Dow Hits 23,000 - There's Just One Thing

Just four weeks since The Dow crossed 22,000...but thanks to Goldman, Boeing, Caterpillar, 3M, and JPMorgan (accounting for over 500 Dow points), the mainstream media"s favorite index just topped 23,000 for the first time ever...

With the Top 6 names driving 50% of the index"s move...

However, it seems options traders ain"t buying it...

If everything"s so awesome... why are investors buying Dow protection with both hands and feet?

As retail piles in, so professoinals are hedging to extremes.

Finally - for good measure - "Industrial" Production remains well below 2014 highs... but the "Industrial" Average is soaring...

Morgan Stanley: "Client Cash Is At Its Lowest Level" As Institutions Dump Stocks To Retail

The "cash on the sidelines" myth is officially dead.

Recall that at the end of July, we reported that in its Q2 earnings results, Schwab announced that after years of avoiding equities, clients of the retail brokerage opened the highest number of brokerage accounts in the first half of 2017 since 2000. This is what Schwab said on its Q2 conference call:

New accounts are at levels we have not seen since the Internet boom of the late 1990s, up 34% over the first half of last year. But maybe more important for the long-term growth of the organization is not so much new accounts, but new-to-firm households, and our new-to-firm retail households were up 50% over that same period from 2016.

In total, Schwab clients opened over 350,000 new brokerage accounts during the quarter, with the year-to-date total reaching 719,000, marking the biggest first-half increase in 17 years. Total client assets rose 16% to $3.04 trillion. Perhaps more ominously to the sustainability of the market"s melt up, Schwab also adds that the net cash level among its clients has only been lower once since the depths of the financial crisis in Q1 2009:

Now, it"s clear that clients are highly engaged in the markets, we have cash being aggressively invested into the equity market, as the market has climbed. By the end of the second quarter, cash levels for our clients had fallen to about 11.5% of assets overall, now, that"s a level that we"ve only seen one time since the market began its recovery in the spring of 2009.

While some of this newfound euphoria may have been due to Schwab"s recent aggressive cost-cutting strategy, it is safe to say that the wholesale influx of new clients, coupled with the euphoria-like allocation of cash into stocks, means that between ETFs and other passive forms of investing, as well as on a discretionary basis, US retail investors are now the most excited to own stocks since the financial crisis.  In a confirmation that retail investors had thrown in the towel on prudence, according to a quarterly investment survey from E*Trade, nearly a third of millennial investors were planning to move out of cash and into new positions in the second half of 2017. By comparison, only 19% of Generation X investors (aged 35-54) were planning such a change to their portfolio, while 9% of investors above the age of 55 had plans to buy in.

Furthermore, according to a June survey from Legg Mason, nearly 80% of millennial investors plan to take on more risk this year, with 66% of them expressing an interest in equities. About 45% plan to take on “much more risk” in their portfolios.

In short, retail investors - certainly those on the low end which relies on commodity brokerages to invest - are going "all in."

This was also confirmed by the recent UMichigan Consumer Survey, according to which surveyed households said there has - quite literally - never been a better time to buy stocks.

What about the higher net worth segment? For the answer we go to this morning"s Morgan Stanley earnings call, where this exchange was particularly notable:

Question: Hey good morning. Maybe just on the Wealth Management side, you guys had very good growth, sequential growth in deposits. There"s been some discussion in the industry about kind of a pricing pressure. Can you discuss where you saw the positive rates in Wealth Management business and how you"re able to track, I think, about $10 billion sequentially on deposit franchise?

Answer:  Sure. I think, as you recall, we"ve been talking about our deposit deployment strategy for quite sometime, and we"ve been investing excess liquidity into our loan product over the last several years. In the beginning of the year, we told you that, that trend would come to an end. We did see that this year. It happened a bit sooner than we anticipated as we saw more cash go into the markets, particularly the equity markets, as those markets rose around the world. And we"ve seen cash in our clients" accounts at its lowest level.

In other words, when it comes to retail investors - either on the low, or high net worth side - everyone is now either all in stocks or aggressively trying to get there.

Which reminds us of an article we wrote early this year, in which JPM noted that "both institutions and hedge funds are using the rally to sell to retail." Incidentally, the latest BofA client report confirmed that while retail investors scramble into stocks, institutions continue to sell. To wit:

Equity euphoria continues to remain absent based on BofAML client flows. Last week, during which the S&P 500 climbed 0.2% to yet another new high, BofAML clients were net sellers of US equities for the fourth consecutive week. Large net sales of single stocks offset small net buys of ETFs, leading to overall net sales of $1.7bn. Net sales were led by institutional clients, who have sold US equities for the last eight weeks; hedge funds were also (small) net sellers for the sixth straight week. Private clients were net buyers, which has been the case in four of the last five weeks, but with buying almost entirely via ETFs. Clients sold stocks across all three size segments last week."

The best way to visualize what BofA clients, and especially institutions, have been doing in 2017 is the following chart:

Meanwhile, a familiar buyer has returned: "buybacks by corporate clients picked up as US earnings season kicked off, with Financials buybacks continuing to dominate this flow."

