington being at the crossroads of critical activity in business, law, and government service make Georgetown attractive.

Georgetown's McDonough School is now under the helm of Dean David Thomas, who arrived on campus within the past two years after a heralded career as a professor at Harvard Business School. His specialty there for two decades was organization behavior and human-resource management.  He has already made impressions along the Potomac. For example, taking advantage of the university's strengths in international business and affairs, the business school now requires first-year students to spend three weeks studying the "Structure of Global Industries," which provides a blueprint for students to study all aspects of business from a global perspective.

Thomas apparently also figured the school could do better in diversity initiatives, starting with the student body.  Georgetown hired Shari Hubert as associate dean of admission to increase diversity in applicants and matriculating students. Hubert, an MBA graduate from Harvard, has extensive experience in recruiting in positions she held at Citigroup, GE Capital, and the Peace Corps. Joining The Consortium was an appropriate next step for Thomas and Georgetown.

The McDonough School's MBA program is of modest size by most standards with about 250 students in a full-time MBA class--about the size of Dartmouth's Tuck, not as big as the programs at NYU or Michigan.  (The school has about 1,000 MBA students--including part-time and executive programs--and about 1,400 undergraduates.)

Otherwise, its profile is as familiar as those at other Consortium schools.  Students typically have about five years of work experience and are about 27-28 years old on average. About 1,800 prospects apply to the full-time program with admission rates hovering around 35%.  About 30% of recent classes are women. Also like other top schools, a significant percentage of graduates go into finance (28% in a recent year) and consulting (26%).

This bundle of advantages will now make for tough decisions for the prospective Consortium applicant, who--if she decides she wants to remain on the East Coast--must ponder choosing among rich business-school experiences at Virginia, North Carolina, and now Georgetown.

Tracy Williams

See also:

CFN:  Cornell Makes 15, 2009
CFN:  Welcome Back UC-Berkeley, 2010
CFN:  California Dreamin': UCLA Joins The Consortium, 2010
CFN:  Is the MBA Under Attack, 2013?
CFN:  The Global Imperative on Campus, 2012

How Will Steven Cohen's Saga End?

Should investors take the money and run?

If you were fortunate to invest in Steven Cohen's hedge fund, what would you do? Keep the faith, and keep your funds in SAC Capital Advisors?  Or take the money and run, while government investigators pore through trading records for evidence of insider-trading?

How will the SAC Saga end?


Tucked away along I-95 on the winding hedge-fund corridor in Connecticut is the home of the closely cloaked $14 billion hedge fund run by Cohen.  In the world of quantitative trading and hedge-fund investing, Cohen's SAC Capital is well known, envied by many, desperately copied by others, and revered by most in the investment community. These days, the fund is known outside the hedge-fund world because of  the investigative cloud that lingers above it.

Since its 1992 founding, an obsessed Cohen permitted few to learn about his fund's operations, performance, and trading strategy.  For most of the fund's existence, Cohen avoided public appearances and showed up nowhere if media appeared, except for arts and charity events. (His investments in art are legendary.)

He refused to let others take photos of him. The New York Times or Wall Street Journal published over and over the same one or two photos it could find of him in articles that chronicle the fund's history. The industry factions that follow, watch, report and try to ape his successes hardly knew or understand what went on inside. Forbes magazine estimated his net worth recently to be about $8 billion. The fund eventually reached $14 billion under management.

Nowadays headlines of SAC appear routinely in the financial press. Photos of Cohen accompany many news stories, and his face has become more familiar.  News about the fund has been sour for much of the past year or two, because the news is primarily about insider-trading investigations. 

SAC made its billions from equity trading.  Under Cohen's direction, the fund sponsors many strategies, including high-frequency trading (searching for price anomalies around the globe), fundamental and value trading, and quantitative analysis.

Former analysts, traders and researchers at the fund--after they have departed or were dismissed--have divulged morsels of SAC intelligence.  Cohen is the quarterback and captain of all trading activity, his hands always involved, his voice wielding a final say-so in trading positions and strategies. He grooms strategies, hires stalwart traders, and entrusts them with significant amounts of capital, permitting them to try out their ideas or execute their trading views.