And just like during the peak of the last bubble, retail is once again becoming the last bagholder; now it is only a question of how long before the rug is pulled out. For now, however, enjoy the Dow 23,000.

Would You Pay $2,500 For One Hour With An Equity Analyst? This I-Bank Seems To Think So...

Wall Street equity analysts are paid "yuge" salaries to employee the finance skills they picked up from their business school professors to value various corporate securities and asset-backed securitization structures, among other things.  And while their valuations of those securities have served as a frequent source of comic relief for many of us over the years, no bastardization of basic financial concepts tops recent attempts by the financial elites of the world to place a value on their own services.

As evidence of that fact, we present to you "Exhibit A" from a Bloomberg article published earlier today suggesting that Morgan Stanley, who is still trying to figure out how much their equity research is worth to clients after nearly a year of internal cogitation, is considering asking hedge fund clients for $2,500 for the extreme pleasure of spending just one hour with one of their esteemed research analysts.

Fund managers will have to pay about $2,500 for an hour-long, one-on-one meeting with some of Morgan Stanley’s equity analysts once Europe’s MiFID II financial rules kick in, according to people with knowledge of the plan.

The fee is on top of the annual rate Morgan Stanley plans to charge some clients for basic access to its equity research portal once the regulations come into force in January, the people said, asking not to be named as the negotiations are private. The bank also quoted a small client $25,000 annually for five users for basic equity research access and five total hours of analyst time, another person said.

Of course, any I-banking summer intern could easily spot the outlier in Morgan Stanley"s proposed $2,500 hourly billing rate when matched up against comps from the legal industry.  According to the National Law Journal, even the priciest partners at the best law firms can only command hourly billing rates equal to roughly half of what Morgan Stanley wants.

Meanwhile, the "median" partner at any given law firm only gets paid about one-fifth of Morgan Stanley"s proposal.

As McKinsey & Co. recently pointed out, the end result is that new European regulations designed to separate research and trading revenue for investment banks will likely cost them more than $1 billion as clients become pickier about what they pay for. 

Of course, ultimately the market will set a clearing price for the "value add" of equity analysts...and we"re almost certain it"s going to surprise some folks.

The U.S. Justice System Must Focus On Elite Criminality

Authored by Mike Krieger via Liberty Blitzkrieg blog,

Two very important articles published in recent days serve to once again highlight America’s metastasizing elite criminality problem. A problem which our justice system simply refuses to address.

This corrupt two-tier justice system is something I’ve been focused on from the very beginning of my writings, and I continue to see it as a civilization-level threat for this country if not aggressively addressed and confronted in the very near future.

The two articles in question focus on different aspects of untouchable elite culture in America.

The first relates to the continued fraud pervasive in America’s largest financial institution, while the second covers a thirty year history of predatory sexual behavior by one of Hollywood’s biggest moguls, Harvey Weinstein. In both cases, countless people have known and reported on repeated abuses perpetrated by both the institution and the man, yet the U.S. justice system and the vast majority of “elite” culture happily help shield them from justice. Predators are predators, and elite predators are far more dangerous to society that your average street crook, so why does our justice situation deal with it in the exact opposite way?

Let’s start with the blockbuster article published in The Nation by the always informative David Dayen. The article is titled, How America’s Biggest Bank Paid Its Fine for the 2008 Mortgage Crisis—With Phony Mortgages!

Here’s just brief excerpt:

JPMorgan’s share of the settlement was $5.3 billion, but only $1.1 billion had to be paid in cash; the other $4.2 billion was to come in the form of financial relief for homeowners in danger of losing their homes to foreclosure. The settlement called for JPMorgan to reduce the amounts owed, modify the loan terms, and take other steps to help distressed Americans keep their homes. A separate 2013 settlement against the bank for deceiving mortgage investors included another $4 billion in consumer relief.

A Nation investigation can now reveal how JPMorgan met part of its $8.2 billion settlement burden: by using other people’s money.

Here’s how the alleged scam worked. JPMorgan moved to forgive the mortgages of tens of thousands of homeowners; the feds, in turn, credited these canceled loans against the penalties due under the 2012 and 2013 settlements. But here’s the rub: In many instances, JPMorgan was forgiving loans on properties it no longer owned.

The alleged fraud is described in internal JPMorgan documents, public records, testimony from homeowners and investors burned in the scam, and other evidence presented in a blockbuster lawsuit against JPMorgan, now being heard in US District Court in New York City.

Sounds hard to believe, but it’s true. Not only that, but as we’ve come to expect from the “rule of law” in America, it somehow never applies to that group of people with the greatest ability to financially destroy people and their lives. Bankers. For example, here’s some more from the same piece:

Federal appointees have been complicit in this as well. E-mails show that the Office of Mortgage Settlement Oversight, charged by the government with ensuring the banks’ compliance with the two federal settlements, gave JPMorgan the green light to mass-forgive its loans. This served two purposes for the bank: It could take settlement credit for forgiving the loans, and it could also hide these loans—which JPMorgan had allegedly been handling improperly—from the settlements’ testing regimes.