But he was said to be harsh if performance waned or fell shy of his expectations.  He pushed traders hard, not merely to "seek alpha" (as the hedge-fund jargon goes), but to out-perform even the toughest fund benchmarks. Traders are dismissed swiftly if they don't meet targets.

Traders felt the pressure to find an edge, a trading strategy or a performance trend that would please the boss.

Over the past few years, some former traders have been accused and indicted of insider trading at funds they managed after leaving SAC. Some former employees have been accused of illegal trading while at SAC Capital.  The SEC continues its investigation of trading under Cohen's supervision. He has insisted throughout he is innocent and, in recent months, has delivered strong statements assuring investors that from his top perch he has applied tough discipline to make sure the firm stays within legal lines.

Meanwhile, regulators and law-enforcement officials comb through, around and about SAC.  SAC Capital and Cohen may never be charged of anything, but right now, a stench hovers above the fund and seems to have settled there for a long time to come.  Some investors want out--now. The typical redemption rules apply. Investors can get out, but only after applying for withdrawals and then allowing their monies to trickle out over time. 

With investigators in its backyard searching through voluminous trading records, what will eventually happen to the fund? Why would investors want to hang around and leave large amounts of money with Cohen? He has an impressive performance record, but will he admit that he is distracted by the legal cases and investigations around him?

What does an investor do? There are two or three options.

1) Get out now or when redemption rules allow. 

Certain institutional investors (perhaps pension funds and public funds that answer to a broader community) will flee, because they will not want to explain to stakeholders why they are allied with a fund where illegal activity might have occurred and where there exists the possibility, even if remote, that the fund's founder will one day be indicted like some former employees.

2)  Assess the likelihood that Cohen will one day be charged, an event that would likely lead to the subsequent wind-down of the fund.

If that assessment exceeds 50-50, wage the bet that the fund will continue and, with distractions beyond it, performance will resume at stellar levels. Because there are and will be redemptions, Cohen may scale down the fund, reduce the number of strategies, and make itself nimble.

3) Assess the worst-case scenario:

Cohen is charge and indicted, and the evidence is strong enough for a conviction.  The fund would likely wind down. But markets, regulators, banks and investors must weigh the impact of a liquidation.

Would the impact cause as much market chaos as the frightening collapse at Long Term Capital did in 1998. Its stunning, sudden implosion pushed markets to the brink of apocalyptic turmoil and forced government overseers to assemble a bank group to help settle the chaos.

In this case, would regulators step up in the same way to ensure the disposition of assets, positions and employees is handled in an orderly manner and with minimal impact to markets? Or would a group of neighboring hedge funds, down the expressway in Connecticut, sweep through to bid for the portfolios and positions and hire its expert traders?

Stay tuned.  This is a summer-time saga, likely to drag out through the fall and long enough to bore most market observers, until one day months from now government investigators surface one late Friday afternoon to catch everybody off guard with surprise announcements.

Tracy Williams

See also:

CFN: Ray Dalio's Cult at Bridgewater Associates, 2011
CFN:  Quants and Quant Funds, 2010

Who's Headed into Finance in 2013?

Cornell attracts its share of Consortium finance MBAs

On your mark. Get set. This week, over 300 new Consortium students will launch their campaigns to earn an MBA by heading to New Orleans for the Consortium's 47th Orientation Program.  As in previous years, they will be engulfed by activity, events, recruiters, school staff, seminars, sponsors and celebratory gestures. For most of them, OP is a festive, uplifting time. They pause and take a week-long breath before embarking upon the frenetic pace of graduate business school. 

Among the new MBAs, who's headed into financial services in 2013?

How many among the 300-plus have expressed an interest in concentrating in finance at school or a career in financial services? As they take new twists and turns over the next two years, what do they aspire to do when graduation comes in 2015?

Let's consider the current environment.  The awful, dreadful financial crisis is receding into memory, although there is a haunting, lingering impact. The crisis and economic recession caused upheaval and changed the landscape at banks, broker/dealers, investment funds, insurance companies and private-equity firms.  Financial institutions are rushing to hire just as many experts in compliance, risk management, regulation and technology as they are in luring investment bankers, brokers, wealth managers, and traders.

With steady improvements in the economy  and with remarkable upturns in equity markets, this year's new MBA students won't need to whisper when they declare an interest in financial services. The job or role they dream of may actually exist in two years. Or the job or role may turn out to be something they never knew existed in their first days of a corporate-finance core course.

The new class of Consortium students, after the OP, will disperse and head off to 17 different Consortium business schools all across the country.  Of the total, over 130 have expressed some degree of interest in financial services, even if it is a tentative or preliminary interest. That number already suggests renewed confidence. In previous years, especially during the morale-plummeting crisis years, fewer than 100 dared to raise a hand to say they were interested in banking, trading or investment research.

Many of them, like other non-finance MBA students, are in career transition. Some are opting for finance after stints in other fields (non-profits, public service, engineering, or marketing).  Some are currently in banking or trading and will use the MBA (and what they learn in class) to leap from one segment to another (from, say, private banking to equity research).

No doubt they understand what they are about to take on.  They know this isn't the 1980s, when an MBA graduate Dartmouth could join Morgan Stanley's corporate-finance unit and plan to be there for 20-plus years and, with confidence, take steady, resolute steps to managing director.  They know it's possible Morgan Stanley may not exist (in the way we know it today) in 20 years. (Drexel Burnham, Bear Stearns, Salomon, and Lehman Brothers, favorite firms for MBAs in the 1980s, don't exist in 2013.)

They know they must plan a career in five-year segments. Even in finance, they know they must reinvent and rebrand themselves all the time and be willing to try something new when pushed against the wall. They know they must explore a variety of institutions, segments, roles, and options.  They know, too, the best opportunity may not be at Goldman or Citigroup, but could be at a regional investment fund, at a financial institution in Brazil or at a futures brokerage in Chicago.  If they don't know now, they will learn that roles in compliance, risk management and financial regulation are more valued by some banks than first-year jobs in M&A or on the currency desk.

MBA students in finance (including those at Consortium schools) tend to head to business schools with strengths in finance, where finance faculty are widely known and where finance recruiters swarm. They also head toward schools that already have a large concentration of students in finance. They want to be with others with similar aspirations or they don't want to be at a disadvantage. Like-minded students want to be with each other.

In this year's class, Cornell and NYU business schools will have the largest number of Consortium finance students. Michigan, Texas, Virginia, Yale and Indiana follow closely behind. These numbers are as expected, because these schools tend to support the largest numbers of Consortium students and some of them have historically attracted many students with an eye on Wall Street, banking, private equity, or investment management.

Students today, including Consortium students, are mindful to keep they must keep options open. When they are asked to indicate an interest before they start school, they will likely show many hands.  Many finance students will say they will pursue finance, plus something else. Often, that will be finance and consulting or finance and marketing.

Consortium students in the Class of '15 are similarly spreading their wings, while they have primary objectives. Over a dozen expressed an interest in venture capital and are likely aware of the difficulty in securing a position in a major venture firm, particularly one that resides on Sand Hill Road in Silicon Valley. Venture-capital firms hire MBAs from top schools and cherish candidates with strong technical experiences (and degrees), but are notably erratic in how they bring on whom they hire.

Another dozen or so are interested in investment banking. That wouldn't be unusual in any class. Despite the topsy-turvy world of investment banking (Who's laying off or reducing staff this week?), investment banking is still an important segment of finance, it will always be here, and there still remains the lure of working for such firms as Goldman Sachs, Lazard Freres, and JPMorgan.

Many more also say they will explore financial management, which captures areas from private banking and asset management to corporate finance at non-financial companies.  Others are interested in finance in specific industries:  real estate and energy, e.g.

The pairing of finance and consulting seems to be as popular as ever.  That might be a result of some students aiming for a particular firm experience (at, say, Goldman Sachs or Booz Allen or Blackstone), hopeful for an opportunity to have a prestigious, meaningful experience in their first few years and not necessarily loyal to a particular industry. Or they wish to be in an advisory function, which is what investment banking and consulting are about.