“No one in Washington seems to understand why Americans think that different rules apply to Wall Street, and why they’re so mad about that,” said former congressman Miller. “This is why.”

Most of the loans that JPMorgan released—and received settlement credit for—were all but worthless. Homeowners had abandoned the homes years earlier, expecting JPMorgan to foreclose, only to have the bank forgive the loan after the fact. That forgiveness transferred responsibility for paying back taxes and making repairs back to the homeowner. It was like a recurring horror story in which “zombie foreclosures” were resurrected from the dead to wreak havoc on people’s financial lives.

Federal officials knew about the problems and did nothing. In July 2014, the City of Milwaukee wrote to Joseph Smith, the federal oversight monitor, alerting him that “thousands of homeowners” were engulfed in legal nightmares because of the confusion that banks had sown about who really owned their mortgages. In a deposition for the lawsuit against JPMorgan Chase, Smith admitted that he did not recall responding to the City of Milwaukee’s letter.

Few would expect Jeff Sessions’s Justice Department to pursue such a case, but what this sorry episode most highlights is the pathetic disciplining of Wall Street during the Obama administration.

JPMorgan’s litany of acknowledged criminal abuses over the past decade reads like a rap sheet, extending well beyond mortgage fraud to encompass practically every part of the bank’s business. But instead of holding JPMorgan’s executives responsible for what looks like a criminal racket, Obama’s Justice Department negotiated weak settlement after weak settlement. Adding insult to injury, JPMorgan then wriggled out of paying its full penalties by using other people’s money.

The larger lessons here command special attention in the Trump era. Negotiating weak settlements that don’t force mega-banks to even pay their fines, much less put executives in prison, turns the concept of accountability into a mirthless farce. Telegraphing to executives that they will emerge unscathed after committing crimes not only invites further crimes; it makes another financial crisis more likely. The widespread belief that the United States has a two-tiered system of justice—that the game is rigged for the rich and the powerful—also enabled the rise of Trump. We cannot expect Americans to trust a system that lets Wall Street fraudsters roam free while millions of hard-working taxpayers get the shaft.

Of course, this is just the latest when it comes to JP Morgan. I highlighted the firm’s rap sheet in last month’s post, Which is Fraudulent – Bitcoin or JP Morgan?

How many JP Morgan executives have gone to jail?

Now onto Harvey Weinstein, a guy whose cretinous behavior has been the biggest non-secret in Hollywood for decades. Just like with banker crooks, he mere settles cases and continues to walk around, freely hunting the next defenseless victim.

The New York Times article published yesterday exposing some of this grotesque man’s history was extraordinary and I suggest everyone read it. Here’s just a little from the piece, Harvey Weinstein Paid Off Sexual Harassment Cases for Years:

Two decades ago, the Hollywood producer Harvey Weinstein invited Ashley Judd to the Peninsula Beverly Hills hotel for what the young actress expected to be a business breakfast meeting. Instead, he had her sent up to his room, where he appeared in a bathrobe and asked if he could give her a massage or she could watch him shower, she recalled in an interview.

 

“How do I get out of the room as fast as possible without alienating Harvey Weinstein?” Ms. Judd said she remembers thinking.

 

In 2014, Mr. Weinstein invited Emily Nestor, who had worked just one day as a temporary employee, to the same hotel and made another offer: If she accepted his sexual advances, he would boost her career, according to accounts she provided to colleagues who sent them to Weinstein Company executives. The following year, once again at the Peninsula, a female assistant said Mr. Weinstein badgered her into giving him a massage while he was naked, leaving her “crying and very distraught,” wrote a colleague, Lauren O’Connor, in a searing memo asserting sexual harassment and other misconduct by their boss.

 

“There is a toxic environment for women at this company,” Ms. O’Connor said in the letter, addressed to several executives at the company run by Mr. Weinstein.

 

Dozens of Mr. Weinstein’s former and current employees, from assistants to top executives, said they knew of inappropriate conduct while they worked for him. Only a handful said they ever confronted him.

 

Mr. Weinstein enforced a code of silence; employees of the Weinstein Company have contracts saying they will not criticize it or its leaders in a way that could harm its “business reputation” or “any employee’s personal reputation,” a recent document shows. And most of the women accepting payouts agreed to confidentiality clauses prohibiting them from speaking about the deals or the events that led to them.

 

In interviews, some of the former employees who said they had troubling experiences with Mr. Weinstein asked a common question: How could allegations repeating the same pattern — young women, a powerful male producer, even some of the same hotels — have accumulated for almost three decades?

 

“It wasn’t a secret to the inner circle,” said Kathy DeClesis, Bob Weinstein’s assistant in the early 1990s. She supervised a young woman who left the company abruptly after an encounter with Harvey Weinstein and who later received a settlement, according to several former employees.

 

In March 2015, Mr. Weinstein had invited Ambra Battilana, an Italian model and aspiring actress, to his TriBeCa office on a Friday evening to discuss her career. Within hours, she called the police. Ms. Battilana told them that Mr. Weinstein had grabbed her breasts after asking if they were real and put his hands up her skirt, the police report says.