Not many expressed an interest in community banking, insurance, or financial brokerage.

Students willing to explore multiple concentrations also suggests a few more trends: (a) They know that the optimal dream job for an MBA graduate may not yet exist or is still in the making or (b) They may not yet be familiar with industry details to know they might be suitable for a certain segment. Many MBA candidates will learn over the next two years (or after they are hired by a financial institution) they are best suited for roles in risk management, audit, compliance or research.  The business-school experience is supposed to permit students to explore, get their feet wet in alien territory, and test new fields.

The daunting rat race of the recruiting process hastens the exploration effort, and that's unfortunate. It thrusts the new student into a boiling pot, where they must make career decisions overnight. Students declare where they will go to school in April or May, and by August, before they have sat through one marketing case study, they are swept into the helter-skelter pace of finding a summer internship.

For now, they get to explore, contemplate, and plan.

Tracy Williams

See also:

CFN:  Outlook for MBAs, 2013
CFN:  Consortium Orientation Program, NOLA-Bound, 2013
CFN:  Consortium Orientation Program, Minneapolis, 2012
CFN:  Consortium Orientation Program, 2011
CFN:  Consortium Orientation Program, Orlando, 2010
CFN:  Consortium Orientation Program, Charlotte, 2009

Merger Mania: Boom Times Ahead?

Is this an era of good feeling in mergers and acquisitions?

Time for a break-up or spin-off?

Every other day in the financial media, a deal announcement soars through the headlines.  Dell's founder, Michael Dell, wants to buy back his company, but others bid for the same and "put the company in play" (sort of). US Airways and American Airlines agree to a blockbuster combination that lifts one of the companies out of bankruptcy. Warren Buffett and his Berkshire team decide to purchase Heinz for $23 billion, reinforcing the long-time notion that Buffett has the uncanny knack for extracting value from even the most mature food-products industries.  Sprint Nextel has its eyes on Clearwire. 

In the past week, an aggressive activist investor wants to shake up Sony Corp. and spin out its entertainment division, the unit that includes movies and music labels. Dan Loeb, using his Third Point investment-fund vehicle, prepares to take on the entrenched customs of the Japan financial system, which has always been a guardian of the country's ancient corporate practices and traditions.

Loeb argues that the market is under-valuing the entertainment division because profit margins are not as high as they could be and because performance will improve if its management group "focuses" sufficiently on operations. His argument and his finance logic are not unorthodox.  The daring boldness of his approach toward board members in their country is.

Yahoo, always scrambling to remain relevant and stay on the same stages as Google and Facebook, decides to toss $1.1 billion in the way of Tumblr and acquire it.

Have we wandered back into an era of big deals and industry-shaking merger transactions?  Are the times ripe for companies to stop hoarding billions in cash and start doing something productive with it?  Will we revisit the days of the explosion of deals in the late 1980s or the bubble bursts of the mid-2000s? Will transactions in recent months spur other companies, bankers and investors to do even more?

For a year or two after the financial crisis, companies recovered and conducted business, but they held onto cash generated from operations.  Misers, more or less, they were, in a word, scared. They hesitated to reinvest in new businesses and expansion. They worried about the coming of yet another crisis. They stuffed cash into safe, low-yielding assets because they worried they might not be able to tap debt markets to borrow, even if they could borrow at absurdly low rates. (Apple's billion-dollar stash in 2012 was the stuff of headlines and editorials--until this year when shareholders started pleading with the company to do something with it.)

Companies sat on the financial sidelines--not sure what was looming ahead, not sure of the impact of Washington political winds, not sure when the recovery would ever resume. With stock markets crumbling and volatile and with nobody able to project an economic turnaround, companies weren't eager to make acquisitions, do deals or do much of anything--except wait it out. 

As markets have recovered and business confidence has surfaced, companies with mountains of cash are deciding they must do something. They have begun to feel the pain of purchasing U.S. Treasury securities that accrue virtually no return. With equity markets on a roll--at least in early, 2013--companies can comfortably elect to do cash or stock acquisitions in the way they couldn't rationalize a few years ago. 