 

The claims were taken up by the New York Police Department’s Special Victims Squad and splashed across the pages of tabloids, along with reports that the woman had worked with investigators to secretly record a confession from Mr. Weinstein. The Manhattan district attorney’s office later declined to bring charges.

As disturbing as all that is, it might be the tip of the iceberg. Here’s some additional info from an article published today by The Daily Beast, Hollywood’s Loud Silence on Harvey Weinstein:

The Times piece later identified the 1997 actress as Rose McGowan, who starred in the 1996 film Scream, which was distributed by Weinstein-owned Dimension Films. In October 2016, McGowan tweeted, “Because my ex sold our movie to my rapist for distribution #WhyWomenDontReport.” It’s not known whom McGowan was referring to, though she dated filmmaker Robert Rodriguez from 2006 to 2009, and their film Planet Terror was distributed by Weinstein in 2007.

In the wake of the blockbuster Times exposé, The Daily Beast reached out to dozens of prominent actors, actresses, and filmmakers—who both have andhave not worked with Weinstein—only to receive many replies of “no comment” and plenty of radio silence.

Elite criminals are the most dangerous criminals on earth, but our justice system treats them like well-meaning philosopher kings who deserve endless breaks in the face of rampant unethical and often evil behavior. It should be completely obvious to everyone that the only reason elite crooks get treated with kid gloves is because they’re rich and powerful. The end result of this dereliction of justice is those entrusted with protecting the public have willingly created an entrenched, untouchable, distributed, criminal class which spans across and leads all major industries in America.

As I tweeted earlier today:

The entire force of the U.S. justice system should be focused on elitist crimes, but instead the exact opposite happens.

— Michael Krieger (@LibertyBlitz) October 6, 2017

If we don’t get a grip on this now and begin to marshal our resources against the most dangerous criminals in America — those from the highest echelons of U.S. society — the country will continue to unravel and in an increasingly dangerous and chaotic fashion.

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Macquarie Identifies The Winners And Losers Of MiFID II

Macquarie"s equity research team has just offered up a valuable economics lesson which seems to perfectly, if inconveniently, explain why their business model is doomed by the upcoming implementation of MiFID II. 

So what happens when you compete in a "slightly" fragmented market (see below) to sell a highly commoditized product to a customer that places so little value on the product that it has historically only existed courtesy of subsidies from trading revenues...then a regulatory body suddenly comes along and says you have survive as an independent operation?

Well, as Macquarie notes today, almost everyone, particularly those in an equity research group, loses.

As equity research analysts, we can’t close the review of MiFID II implementation without discussing the implications of research unbundling, by which asset managers will have to pay separately for execution and trading. Here are a few points that have emerged as consensual on a number of white papers and articles:

• P&L method over RPA. An increasingly large number of leading asset managers already announced they will internalise the cost of research in their P&L instead of charging it separately to investors via Research Payment Accounts that are seen as overly cumbersome to implement. The list includes, in alphabetical order, Allianz Global, Aviva, Axa IM, BlackRock, Deutsche AM, Franklin Templeton, HSBC AM, Invesco, Janus Henderson, JPMorgan AM, M&G, Robeco, Schroders, Standard Life, T Rowe Price, UBS and Union (please see live list here).

• Research budget cuts. A McKinsey report estimated a 10-30% reduction in buy side’s external payment for research over the next three years, while an S&P survey indicates a 10-15% increase in internal research budget.

• Run to the bottom on pricing – a number of FT articles indicate bulge brackets demanded a minimum payment of up to £300-400k/year for access to written research, but that has decreased significantly. JPMorgan is reportedly offering entry level access for $10k/year and Jefferies will offer its research for free, not to jeopardise banking revenues.

According to the S&P survey mentioned above, asset managers’ EBIT may decline by 15%/ 30% as a result of the shift to P&L accounting for external research. In any case it is clear that both buy side and sell side are involved in the consumption and production of research will see a decrease in profitability and may seek cost savings, continuing the gloomy trend in headcount decline highlighted in Fig 5-6.

Meanwhile, Macquarie highlights the fact that the upcoming implementation of MiFID II will only add to the complete decimation of the financial industry that has already lost 1,000"s of jobs over the past 6 years.

According to a recent report by Coalition (Fig 5), front office headcounts declined 21% since 2011, in spite of a generally supportive macro environment. The data show a much harder decline in FICC (-32%) compared to -12% to -14% for Equity and Advisory. Part of the decline may be explained with business cycle, but we believe an acceleration in the shift to electronic trading is also at play.

Lastly, data compiled specifically by McKinsey on the Equities segment of the top 9 investment banks show that sales and trading headcount declined three times faster than research since 2011 (Fig 6). For example, Goldman Sachs’ US cash equities business moved from 600 traders in year 2000 to only 2 traders in 2016, plus 200 programmers.

Finally, for those who have managed to avoid this particular distraction and have no idea what MiFID II is, the global equity research industry is in the midst of a major disruption which has been brought on by the European Union’s MiFID II regulations, enforced from Jan. 3, which aim to tackle conflicts of interest by requiring asset managers to separate the trading commissions they pay from investment-research fees.

Of course, the biggest problem with such a regulation continues to be that literally no one knows the true "value" of equity research, not even the investment banks that are selling it.  Meanwhile, we"re almost certain that hedge funds don"t feel the need to buy 50 different versions of a research report on the same company that can all be summarized in four words:  "Buy The Fucking Dip."

Warren Slams Wells CEO "You Should Be Fired" As Buffett Counters "He Has My Faith"

In a repeat of what she said almost exactly one year ago, when Senator Elizabeth Warren told then-Wells Fargo CEO Stumpf "You should resign, you should be criminally investigated" - not long before Stumpf indeed resigned, moments ago the kangaroo court was back in session and Warren doubled down her attack on Stumpf"s replacement, Wells CEO Tim Sloan, blasting that he should be fired as he was part of a culture that pushed the bank to create millions of fake accounts for customers without their knowledge.

In prepared testimony, Sloan apologized for the creation of unauthorized accounts and said the bank has hired back more than 1,000 workers who were wrongly fired or left under a cloud. In late August, Wells admitted that as many as 3.5 million accounts were created for customers without their permission, nearly 70% more than originally thought. The scandal led to the departure of several executives including former CEO John Stumpf.

While the practice had been going on for years at the bank, it only became public last year, when Wells agreed to pay a $185 million settlement with regulators. Since then, it was revealed that the tactics extended to enrolling customers in auto insurance that they didn"t need as we previously reported and as CNBC noted. Wells paid a $142 million class-action settlement and $2.8 million in refunds to affected customers.

Meanwhile, Warren attacked Sloan over his past comments to investors, saying he “bragged” about high levels of new accounts even though he was aware of sales-practice problems at the bank: "You went to the stock market and you bragged about it," Warren said at the Senate Banking Committee hearing Tuesday.

"At best you were incompetent, at worst you were complicit," the Massachusetts Democrat lashed out at Sloan, adding that "either way, you should be fired" as “you enabled this fake account scam, you got rich off it, and you tried to cover it up."

Warren pushed Sloan on transcripts she found in earnings calls that she said showed the CEO was bragging about the bank"s sales ability even as he knew about the cross-selling problems. "I"ve read through them, and on these calls no one, not even John Stumpf, who was the CEO at the time, bragged more about Wells Fargo"s ability and commitment to open new accounts for existing customers," Warren said, referring to earnings calls between 2011 and 2014.

"I"m proud of the credit card products we have at Wells Fargo," Sloan defended himself, saying comments cited by Warren were taken "out of context."

Warren wasn"t alone, and other members of the committee also pressed Sloan about how the bank could have allowed the sales scandal to get so out of control. "What in God"s name were you thinking?" asked Republican Sen. John Kennedy of Louisiana, quoted by CNBC.

As a reminder, as many as 3.5 million accounts were violated as employees tried to meet aggressive cross-selling goals that have since been scrapped, and while Sloan vowed that the bank was making strides in restoring its reputation, Warren and others weren"t impressed. "Wells Fargo needs to start over, and that won"t happen until the bank rids itself of people like you who led it into this crisis," said Warren, who previously had demanded that the 12 board members in place during the scandal be removed, only to be defied by Warren Buffett during the bank"s last shareholder meeting.

Sloan defended his role at the bank, sidestepping questions over why he hadn"t acted sooner and instead focusing on the steps he was taking now. Sloan was chief operating officer before succeeding Stumpf, who was forced out as CEO last October, a month after the bank settled charged with regulators over the cross-selling practice. Sloan outlined a number of steps Wells Fargo is taking to improve operations and prevent a similar scandal.

"I don"t believe your criticisms of the board are accurate," he later said. "I think the reason I am the right person to run this company today, notwithstanding your criticisms, is because I have been making change at this company for 30 years."

"I"m not afraid to make hard decisions when it"s needed, and I have the support of 270,000 people," he said, referring to the bank"s employees. "That"s why I think I"m the right person."

"Are you kidding?" Warren responded.

One person who wasn"t kidding, was prominent democrat and billionaire Warren Buffett, who earlier told Becky Quick that he still believes in the CEO of Wells Fargo after the fake accounts fallout at the bank. "Tim Sloan has my faith," said the CEO of Berkshire Hathaway. "When you find a problem, you have to jump on it... Somebody messed up and the job is to find out who messed up."

Berkshire remains Wells Fargo"s largest shareholder, with a 9.4% stake. When asked whether he sold any shares of Wells Fargo, Buffett said "only enough to stay under 10 percent, which was something the Fed requires."

And since the decision whether Sloan stays or goes ultimately is in the hands of Wells Fargo"s shareholders, perhaps Warren should target her anger at the Omaha billionaire: it was his input during the last Wells Fargo proxy vote that made sure the current board escaped unscathed from the bank"s ongoing scandals.

JPMorgan Ordered To Pay Over $4 Billion To Widow And Family

A Dallas jury ordered JPMorgan Chase to pay more than $4 billion in damages for mishandling the estate of a former American Airlines executive.