But does that explain recently announced big deals?


Statistics actually show merger activity in 2013 running at about the same rate as last year--in number of transactions in the U.S., around the global, in fees generated, and in the aggregate value of deals. Hence, the industry and market celebrate the fact that spikes of last year are not necessarily spikes, but perhaps signs of a new trend.

Through April, according to Factsheet, there have been about 10,000 announced corporate mergers, acquisitions, takeovers, or buy-outs involving U.S. companies over the past 12 months, slightly less than in the previous 12-month period.  The aggregate value of transactions is slightly higher. Certain industries have experienced more significant growth the past year:  broadcasting, real estate, computer hardware and retailing. 

The leading banks in advising companies tend to be the familiar crew of top investment banks:  JPMorgan, Goldman Sachs, Merrill Lynch, Credit Suisse, Barclays and Citi. Despite having withdrawn from much of investment banking, UBS is still booking remnant merger business.

Over the past few years, a couple of boutique banks, Evercore and Centerview Partners, have slipped through the back door to join this elite club. Evercore nudged its way in 2012-13 with key roles in deals involving Dell, Kraft Foods, and Ally Financial. It ranked 10th among global banks in the aggregate value of deals done in the first quarter, 2013, according to the Financial Times.


The stir around Sony will be intriguing to watch. Gather and get a front-row seat.  You have an irascible investor who likes to get his way and who has a sound track record. He bursts into Sony's offices in Japan to demand that the board respond to his request to spin out the entertainment group. (This week, the board agreed to ponder his demands.)

This kind of corporate jockeying and board-room maneuvering is nothing new in the U.S., but Loeb and Third Point are taking on a different culture, a country not accustomed to takeover tactics or threats from billion-dollar investment funds based in the U.S. However, these are better times even in Japan. Its economy has escaped doldrums under its new prime minister Shinzo Abe, who has taken the right steps to give it a swift kick. Japanese companies and investors might be open to Loeb's ideas--especially if they result in improved returns for all shareholders and two stronger companies.

Yahoo will be watched, if only to see if it can finally get one right. Yahoo is known for errant strategies and botched acquisitions and lagging behind the Internet-eyeballs race . With a new CEO (Marissa Mayer), who has injected hope, energy, and discipline into the company, the market might give it the benefit of doubt and treat the Tumblr acquisition as something that makes sense.

The deal numbers, the league tables, and merger statistics don't point to these being the best of times for merger bankers and private-equity investors. It's not 1986 or 2005 all over again.  Brisk, consistent activity, nonetheless, suggests we are far beyond the deal paralysis of the crisis, even with some large companies still paranoid and protective of some of their stashes of cash. 

The best of times? No. Better times than before? Yep.

Tracy Williams

See also:

CFN:  Boutique investment banks, 2009
CFN:  Today's Bulge Brackets, 2012
CFN:  Outlook, 2013
CFN:  Apple's Stash of Cash, 2012

What Will Dimon Do?

WWJD. Not what would Jamie Dimon do? But what will Jamie do?

Waiting Anxiously for the Shareholder Vote

In a matter of days, JPMorgan Chase shareholders will find out the results of a crucial vote to determine whether Chairman and CEO Jamie Dimon should relinquish  his role as Chairman of the bank holding company. In a similar vote last year, 40% of shares outstanding voted for him to give up the role as Chairman.  A year later, Dimon and JPMorgan have had to digest continual impact from the billions in trading losses in the infamous "London Whale" credit-derivatives debacle. They have endured stiff criticism from regulators for how JPMorgan managed those losses and for how regulators perceived the bank was behaving in response to inquiries.

Dimon has already been penalized for "Whale" mistakes when his 2012 bonus was reduced, even as JPMorgan continued to generate extraordinary earnings last year and in 2013's first quarter. His inner circle of senior managers (operating committee members) has changed faces substantially with some departing, some nudged out, and others promoted.

(JPMorgan reported record income of $21 billion in 2012--good enough for a 15% return on equity. It earned $6.5 billion in the first quarter, 2013. By year-end 2012, the bank reported assets exceeding $2.3 trillion supported by an equity base of over $200 billion.)