Jo Hopper and two stepchildren won a probate court verdict over claims that JPMorgan mismanaged the administration of the estate of Max Hopper, who was described as an airline technology innovator by the family’s law firm. The bank, which was hired by the family in 2010 to independently administer the estate of Hopper, was found in breach of its fiduciary duties and contract. In total, JP Morgan Chase was ordered to pay at least $4 billion in punitive damages, approximately $4.7 million in actual damages, and $5 million in attorney fees.

The six-person jury, which deliberated a little more than four hours starting Monday night and returned its verdict at approximately 12:15 a.m. Tuesday, found that the bank committed fraud, breached its fiduciary duty and broke a fee agreement, according to court papers.

"The nation"s largest bank horribly mistreated me and this verdict provides protection to others from being mistreated by banks that think they"re too powerful to be held accountable," said Hopper in a statement. "The country"s largest bank, people we are supposed to trust with our livelihood, abused my family and me out of sheer ineptitude and greed. I"m blessed that I have the resources to hold JP Morgan accountable so other widows who don"t have the same resources will be better protected in the future."

"Surviving stage 4 lymphoma cancer was easier than dealing with this bank and its estate administration," Mrs. Hopper added.

Max Hopper, who pioneered the SABRE reservation system for the airline, died in 2010 with assets of more than $19 million but without a will and testament, according to the statement. JPMorgan was hired as an administrator to divvy up the assets among family members. “Instead of independently and impartially collecting and dividing the estate’s assets, the bank took years to release basic interests in art, home furnishings, jewelry, and notably, Mr. Hopper’s collection of 6,700 golf putters and 900 bottles of wine,” the family’s lawyers said in the statement. “Some of the interests in the assets were not released for more than five years.”

The bank"s incompetence caused more than just unacceptably long timelines; bank representatives failed to meet financial deadlines for the assets under their control. In at least one instance, stock options were allowed to expire. In others, Mrs. Hopper"s wishes to sell certain stock were ignored. The resulting losses, the jury found, resulted in actual damages and mental anguish suffered by Mrs. Hopper. With respect to Mr. Hopper"s adult children, the jury found that they lost potential inheritance in excess of $3 million when the Bank chose to pay its lawyers" legal fees out of the estate account to defend claims against the Bank for violating its fiduciary duty.

Confirming that much of America does not hold Wall Street in high regard, the court’s verdict form showed that  jurors awarded $8 billion in punitive damages against the bank. Alan Loewinsohn, attorney for Jo Hopper, said in an interview there may be duplication of some of the damage findings. He asked the jury to take into account the bank’s worth and asked them for $2 billion in punitive damages. “I believe they used that figure for the other parties in the case as well,” he said.

As a result, he said, the punitive damage award could end up being “somewhere between $4 billion and $8 billion.” The verdict form also shows jurors were advised to consider factors including “the net worth of JPMorgan.” JPM has a market cap of about $330 billion.

At the lower end of that range, the jury’s award would erase almost two-thirds of the $6.6 billion profit that JPMorgan generated globally during the second quarter. According to Bloomberg, it would rank high among the largest sanctions ever levied against the bank - somewhere between the $2.6 billion it agreed to pay in 2014 for allegedly failing to stop Bernard Madoff’s Ponzi scheme, and a $13 billion settlement it reached with government authorities in 2013 for its handling of mortgage bonds that fueled the financial crisis.

"Mrs. Hopper asked the jury to send a message loud enough for JP Morgan to hear it all the way to Park Avenue in Manhattan," said Loewinsohn, "Hopefully, that message has been received."

Probably not: sadly for widow Hopper, she is unlikely to see the full award: large punitive damages verdicts like the one in the Hopper case are often scaled back because the U.S. Supreme Court has ruled they can’t be disproportionate to actual damages. In this case, the jury awarded less than $5 million in actual damages.

The bank said it acted in a professional manner and in good faith on Hopper’s estate and is “highly confident” the jury verdict won’t stand under Texas law.

“Clearly the award far exceeds any possible interpretation of Texas tort reform statutes,” Andrew Gray, a spokesman for the bank, said in an emailed statement. “There has been no judgment entered by the court based on this verdict.”

Former Citi CEO Vikram Pandit: "AI Could Kill 30% Of Back-Office Banking Jobs By 2023"

Just as the development of electronic trading led to mass downsizing on sales desks across Wall Street, advances in artificial intelligence could decimate the ranks of banks’ back-office staff, according to former Citigroup CEO Vikram Pandit. And given the rapid pace of technological advance, jobs in operations and retail banking could begin disappearing in as few as five years.

Pandit, who shared his thoughts about the future of the banking industry during an interview with Bloomberg, said that the industry’s focus on technology as a cost-saving measure - Bank of America Corp.’s Chief Operating Officer Tom Montag said in June that the bank is searching for more ways for technology to replace people – has inspired him to move up his timeline aggressively.  

As Bloomberg points out, Pandit’s forecast for job losses is in step with one made by Citigroup last year. In a March 2016 report, the lender estimated a 30% reduction between 2015 and 2025, as banks find more applications for automation in their retail businesses. That could lead to job losses numbering 770,000 in the US, and as much as 1 million in Europe, Citigroup said.

“Everything that happens with artificial intelligence, robotics and natural language - all of that is going to make processes easier,” said Pandit, who was Citigroup’s chief executive officer from 2007 to 2012. “It’s going to change the back office.”

This pressure on employees to prove that they’re more productive than the technology has transformed banking into an “enormously competitive” industry, Pandit said, adding that he expects the shift to produce yet another wave of consolidation in an industry that’s already dangerously concentrated, a flaw that was both exposed and exacerbated by the financial crisis.

Though he also believes advances in technology will lead to the development of “specialist providers,” making the financial system “a bit more decentralized.”

Pandit achieved lasting notoriety after becoming CEO of Citigroup in December 2007 just as the cascading subprime mortgage crisis was driving the US economy into a recession. He had previously led a hedge fund that was acquired by the bank, and, upon taking the top job, was widely criticized in the press for his inexperience in managing many of Citigroup’s core businesses like, for example, banking.

He’s now the CEO of Orogen Group, an investment firm that he co-founded last year, five years after being forced out as Citi’s CEO.

While Pandit’s prediction should be concerning to anyone who works in the financial industry, humanity as a whole would have much more to worry about if another CEO’s dire predictions about AI are eventually realized.
In one of several memorable tweetstorms on the topic, Tesla CEO Elon Musk urged governments to start considering regulation to govern the development and application of AI technology, arguing that the machines pose a greater danger to the US than North Korea.

If you"re not concerned about AI safety, you should be. Vastly more risk than North Korea. pic.twitter.com/2z0tiid0lc

— Elon Musk (@elonmusk) August 12, 2017

However, other banking CEOs, including JP Morgan Chase & Co.’s Jamie Dimon, have played down the potential impact of technology in the financial industry, as Bloomberg reminds us. Conversely, automation could create “more opportunities” for employment as the firm hires a bevy of “technology workers.”

“JPMorgan Chase & Co. CEO Jamie Dimon cautioned in June against overreacting to the impact of technology on jobs. While the bank is using technology to reduce costs, that helps create other opportunities, Dimon said in an interview published on LinkedIn. He predicted that employee numbers at his firm will continue to rise -- as it hires more technology workers.”

…Of course, Dimon has every reason to expect this: After all, that’s exactly what happened when the adoption of automation by manufacturers began to accelerate. Right?
 

Big Bank Bosses Are Dumping Their Stocks As "Credit Risk Ricochets Back"

"Credit risk is ricocheting back as a legitimate concern after years of hibernation..." warns David Hendler, founder and principal at Viola Risk Advisors, who considers recent share sales by executives at the big retail banks, in particular, to be smart, as consumer portfolios are showing signs of strain.

Wall Street analysts have been urging investors all year to buy stocks in the big US banks, but, as The FT reports, Wall Street itself is not listening.

We noted at the start of the year that executives of the biggest TBTF banks were dumping their shares as a post-Trump rally took their stock prices higher...

And now, as The FT reports, it continues to gather pace. Insiders at the big six banks by assets — JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Goldman Sachs and Morgan Stanley — have in total sold a net 9.32m shares on the open market since the turn of the year. Even excluding Warren Buffett’s big dumping of shares in Wells in April, to avoid tripping over rules capping ownership by a non-bank, sales by insiders outnumber purchases by about 14 to one.

That is an unusually long streak of net sales, across each of the big six.

Last year, for example, insiders at JPMorgan, Citigroup and Bank of America bought more shares than they sold.

Buying and selling of shares by bank insiders can have a powerful signalling effect.

Last year Jamie Dimon, chairman and chief executive of JPMorgan, seemed to call an end to a mini-rout in bank stocks when he bought half a million shares in his own bank in mid-February.

But there have been no similar demonstrations of faith by senior insiders this year, suggesting they fear that the big gains under Mr Trump have come to an end.

Insiders at Goldman and Morgan Stanley have made no open-market purchases this year, according to the Bloomberg data.

So who is the sucker at this table?

Dick Bove gets it... "banks won"t be able to hold on to the earnings boost they get from higher interest rates. The hole in the bottom of the piggy bank, as he described it, would be that higher rates would also hurt the value of financial assets held by the bank, thus leaking out any benefits from increasing borrowing costs."

Deutsche Bank Forced To Slash Fixed-Income Research Price By Half On Lackluster Demand

One by one over the past several months, Europe"s largest investment banks have each rolled out their new pricing models detailing how they"ll charge for research in 2018 once the new MiFID II regulations go into effect.  Pricing strategies have varied from expensive all-in packages costing nearly $500,000 a year to pay-as-you-go plans that charge for each research report individually.  Here are a couple of recent examples:

That said, ever since the first pricing plans hit the market we"ve maintained that the finance world"s masters of corporate valuation might ultimately find themselves shocked by the bid/ask spread between what they think their daily pearls of financial wisdom are worth versus the value that asset managers are willing to ascribe to those services.  Here"s how we summed it up in one of our first posts on the topic:

Literally no one knows the true "value" of research, not even the investment banks that are selling it.  Up until now, equity research has been treated as a "freebie" given away to institutional clients in return for trading commissions but that is all about to change thanks to the European Union’s MiFID II regulations, which require asset managers to separate trading commissions from investment-research payments.