Some shareholders, who have large stakes and have stepped into activist roles, want to make sure such trading losses or astounding surprises in mismanagement will never occur again. They want to reorganize board membership, juggle risk-management oversight, and put more checks in the checks-and-balances of Dimon's power over the organization.  In effect, some contend that JPMorgan-related mishaps might not have occurred if Dimon had a chairman peeking over his shoulder.

As the vote counting winds down, the question for the moment is not what should Dimon do or what would he do.  The question? What will he do if the role of Chairman is seized from him?

His storied banking resume' indicates he doesn't like playing second-fiddle. He's comfortable biding a little bit of time as he awaits a top spot, but he fidgets and fumes if the wait is prolonged. Moreover, certainly he wouldn't want to give up power, authority and influence he has had for eight years or more.

Since he has been JPMorgan's head, he has not had a formal second in command, a president waiting in a green room for him to retire.  When JPMorgan purchased Bank One ten years ago, where he had been Chairman and CEO, he agreed to be President and CEO-in-waiting.  Typical of Dimon, he itched to assume full control of the bank sooner than he was supposed to. From the moment he arrived in New York from Chicago, he aggressively pushed his agenda of expense-control and balance-sheet strengthening, while then-CEO Bill Harrison was still in office.  Back then, Dimon urged the board to make him Chairman and CEO months ahead of schedule. That was no surprise.

Before JPMorgan and Bank One, Dimon had made his mark at Citigroup. As Sandy Weill's long-time protege' when the two of them built a financial-services behemoth during the 1990s, Dimon, over time, agitated his boss, even undermined him. Eventually a power struggle and some fiery situations caused Weill to fire his favorite deputy. Dimon might have been the CEO of Citi today (and Citi might be a much different organization), if he were willing to play fair and square with Weill.  Weill had the last word, and Dimon went on to make financial history elsewhere.

What will Jamie do if he's no longer chairman of JPMorgan?

Will he remain as CEO and proceed to manage the bank in the way he has since the financial crisis--expanding in all areas, controlling costs and operations, restructuring the mortgage businesses, and hustling to keep a trillion-dollar bank under control? Will he be willing to subject his strategy, actions, and every managerial move to the second guessing of a non-executive chairman--especially when Dimon hasn't been accustomed to such in the past decade?

Or will he agree to finish out the year or two as CEO and opt to retire sooner than he expected? Will he cooperate, manage the global business, and assist in selecting a CEO successor and grooming him or her? Will he cooperate, too, if only to ensure his own shareholder stake in the bank (over hundreds of millions in ownership) is not jeopardized?

Amidst this debate of corporate governance, many have taken sides. Some have pointed to studies that show the impact of separating the two roles.  Many of the studies indicate little, if any, favorable impact on a company's revenue or earnings growth or stock price when the roles are separated.

Jeff Sonnenfeld, a senior associate dean at Yale's School of Management, a Consortium school, in The New York Times this week called the shareholder vote at JPMorgan a "Jamie Dimon Witch Hunt" and reminded readers that some of the most scandalous companies in the last century, including Enron and Worldcom, had separate Chairmen and CEOs.

Other experts point out the decision to separate should not be determined by previous studies, but by the particular challenge or issue that confronts the company. Case by case, they say. In the case of JPMorgan, the challenges are to (a) manage the complex risks and operations of a financial institution almost too big to fail, (b) respond to, report, and manage the escalating requirements of regulators, and (c) meanwhile, continue to grow revenues, earnings and a stock price that seems to have trouble eclipsing the $50/share threshold. Some of the proponents in the shareholder vote think JPMorgan can overcome these kinds of challenges with two people in charge.

But what happens to JPMorgan and its ability to confront these issues if one of the two is not Dimon? Is Dimon about to bolt out the door?

Here are a couple of scenarios.

1.  Shareholders vote to keep Dimon as Chairman, but the vote is close, say 51%-49%.  Dimon, therefore, won't linger or care how close it was. With a short memory, he will proceed along his recent course--cooperating with regulators, gearing up for Dodd-Frank and Basel III, reshaping his inner circle, and driving his bank leaders crazy, pushing them to increase revenues, manage all risks imaginable, and control costs.

Several recent scoldings from regulators and all the attention in the press about confrontations with lawmakers and regulatory bodies will keep Dimon focused on issues of risk, regulation and compliance.  The bank is re-engineering its organization from front to back to ensure compliance and help comfort outsiders to show Dimon has things under control in the way it seemed he didn't--momentarily--during the "Whale" crisis.

Events of the past year will encourage him to be more forthcoming with the public about his intentions for succession.  He might even quietly support the effort that his successors be a separate Chairman and CEO. In recent months, with the shuffling among those in the inner circle and by appointing people into the roles of COO, he has offered clues. But in the past, he offered hints of who were the designated favorites one year, yet changed the slate quickly a year or two later.

2.  Shareholders vote to take away Dimon's Chairman title, but permit him to remain as CEO as long as he wishes. Dimon will be wounded. However, he would be a professional, uttering the right remarks about his support for the new structure. He would also likely regroup and contemplate next steps. He would not be comfortable taking directions regarding strategy and the deployment of capital from a part-time Chairman, especially if he feels confident his sole leadership is the best course.

As an experienced professional and an investor who will not want boardroom turmoil to inflict unnecessary volatility in the stock price, Dimon won't pout and play spoilsport. However, the thrill and energy of running JPMorgan won't be the same. The power he wielded within the organization may not be the same, because the buck won't any longer stop with him.

He would likely plan a retirement over the period of a year or two. Following the footsteps of former CEOs, like GE's Jack Welch, known for being accomplished, premier business managers, Dimon will review his achievements, reflect on them, and will likely want to write about them (or teach them to a business-school finance class). He won't sit still and will pursue something bold. He'll want to advise future bank leaders on what went right, what worked, how it all worked, and what went wrong.

And it's likely then he'll insert the last word to say that separating the roles of Chairman and CEO at JPMorgan might have been something, in his case, that didn't work as well as the status quo.

Tracy Williams

See also:

CFN: JPMorgan and Its Trading Losses, 2012
CFN: Jamie Dimon on Regulation, 2012
CFN:  Jamie Dimon's Message to Shareholders, 2011

MBA Professors: Who's the Best?

NYU's Damodaran: Finance Pundit

Take any prominent business school, any of the schools recruiters and prospective applicants gush over. There is likely on campus a well-known, popular, favorite teacher, a campus legend who exudes business-school royalty. That professor would be the one whose course is in saturated demand and is a hot attraction.

That's the professor who has the knack for making corporate finance or economics lectures sparkle, who ignites the classroom with animated discussions of business decision-making, business strategy or financial maneuverings. She is the professor who delivers the lecture in operations research or derivative products with verve--an actress at the podium who explores a business-school case as if it were a movie script.


He would be the professor, an expert in his field, who commands in-depth knowledge in his subject, who has written tirelessly on the topic, and who is likely the industry's go-to source to explain to the public a financial trend, a theory of markets, a marketing ploy or the science of pricing goods. 

In finance, she would be the professor who transforms an intermediate accounting lecture into Broadway drama, successfully able to explain concepts of cost of capital or cost of goods sold with conviction and passion. And her students would get it.

In the world of business schools, lists abound everywhere: lists of top schools; lists of top places to study finance, marketing or non-profit management; lists of schools whose graduates have the highest starting salaries, and lists of schools most favored by recruiters.

There are now even lists of top professors.  How is it even possible to assess, rate and rank thousands of MBA professors across the country in an unbiased way? How do you assess fairly what it means to be a top professor? List-makers do it regardless, notwithstanding the subjective, whimsical nature of rankings.

Disregard for a moment the validity of rankings and lists. You might notice one name that tends to appear on many lists of top MBA professors, partly because he is indeed a highly respected professor. Or it's partly because he is popular with students, who fawn over his lectures and dive into his blog postings and writings. It's partly because they absorb his message and are stirred by it enough to jump into the dialogue. It's partly because of his masterly manner of communicating, an ability to explain finance in ways that are colorful, relevant and intriguing.

That professor would be Aswath Damarodan, a corporate finance professor at Consortium school NYU-Stern (who has likely taught dozens, if not hundreds of Consortium students over the years).  He has written several books on corporate finance, taught a generation of students at Stern, and, thanks to the the breadth and immediacy of the Internet, has blogged weekly on just about any finance topic he feels deserves his attention, insight and analysis. In a typical blog posting or essay, he explains the topic, provides analysis and shows trends, adds background, adds insight, and, as if he can't wait, offers a striking opinion. Sometimes it's an opinion that bites or hurts or certainly goes against popular discourse.

There are few finance topics he isn't afraid to address. His willingness to reach out to students (and alumni and just about anybody interested in finance), his eagerness to engage in dialogue with the public are likely a prime reason he appears on top-prof lists.

His blog postings, for sure, could be required reading for advanced students and even jaded investment bankers who might want to understand (big picture) the business they conduct (although his tone regarding investment bankers won't win fans from this crew).  His postings and explorations of ideas might help bankers and company CFOs understand whether the direction they are headed in  a deal is a path that benefits shareholders or a path that leads to financial doom.

In arguably the biggest corporate-finance headline of 2012 ("What should Apple do with its billions in cash?"), Damodaran gladly inserted his views, an analysis that would earn in buckets of fees if he were the mandated adviser.  Providing a fresh valuation of Apple shares, he conveys his blunt disappointment in Apple CEO Tim Cook: "I see Mr. Cook go from forum to forum, saying nothing of substance and wreaking havoc on the stock price almost every time he talks."

(This week, he updates his occasional analysis of the company, based on recent earnings, and he decides it is still safe to hold on to Apple stock, if you hold it. He had not yet analyzed the details of Apple's $17 billion debt offering, although he suggests accruing more debt could be a good thing at Apple.)

Damodaran has built his reputation and star power at Stern over 27 years.  He holds an MBA and Ph.D. from Consortium school UCLA.

The postings, his writings, and in-class discussions link finance theory and traditional analysis to current events, but he is not wedded to old theory.  For the most part, he tries to make sense of what's going on and then provide a passing point of view.

In early 2013, with gold markets headed for a free-fall, the professor stepped in to help students and his followers put some common sense around investing in gold. Damodaran, like many experienced investors (including guru Warren Buffet), wonders what's the big ado and fascination with gold as an investment, yet explains one or two cases where, in fact, investing in gold should be part of a balanced portfolio.

Damodaran won't hesitate to recommend the best way for a company to manage its balance sheet or shape its capital structure or the best strategy for buying back stock or paying a dividend. He didn't hesitate to declare that most large-scale acquisitions don't make sense in the long term.  Moreover, he says companies ought to do much of the deal or valuation analysis themselves and shouldn't rely too much on the conflicted advice from investment bankers.

Activist investors, such as those who have pursued an agenda with companies like Apple, JCPenney, and Herbalife, grab much of the publicity in the financial press. Some call for significant transformation in the company, whether in the board room or in production lines.  Some, well, hold companies hostage to get their agenda on the table, if only to trigger a quick short-term surge in the stock price.  Do they act against the objectives of long-term strategic investors?

Damodaran examined the question recently, weighed all sides, and decided in the end that the two groups don't act against the interests of the other.  Short-term activists, he argued, really look out for the interests of strategic investors.

Drama, flair, style and energy thrust teachers onto lists of best professors.  Damodaran, as former students would attest, has some of that, but his writings, teachings and spontaneous, well-reasoned observations about what surrounds him in the marketplace are what keeps him there.

Even the most astute MBA students in finance and those headed for cubicles at Morgan Stanley, Carlyle or Blackstone can praise his efforts to "break it all down" and tell the real story of what's going in financial markets. Consider his "Musings on Markets" a must-read for both first-year finance students and senior deal-doers.

Tracy Williams

See also:

CFN:  Most Popular Business School Professors, 2011
CFN:  Professors and the Global Imperative, 2012
CFN:  Most Satisfied MBA Alumni, 2011