Unfortunately, at least for the Investment Banks of the world, while the cost of generating equity research may be substantial, it turns out that the true "value", as defined by institutional clients" maximum willingness to pay for reports, may be much less.  Which is shocking given the creativity required to constantly generate new variations of daily reports politely suggesting that you "Buy The Fucking Dip."

But, as banks try to figure out their "value add", the bid ask spread ranges from about $50,000 for a basic, annual fixed income package up to $600,000.  In other words, at least 1 investment bank thinks their research is worth roughly 6 full-time, dedicated junior analysts.

Of course, as we said before, almost any amount of money seems, at least to us, to be too much to have the same people give you the same advice over and over again, namely "buy more stocks, faster."  There, we just summarized 90% of all equity research that will ever be written for the rest of history in 4 simple words and completely free of charge.  You"re welcome.

Now, it turns out that Deutsche has become the first investment bank forced to admit what we"ve known for some time now, namely that the commoditized product they sell into a hyper-competitive, saturated market might not be as valuable as they once thought.  And, to our complete "shock", they"ve been forced to slash their research prices in half as a result.  Per Bloomberg:

Deutsche Bank AG has halved the price of its fixed-income and macro research as competition mounts in the run-up to Europe’s MiFID II regulations, three people with knowledge of its plans said.

The German lender proposes to charge asset managers 30,000 euros ($35,000) a year for up to 10 users, said the people, who asked not to be identified because the information is private. This was cut from the 60,000 euros it had initially planned after other banks revised their prices lower, according to a memo sent to clients. A spokesman for Deutsche Bank declined to comment.

So, what do you get as part of this new 50% off deal?  How about free web access to reports (which is great because the carrier pigeons have been really slow lately) and the ability to actually speak with analysts...is that something that might interest you?

Deutsche Bank’s 30,000-euro package includes web access to written research and contact with analysts, the people said. Deliberations are ongoing and the bank hasn’t made a final decision on the pricing.

The Frankfurt-based lender’s prices are linked to the number of users. Web-only access for up to five people is quoted at 15,000 euros per year, while a package including web access and contact with analysts is 50,000 euros for up to 25 users, one of the people with knowledge of the matter said.

Why do we have a sneaking suspicion that DB isn"t going to be the only bank forced to slash their research prices?

Goldman Issues First Warning On Q3 Results

Remember what Goldman said when it reported atrocious earnings two weeks ago, when it revealed that FICC revenues plunged by 40%? Here is a reminder:

"During the quarter, Fixed Income, Currency and Commodities Client Execution operated in a challenging environment characterized by low levels of volatility, low client activity and generally difficult market-making conditions... During the quarter, Equities operated in an environment characterized by generally higher global equity prices, while volatility levels remained low."

Spot the common theme? Yup: lack of volatility.

Fast forward to today when Goldman became the first bank to warn that Q3 is shaping up to be a continuation of Q2. This is what its CFO Chavez said moments ago, via Reuters:

• GS CFO CHAVEZ: FICC TRADING MARKET BACKDROP, LOW VOLATILITY WE SAW IN SECOND QUARTER HAS CONTINUED INTO THIRD QUARTER

However, Chavez declines to provide specifics on trading revenue so far this quarter during the company"s fixed-income call with investors.

Some other highlights from the ongoing Fixed Income presentation currently taking place, according to which Goldman is increasingly hoping to become a commercial bank. Maybe it can be the next Wells Fargo? It certainly shares the ethics...

• TREASURER ROBIN VINCE: WE HAVE PLANS TO EXPAND ONLINE DEPOSIT PLATFORM

It sure does: judging by this the once feared Goldman, is happy to be seen as a boring, old deposit gatherer:

Some other comments:

• Filling out the gap in client coverage in trading business is first priority, he says


• Excluding treasuries from Goldman’s supplementary leverage ratio would boost it by 70 basis points, Treasurer Robin Vince says on call


• “We are believers in risk-based” capital requirements, Vince says

• GOLDMAN CFO MARTY CHAVEZ: WE ARE TRYING TO CLOSE COVERAGE GAPS TO IMPROVE OUR FIXED INCOME BUSINESS


• GS CFO CHAVEZ: WE"RE ASKING OUR FIXED INCOME CLIENTS HOW WE"RE DOING AND WHAT WE CAN DO BETTER


• GS CFO CHAVEZ: WE SEE OPPORTUNITY IN BUILDING OUT CASH SERVICES, MORE CROSS-SELLING WITH INVESTMENT BANK AND TRADING

And if the revenues don"t materialize soon, taking a page out of the Wells Fargo playbook, Goldman will be just as happy to "cross-sell" you into a long CDO position the next time you deposit $500 with the bank.

Full presentation below: