M&I

Question 1

Fallen Titans Keep on Giving. Bankers whose reputations took a hit in Crisis continue charitable activities.

Answer 1

• Angelo Mozilo, former CEO of Countrywide Financial Corp., donated $2 million to a pediatric ICU at Providence Tarzana Medical Center in Tarzana Calif.
• Phyllis and Angelo R. Mozilo Family Foundation
• Mr. Mozilo agreed in 2010 to pay $67.5 million to settle SEC allegations for insider trading and civil fraud. Largest crisis-related penalty by an individual.
• Kenneth D. Lewis, former CEO of BofA has also given to a foster care in N.C. and to New Vision Renewable Enegy, an W. Va. nonprofit that builds solar panels and rigs them homes in Appalachia.
• Former Washington Mutual CEO Kerry Killinger, donatied to Seattle Art Museum.

Question 2

Lehman Brothers, 5 years later

Answer 2

• $1.75 B, price Barclays agreed to pay in 2008 for Lehman’s U.S. Broker deal unit.
• $3 B, amount Lehman lent to SunCal, one of the largest land developers in Western U.S.
• 2,000 acres, amount Lehman foreclosed on in Boot Ranch golf course in Fredericksburg, Texas.
• SunCal also had developments in Claifornia communities such as Marblehead in San Clemente.
• Stephan Elieff, CEO of Suncal.

Question 3

George Walker

Answer 3

• Former CEO and Chairman, Neuberger Berman at Lehman Brothers.
• Lehman bought Neuberger Berman, an asset-management firm, in 2003.
• To save the company from bankruptcy in 2008, **Walker ** and other executives bought a majority stake in the company.

Question 4

What is the name of the data index which tracks indurstrial production?

Answer 4

Industrial Production Index

Question 5

Spain, Italy Banks Push Accounting Maneuvers

Answer 5

• Ailing banks find ways to make their financial conditions appear stronger.
• In Spain, the issue is deferred tax assets, which are worthless under new intnl accounting rules. Banks want to convert these to government-backed tax credits.
• Banks in Spain, with thin capital cushions, are lobbying govt to transform worthless tax assets into government guaranteed tax credits.
• In Italy, UniCredit SpA and Sanpaolo Spa hold 60% of Bank of Italy equity.
• These stakes, are hard to value since they aren’t traded and top bank CEOs ask for reevaluation, which would pad capital cushions.

Question 6

Financial Stocks on Upswing Once More

Answer 6

KBW Bank and KBW Insurance indexes have outpaced S&P 500 due to expectations of paring back of Fed Stimulus.

Expected higher long term interest rates

Higher rates boost net interest margin-spread between what banks pay for deposits and earn in lending.

Insurerers such as MetLife and Prudential Financial are benefiting.

Question 7

Targeting the Fed’s Pesky Inflation Problem

Answer 7

The Fed may hold off on taperingsinceinflationis fartoo low.

Inflation at 1.2%.

Worries due to low inflation:

1. Greater risk of deflation if economy slipped
2. Low overnight interest rates, prompted by inflation, give Fed less rate-cutting ammunition.
3. Fed constrained in attacking asset bubbles.

Question 8

Free-Trade Fever Hists Stocks in Shanghai

Answer 8

Chinese State Council, Chinese government’s cabinet, said it plans to implement a free trade zone in Shanghai port.

Looser capital controls and fewer barriers to trade and investment.

Share prices jumped for Shanghai International Port (Group) and Shanghai Jinqiao Export Processing Zone Developement Co.

Could propel yuan to an international currency.

Question 9

Stocks Welcome Summers Retreat

Answer 9

Stocks and bonds rallied as news broke that Lawrence Summers was no longer in the running for Bernake’s replacement.

Likely successor, Janet Yellen, current Fed vice chairman.

Investors see Yellen as Bernake two and take as indication of continued easy-money policies, specifically, $85 B of bond purchases per month.

Question 10

Fight For Detroit’s Assets: Round 1

• Negotiations between Detroit’s creditors and the bankrupt city’s emergency manager, Kevyn Orr soon begin.
• Detroit bankruptcy is largest municipal bankruptcy in history, $18 billion in outstanding debts.
• Biggest creditors-Assured Guaranty, MBIA, Financial Guaranty Insurance, Syncora Holdings.
• Secured bonds are less of a risk since the creditor is more likely to recover cash.

Question 11

LPL Financial Tries a New Approach

• CEO Mark Cassidy has new “two hour” rule, he’ll respond to any email within 2 hrs.
• Tall order for CEO of 4th largest brokerage firm, based on advisors.
• $7.5 million fine levied by regulators in May2013 for sytematic failures in email system.
• Rolling out new technology platform that allows customers to view their balances on mobile devices, and has an enhanced trading platform including e-signature technology.

Question 12

Setting Bank Limits. Time is right to set bank boundaries.

Up for debate is whether J.P. Morgan Chase, Goldman Sachs Group, and Morgan Stanley should be allowed to continue to own, store, and transport commodities such as oil, copper, and aluminum.

Gramm-Leach-Bliley Act of 1999 allows banks to trade physical commodities. Storing and transporting is to be decided in the coming weeks.

Key concerncs are price manipulation and consumer protection.

Question 13

Delayed offering is sold

• Genesse County, MI sold about $35 million in debt last month.
• Money will be used for improvements to water supply system.
• Keith Francis, county’s controller.
• Insurance from Build America Mutual was available for the debt.

Question 14

Bionic Fed No Match for Bond Market

• 10 yr Treasurys’ yields are rising despite tame expectations in inflation.

Question 15

U.K. Set to Begin Exit From Lloyds

U.K. govt announced it would sell a 6% stake in Lloyds Banking Group, marking start of returning its bailed out banks to private hands.

In 2008 and 2009, U.K. pumped Lb100 million into banking sector to take a 39% stake in Lloyds Banking group and 81% of Royal Bank of Scotland Group PLC.

Instead of recapitalizing, the banks shed assets on the road to privatization.

U.K. doesn’t plan to sell RBS shares since they are still below the 5 pound buy in price.

UK Chancellor of the Exchequer - George Osbourne

Question 16

Technical Glitch Halts Options Trading in U.S.

An outage at **Options Price Reporting Authority, OPRA, ** an electronic pipeline delivering options trades and quotes to brokers and investors, lead to a 10 min halt in all options trading contracts.

Technology behind OPRA is managed by the Securities Industry Automation Corp, owned by NYSE Euronext.

Question 17

Heard on the Street: What’s the market yelling about?

Stocks rallied as announcements of Summers removal.

Question 18

J.P. Morgan Whale Hunt Isn’t Over

The $800 million fine J.P. Morgan will pay for London Whale fiasco isn’t the end.

Commodity Futures Trading Commission investigating J.P. Morgan manipulated the price of the CDX.NA.IG.9, the ninth series of an index tied to investment-grade North American corporate bonds.

CFTC is expected to claim that J.P. Morgan’s $82 billion position in the index effectively manipulated prices by increasing demand for IG.9.

London Whale - Bruno Iksil

Question 19

U.K. earns a small profit on Lloyds Stock Sale

• U.K. earned a Lb60 million profit on Lloyd Stock Sale
• Antonio Horta-Osorio, CEO of Lloyds Banking Group, and Portugal native attributed his success in part to shifting Lloyd’s balance sheet away from risky, short-term funding sources.
• Horta Osorio was previously at Banco Santander before jumping.
• Checked himself into a rehab clinic, Priory, after being unable to sleep 5 nights.

Question 20

Prices Keep Locks on Myanmar

• Real estate prices are new hurdle to international corporations setting up in Yangon, Myanmar.
• Serviced apartments and condominiums are in short supply.
• This is preventing small luxury hotel chains such as Small Luxury Hotels of the World from investing in the fastest-growing tourism market in Southeast Asia.
• Yoma Strategic Holdings, singapore-listed investment firm with interests in real-estate, construction, and agriculture, is trading at 80 P/E.

Question 21

Creditors Circling Energy Firm

Answer 21

• Biggest names in finance are clashing over their holdings in Texas utility Energy Future Holding’s (TXU), as the firm moves closer to a bankruptcy filing.
• In 2007, KKR, TPG, and Goldman’s PE arm bought TXU for $32b plus about $13 in assumed debt.
• They bet that rising natural gas prices would allow TXU to charge more for electricity but they fell and racked up $18b.
• Apollo Management and a group of senior creditors are jockeying for payments owed by **Texas Competitive Electric, ** a subsidiary of TXU, ahead of Avenue’s unsecured bonds from Oncore, yet another subsidiary.
• Key to issue is how to calue each subsidiary of TXU and complex tax issues.

Question 22

FedEx flies Under the Radar on Fed Day (Ahead of the Tape)

Answer 22

• Trade is a leading indicator of the global economy’s health, but the high-valued international air freight that makes up much of FedEx’s revenue is the leading tip of that indicator.
• FedEx is “bell-wether”
• While flying high 2000-2007, airfreight growth has slumped in the five years since.
  *

Question 23

Markets Calm Before Fed Decision

Answer 23

• Despite widespread expectations of tapering, fund managers have been in a buying mood lately.
• Expect the FEd to cut it’s bond-buying program by $10-$15b.
• Gold had tumbled 22% this year
• Copper is down 11%.
• Last week Verizon Communications sold $49b in corporate bonds, the largest corp bond offering in history.
• Performance of S&P Sectors: Consumer Discretionary +27.5%, Financials +26.4%,
• Industrials +24%

Question 24

China Adds U.S. Mortgages, Agency Bonds,

Latest Purchases Show Beijing Hasn’t Backed Off Funding of American Debt Even as it cuts back on Treasury Buying.

Answer 24

• In July, China increased its holdings of high-grade securities sold by Fannie Mae and Freddie Mac and securities backed by home mortgages guaranteed by the U.S. agencies, by $20.2b.
• Yet China reduced its holdings of Treasury notes and bonds.
• Reasons for agency bonds and agency mortgage-backed securities as alternative: highly rated bonds and offer higher yields than Treasurys.
• Analysts play down the potential sell off of bonds by the Chinese and the interest rate shock it would expose the government to.
  *

Question 25

China’s Big Fish Reel in Small Fry

Answer 25

• Tencent Holding’s, Chin’s largest internet company, **will pay $448m for 36.5% of ** Sogou, a search engine whose majority shareholder is Sohu.com.
• Tencent dominates online games and operates the widely popular QQ and Wechat messaging services.
• **Baidu is the top Chinese search engine with 69% of search traffic. **
• Alibaba Group Holding, the e-commerce giant, recently formed an alliance with Sina, who owns Twitter like Weibo.
• This deal presents a headache for Qihoo 360 Technology, 15% of search, who was in talks to acquire Sohu.

Question 26

Fed’s Suprise Powers Market Surge

• As Fed announced no tapering, markets rallied.
• Among the best performers, were utilities and housing stocks.

Question 27

SEC Wants Boss-Employee Pay Gap on Display

• Securuities regulators proposed requiring that companies disclose the pay gap between top executives and their employees.
• A requirement of the 2010 Dodd-Frank Act, comparison of CEO vs median worker salary would be disclosed.
• Software giant Oracle Corp, is expected to be a target. CEO Larry Ellison earned $94.6 million in 2012. Most cme from seven million stock options, valued at $90.7m.
• Vanguard Group, largest instutional share-holder in **Oracle. **
• Blackrock third largest institutional shareholders.

Question 28

ConAgra’s Hiccup Could SIgnal Indigestion (Ahead of the Tape)

• ConAgra, whose brands inlcude Chef Boyardee, Hunt’s, and Orville Redenbacher, said it’s recent dip in share price had nothing to do with it’s $6.8 billion purchase of Ralcorp Holdings in January.
• Although some analysts suspect it does, saying Ralcorp’s lack of brands makes it a less defensable purchase.
• Ralcorp spun off it’s main branded business Post Holdings in 2012, and it has outperformed COnAgra substantially.
  *

Question 29

Ready to Jump Into The Housing Market? Read this First.

• Things are looking up in the housing market: the economy is recovering, unemployment is inching down, and the Fed is trying to keep interest rates low, creating a buyer’s markets.
• 5 things to keep in mind?

Answer 29

1. This recovery leaves a lot to be desired: A lot of this recovery has come due to massive government and the Federal Reserve’s efforts to spur demand.
2. The new boom is a rehash of the old one: Most of the growth being seen is in the same areas that swelled and burst in Bubble 1.0-Florida, Phoenix, Las Vegas, California’s Central Valley. In battle scarred Detroit, prices were up 30% from a year earlier, to just $13,355.
3. Big Businesses are doing a lot of the buying: Sales volume and prices are being pushed up by institutional investors such as Blackrock’s Invitation Homes which has ammassed 30,000 homes in 2 years.
4. investing in housing is nothing like buying a house: Most homebuyers make 0% profit when they sell after factoring in interest, maintenance, taxes, and improvements.
5. Interest rates are on the rise

Question 30

Mortgage Insurers Regain Luster

• Hedge Funds including Paulson & Co. have invested hundres of millions in the private mortgage-insurance business this year, joining big banks such as Goldman Sachs Group.
• Turnaround has fueled stock rallies in MGIC Investment Corp. and Radian Group Inc.
• Radian CEO S.A. Ibrahim.
• Federal Housing Agency has raised its cost on insurance, making the private sector more attractive.
• New regulations require larger capital requirements.
• NMI Holdings has launched as a new startup, it raised $510 m from investors including Hayman Capital Management.

Question 31

Higher-Yielding Shares Are Seen As Benefiting Most From Status Quo

• Utility stocks and REITs, real-estate investment trusts, notched most gains as FEd announced continued bond-buying.
• Home builders and emerging market stocks gained as well. Weakened $
• Financials and health care stocks to be hurt, low-interest rates queeze banks income.
• REITs are popular since they must pay out 90% of their income to shareholders.

Question 32

The Fed Has Commitment Issues

• Fed hold’s back on tapering, stocks and bond prices increased.
• Key point: How intertwined the Fed’s bond-purchase program and its committment to short-term (overnight) interest rates are in investors minds.
• Fed said it will keep overnight rate near 0% until unemployment reaches 6.5%.

Question 33

Shopping for Buy Signals At Inditex

Answer 33

• Spain’s Inditex, parent of Zara, has been a favorite for fashion investors.
• Trades 25 P/E
• Continues to achieve solid growth, stands to benefit form online sales (Zara’s first online store opened in 2010), and there is belief they can build that presence.
• Inditex’s brand strength helps maintain pricing, doesn’t have to discount as much as troubled H&M Hennes & Mauritz.
  *

Question 34

Manager Scores Macro Touchdowns

Answer 34

Robert Citrone is an emerging-markets specialist, founder of hedge-fund Discovery Capital Management, which manages more than $12 billion, is up about 15% this year.

**Average annual return of 17% since its 1999 inception. **

Considered a “macro” manager - one who makes speculative bets on economic trends in emerging markets and elsewhere.

Low profile on social media, and prefers to listen than dominate conversation.

Formerly worked at Tiger Management under Julian Robertson.

Bought a minority share in the Pittsburgh Steelers in 2012.

Question 35

Investors Shouldn’t Drool Over Darden

Answer 35

**Darden Restaurants Inc, ** which owns popular chains Red Lobster, Olive Garden, and Longhorn Steakhouse and others, is trading at 16.1 P/E, higher than its competitors DineEquity and Brinker International though lower than Cheesecake Factory.

Darden’s stock historically has done poorly on earnings day - when they disclose their quarterly performance to the public.

On average, it’s stock has shed 1.2% on all earnings days combined.

Question 36

J.P. Morgan Faces a Hard-Line SEC

Answer 36

• J.P. Morgan Chase has agreed to pay $920 m to settle with SEC ($200m), Office of the Comptroller of the Currency (OCC) ($300m) , the Federal Reserve ($200m), and the U.K’s Financial Conduct Authority ($222m) over the london ‘whale’ trading blunder.
• Will alos pay $80m for deceptive marketing practices related to identity-theft protection for credit-card customers.
• SEC continues a civil probe into individual employees of J.P. Morgan who may have been negligent in not fulfilling their duties.
• Rare move: J.P. Morgan admitted wrongdoing in settlement.

Question 37

J.P. Morgan Settles Consumer Cases

Answer 37

• JPMC settled charges that it made errors in hundreds of thousands of debt-collection lawsuits and leading more than 2m credit-card customers to buy services they didn’t want.
• Refunded $309m to 2.1m credit-card customers and will pay $80m in fines.
• Settlement requires that JPMC must notify consumers that their dect is being sold to a third party and verify the information is accurate.

Question 38

French Banks Rethink Partnership

Answer 38

• Societe Generale SA and Credit Agricole are exploring ways to end thier partnership in brokerage-firm New-edge and asset-management firm Amundi, as they refocus their business on core activities.
• CA would trade 50% stake in Newedge for 15% stake in Amundi.
• Newedge was formed in 2008 from SG’s Fimat unit and CA’s Calyon Financial and ranks as the 3rd largest futures brokerage in U.S.
• Amundi was set up in 2010 as the two pooled resources to gain a foothold in lucrative global-asset management business. CA owns 75% while SG has 25% stake.
• Asset management more attractive than brokerage. Amundi’s 2012 Net Profit - $658.1m compared to Newedge’s $14m.
  *

Question 39

Surprise reverts to Unease:

Investors Step Back As Unease Settles In

Answer 39

• A day after stocks surged to new highs on the Fed’s decision to continue stimulus, some investors were having second thoughts.
• Slow earnings growth have stocks in the S&P500 trading at 14.6 P/E, greater than 12.6 in 2012.
• In two weeks since Sept 4, Inflows into ETF’s, often used by faster-moving investors, have outpaced mutual fund inflows. A sign that investors aren’t ready to go long on the market just yet.

Question 40

Taper Delay Stimulates Debt

Emerging Market Countries, Other Issuers Feast as Central Bank Keeps Program

Answer 40

• Fed’s decision put Sept on pace to be most active month for emerging market debt issuance since May.
• Bond prices, hit hard in recent months from tapering fears, rallied Wednesday when the news broke.
• The threat of rising interest rates, which decreases the prices of outstanding bonds, is gone for now.
• Armenia, former Soviet State, issued $750m, 7yr bond at a yield of 6.25%–it’s first dollar bond.
• Some other issuers include **Colombia, ** Banco Nacional de Desenvolvimento Economico e Social, Borets
• Nissan MOtor, Reinsurance Group of America and Svenska Handelsbanken

Question 41

Tech Glitch Sinks Goldman’s Treasury Order

Answer 41

• A computer glitch at the New York Fed, which conducts auctions for the Treasury, blocked Goldman Sachs order for 3-month T-bills and automatically allocated them for more 6-month T-bills.
• This raises investor anxieties over losing money due to balky computers.
• This caused Goldman to get more than $8.75b of the $25b sold of 6month T-bills exceeding the 35% limit that any one bidder can buy in a single aucition. (Yields in 3month were higher, and 6month were lower than expected.)
• Money-market mutual funds, banks, and corporate treasurers are major buyers of Treasur bills.
• Treasury Automated Auction Processing System (TAPPS).

Question 42

“LEH Rocks On”

Alumni of Failed Firm Soak in the Blues

Answer 42

• Five years after Lehman Brothers filed for bankruptcy and the financial crisis began, 450 alumni gathered at BB King Blues Club & Grill near Times Square for a reunion.

Question 43

Air France Is In Search Of Thrust

Answer 43

• The French Arm of Air France-KLM will report operating losses for 6th year straight.
• Problems include fat wage bill, jet fuel up 12%, increased capacity.
• Potential Solutions: It’s cargo business has too much capacity, remove a jet out of service to reduce costs.
• Short and medium haul operations in Europe…cut out some legacy Air France routes and replace with low-cost carrier Transavia.

Question 44

Chocolate Prices Soar in Dark Turn

Shifting Consumer Tastes Are Cutting Into Already Short Supplies as Dry Weather Hurts Harvest

Answer 44

• Chocolate prices are expected to hit a record $12.25 per kg. this year.
• The $5.4b cocoa-futures market is experiencing a feeding frenzy fueled by demand for dark chocolate, which requires more cocoa beans to produce and is healthier than milk chocolate.
• Other causes: shortage of cocoa supplies due to dry weather expected in West Africa, where 70% of cocoa beans are produced.
• Switzerland - per-capita choc cons. among world’s highest.
• Barry Callebaut AG can legally advertise that comsumption of its products help maintain healthy blood circulation.

Question 45

Home Builders Need Stronger Foundation

Answer 45

• Home building stocks KB Home and Lennar lept after the Fed confirmed no tapering plans.
• Lower int rates, rising home prices, and compelling demographics.
• Though these seem to have been priced in before the announcement, not a single home builder has outperformed the broad market this year.
• Two losers so far: Pulte and Hovnanian.
• An investment vehichle some choose to gain sector exposure is the SPDR Homebuilders Exchange Traded Fund. (outperformed all large home-builder stocks).

Question 46

Investors Look Past Fed’s Reprieve

Answer 46

• Investors realized that the Fed still plans to reduce its stimulus, perhaps startring late next month.
• The concern is that markets could become unsettled since investors are uncertain what to expect from the Fed.
• 3 Events loom before the Fed’s next policy meeting scheduled for Oct 29 and 30.

1. September job-creation numbers are due Oct. 4
2. Looming fight between Congress and the president over the federal debt limit.
3. Stock prices may have gotten ahead of themselves after all this Fed stimulus.

Question 47

ICAP Nears Rate Probe Settlement

Answer 47

• ICAP is expected to pay less than $100m to resolve a civil probe into the brokerage firm’s alleged involvement in int-rate manipulation.
• Barclays, UBS, and RBS have agreed to pay a total of about $2.5b in settlements since last summer.
• ICAP settled with CFTC and UK’s FCA.
• ICAP, a london-based interdealer brokerage, acts as a go-between for banks loking to buy or sell products that generally aren’t heavily traded on public exchanges.
• UK authorities in June Charged former UBS and Citigroup trader Tom Hayes with 8 counts of conspiring to defraud by manipulating rates.

Question 48

U.S. Coal Vs. the World

Trouble for U.S. Coal-Mining Stocks is Far From Over

Answer 48

• Power Plants account for 90% of U.S. coal demand.
• Cheap shale caused 21% decline in coal demand from 2007-2012.
• Companies adapt through acquisitions and exports.
• Major miners Arch Coal, Alpha Natural Resources, Peabody Energy, and Walter Energy announced deals to buy miners of metallurgical coal.
• Metallurgical coal, or coking, coalis used in the production ofsteel and isn’t tied to power market.
• China has been a huge consumer of coke but demand is flattening and a weaking Australian dollar (more competitve) are presenting additional problems to U.S. coal-mining stocks.

Question 49

Shadow Boxing With Risk at Chinese Banks

Answer 49

• New Chinese rules that limit exposure of wealth-management products to certain risky investments (trusts) are shaking up China’s shadow banking sector.
• Banks sometimes guarantee the client’s principle in a wealth-management account (higher-interest rate than tradiitonal), but when they **don’t, ** the products doesn’t show up on the balance sheet.
• This allowed banks to take risks with proceeds from thee products they may otherwise avoid. In particular, the money found its way to trusts–which extended financing to questionable borrowers.
• Bigger issue for smaller and mid-size banks that are adding “trust beneficiary rights”, a derivative that gives a bank the right to cash flows generated by loans held by trusts
• China Everbright Bank, had 263b yuan of beneficiary rights at end of June, up 61% from year earlier.
• Total trust exposure is 4%, yet it accounts for 70% of shareholder equity.

Question 50

Wall Street Veteran Joins New Buyout House

Answer 50

Jessica Bibliowicz, National Financial Partners Founder, to be Senior Adviser at Bridge Growth Partners, a PE firm focused on technology and financial services.

Daughter of former Citigroup Chairman and CEO, Sanford Weil.

Carreer Stops include: executive roles at Prudential Financial, Smith Barney of CItigroup - where she famously clashed with her father’s protege James Dimon.

She founded National Financial Partners 15 years ago and sold it to PE firm Madison Dearborn Partners LLC earlier this year.

Bridge Growth Partners founders: Sander Levy, Alok Singh, tech executive Kevin Parker.

Levy previously helped found Vestar Capital Partners - which just bought Huish Detergents to creat Sun Products.

Question 51

Small Banks Clutch Lifeline

Answer 51

$204.9b invested in U.S. banks in 2008 through the Troubled Asset Relief Program (TARP)

Quarterly dividend paymetns owed to the Treasury are set to double to 9%.

While much of the sector has returned to health, some smaller banks that were exposed to commercial-real estate loans are clawing way back and will be unable to pay dividends.

Anchor BanCorp Wisconsin.

Largest taxpayer-backed investments that haven’t been reparid Popular (Banco Popular) $935m.

Surprisingly, Treasury has reaped a small profit on the program so far. Of $204.9b,$195b has been recouped in principal payments and $12bin interest.

Question 52

Atari’s Bankruptcy PLan Leaves Most Lenders Out of Credits

Answer 52

Founded in 1972 and creator of classics “Pong”, “Asteroids”, “Rollercoaster Tycoon”, and “Test Drive”, Atari Inc has filed for Ch 11 Bankruptcy.

In the deal French parent company Atari SA will maintain ownership of the franchises “Rollercoaster Tycoon” and “Test Drive”.

Atari will pay off a $3.8m bankruptcy loan to lender Alden Global Capital.

Parent company Atari SA will pay up to $3.4m in cash to fund the proposal, and contribute $1.75m oce the plan becomes effective.

Question 53

Choppy Seas, Clear Horizon for Carnival

Answer 53

• Costa Concordia pulled from the Mediterranean Sea floor 20 months after tragic accident.
• Carnival Corp., owner and operator of the Costa Concordia, took another hit this year. A fire left 4,000 passengers and crew stranded on the Carnival Triumph for days.
• Trading in line with competitiors Norwegian Cruise Line Holdings and Royal Caribbean Cruises
• World’s largest cruise line
• New focus on Asia , bookings could surge 7-fold by 2020.
• Big Prize - Mainland China, no cruise industry a decade ago…
• 70% of worldwide cruise passengers are from U.S. or Canada.
• Penetration - number of passengers who have ever taken a cruise.

Question 54

Paring Apple’s Blowout iPhone Weekend

Answer 54

• Apple reported a “record breaking” opening weekend for its newest iPhones-iPhone 5s and 5c-at 9m
• Take with caution, Apple included “new” iPhone sales in its opening-weekend count for the first time.
• They also opened in more countries this year, inlcuding China and added Japan’s largest wireless carrier NTT DoCoMo.
• These changes probably added 3m to sales.
• ** Google Android’s 80% year-over-year growth.**
• One for boost for Apple will come when China Mobil, China’s largest carrier, picks up iPhone.
• Without new markets to plumb, Apple sales growth may slow.

Question 55

Jostled by The Fed, Street Needs Risk

In tough quarter for bonds, fortune favors the bold.

Answer 55

Trading in FICC–jargon for fixed income, currency, and commodities–accounts for about 25% of big banks’ earnings.

Past three months: The market first became convinced that the Fed would reduce its bond-buying stimulus program in September, only to be shocked when it didn’t materialize.

This sent bond prices lower and yields higher…the result: banks took paper losses on the bonds they kept on their books and reduced trading activity as investors sat on the sidelines.

Revenue at investment bank Jefferies Group fell 88% in third quarter from a year earlier.

Most Controversial word on Wall Street: Risk

In tough environment, best way to boost profits is to put more capital at risk.

“Value at risk” - VAR - a yardstick of how much a bank’s trading operations could lose in any single day.

Question 56

Accused Traders Citing the ‘Whale’

Answer 56

Manhattan federal grand jury indicted Javier Martin-Artajo and Julien Grout for allegedly inflating the value of derivative positions that led to the “London Whale” losses.

Their response is to point fingers at Bruno Iksil, the London whale, who placed outsize derivative bets on corporate bonds which led to $6b in losses for JP. Morgan

Artajo supervised Mr. Iksil and other traders in the London office while Mr. Grout was a junior trader who worked for Mr. Iksil and was responsible for recording daily values on Iksil’s trading positions.

Iksil reached a “nonprosecution agreement” earlier for cooperating with U.S. authorities.

Iksil was a father figure to Grout.

Question 57

Citi Cuts as Refinancing Boom Fades

Answer 57

Rising interest rates have led to a slow down in U.S. mortgage loan and refinancing applications and banks respond by laying off mortgage workers.

Citigroup said Monday it laid off 1,000 workers in its mortgage business. That brings to total for major lenders to 7,000 for the year.

Wells Fargo, largest mortgage lender. Citi- #6.

For Citi, affected positions are primarily in Las Vegas and Irving, Texas and include jobs such as sales-fulfillment, mortgage underwriting, and mortgage default functions.

Mortgage originations include home purchases and refinancing.

Question 58

Fans of Nike Stock Should Start Sweating

Answer 58

NIke inc. stock is flying high, trading at 23 times forward earnings.

key measure is “futures” - indications of Customer orders Nike gives for the following 6 months.

Stock up 46% this past year.

Nike’s operating income - +25% NA, +19% Emerging Markets, +11% in West Europe, -2% Japan, -11% in China.

If earnings Thursday show slowdown in North America or a failure to resume modest groth in the key Chinese Markey, could spark unease.

Question 59

Paradox of Prudence for J.C. Penney

Answer 59

• J.C. Penny is considering raising more cash to “build a bigger liquidity buffer”.
• Capital structure currently consists of 70% debt
• Same-store sales have taken hit over the past two years, reaching -20% in some quarters.
• Recently ousted CEO Ron Johnson
• Analysts expect Penney to lose 86 cents per share this quarter.

Question 60

ICAP is Fined $87m in Libor Scandal

Three Ex-Brokers HIt With Criminal Charges for Alleged Rate-Rigging; U.S. banks are Expected to Soon Face Penalties

Answer 60

London based brokerage ICAP (world’s largest interdealer broker) became 4th major firm to settle allegations its employees manipulated benchmark interest rates.

So far, all firms that have settled have been European.

ICAP CEO Michael Spencer

$65m to Commodity Futures Trading Commission, $22m to U.K’s Financial Conduct Authority

U.S. Justice Department has criminally charged three former ICAP brokers Darrell Read, Daniel Wilkinson and Colin Goodman.

Allegedly took instructions from bank traders about which direction they wanted Libor to move, and they passed those requests on to other banks.

Barclays, UBS, and RBS have agreed to pay a total of $2.5b to settle charges.

Citigroup and J.P. Morgan Chase expected to reach settlement next summer.

Question 61

Fannie Mae Bond Deal in the Works

Offering Would Link Returns to Performance of Mortgage Pool, Inviting Investors to Share Some Risk

Answer 61

• Fannie Mae plans to sell about $675m of securities whose value will depend on the performance of a pool of $28.05b of mortgages acquired by Fannie Mae in 3rdQ of 2012.
• Freddie Mac, Fannie’s smaller brother, issued similar deal in July.
• Federal Housing Finance Agency, their regulator, has mandated they reduce cost of defaults to U.S. taxpayer.
• Fannie and Freddy don’t make mortgage loans, but buy loans made by other lenders and package them into securities that they sell to investors with a guarantee of principal and int payments.
• Investors are tip-toeing back into the market while Fannie assures this deal known as the Connecticut Avenue Securities series will include its “strongest performing book of business”.

Question 62

Silver Probe Ends Without Charges

Answer 62

The CFTC closed 5yr investigation of silver-market manipulation claims without filing charges.

J.P. Morgan Chase, a large silver trader, was the subject of manipulation allegations.

Silver traders claimed financial institutions had artificially depressed the price of silver in the $19b silver futures market.

CFTC commissioner, Bart Chilton, is disappointed and says the “manipulation standard remains too high a hurdle for regulators to overcome”. Not enough bad actors.

Despite expanded powers of enforcement granted in Dodd-Frank, the agency has successfully concluded just one case- involving the power market.

In order to win, CFTC must prove a trader not only has the intention to manipulate the prices, but also an actual trade that has resulted in an uneconomic price.

Question 63

Exchanges May Hold Hands

Nasdaq, NYSE Said to Be Discussing Protecting Each Other to Avoid Freezes

Answer 63

• Due to recent technology glitches,Nasdaq OMX Group and NYSE Euronext are discussing a system to help each other in the even of a tech failure.
• This month, SEC set a 60-day deadline for exchanges to strengthen thie technology.
• This follows a 3hr halt Aug. 22 in securities listed on the Nasdaq Stock Market as a data feed, known as Securities Information Processor. It suffered another outage a week later.
• Another problem at NYSE Euronext led to 10min shutdown of options market.
• Most logical would be for each to back up each other’s data feed.
• Problem - NYSE’s and Nasdaq’s data feeds use different methods to communicate. Standardizing would be costly and borne by consumer.
• Three feeds - Tape A (NYSE managed), Tape B (NYSE and BATS), Tape C (Nasdaq).

Question 64

Retailers Deal Debt is Bad Fit for Banks

Answer 64

• In May, JPMC, BoA, and Goldman agreed to sell debt for a $1.1b takeover of teenage fashion chain rue21 inc.by U.K. PE firm Apax Partners.
• When they went to market in August, rue’s earnings had fallen and debt investors didn’t buy in.
• Now, they’re offering $780m in debt at discount prices of 80-85cents on the dollar. The banks will be on the hook for the difference which could be $156m. (JP and BoA 45% each, Goldman 10%)
• The bank’s willingness to swallow such losses highlights banks’ aversion to keeping risky debt on their books following crisis.
• rue21 operates 971 stores in 47 states.
  *

Question 65

States Sharpen Payday-Loan Scrutiny

Answer 65

Payday lenders are under pressure to report customer inforamtion to state databases. Alabama last week joined 13 other states (Illinois, FL) that have databases that track use of payday loans.

Payday loans typically must be paid back within two-weeks to 30 days

Average size of parday loan $375.

Consumer Financial Protection Bureau, established by Dodd Frank, supervises payday lenders.

Database efforts come amid concerns that payday loans are trapping consumers in debt.

Borrow Smart Alabama payday-loan trade group opposes the database. Saying databases have led to a decrease in loan volumes in states that have them.

Some states limit the $ amount while others the number of loans that can be taken out in a year.

Indian tribes in NY are suing saying they’re immune to crack down.

Question 66

Saving is no Saving Grace for Economy (Ahead of Tape)

Answer 66

Personal income and spending data show spending has risen 0.3% in August, up form just 0.1% in July.

Annual consumption expenditure has risen just 3.1%, not much considering inflation.

“Financial Repression” - encourage investors to buy riskier assets than they might otherwise, given low yields on safe ones.

Applies to households as pennies saved earn virtually nothing in the bank. Ideally, this should propel sepnding and economic growth.

On the other hand, ytd disposable income has risen just 1.8% amid tax increases and tepid wage gains. Avg since 1960, 6.9%.

Question 67

CrossRoad for Two Legacies

Answer 67

A showdown at the negotiating table awaits Attorney General Eric Holder and J.P. Morgan Chase CEO Jamie Dimon over allegations that JPMC mislead investors in MBSs.

JPMC could pay as much as $11b in fines.

Key topic: Dimon wants JPMC to be shielded from future expensive lawsuits from regulators and private citizens. And wants to spare an admission of wrong-doing.

Dimon famouns for reciting John Pierpont Morgan: “first-class business in a first-class way”.

Dimon Carries two lists in his breast pocket - “What I owe people” and “what people owe me”.

Question 68

Top Banker Meets With Top Lawman

Answer 68

James Dimon met with ERic Holder to discuss a deal to resolve outstanding probes of the bank’s past work in mortgages as well as avoid future civil and criminal charges against JP Morgan.

Price tag could reach $11b.

This comes as an initial settlement of $3b was rejected.

Negotiation was historic because Holder personally led negotiations with the head of a company under investigation.

Sticking point: Whether JP would admit wrongdoing.

Question 69

For Bond Funds, a Fed Bounce

Answer 69

Marquee bond fund managers were vindicated when bets the Fed would be cautious paid off.

Pacific Investment Management Co.’s Total Return Fund, the world’s largest bond fund, run by co-CIO Bill Gross is up 1.05% in the 3rd quarter.

DoubleLine Capital LP’s $35.4b Double-Line Total Retun Bond Fund run by Jeffrey Gundlach is up .31% this year.

Question 70

Swaps Rules Worry Industry

Coming regulations have market players concerned about possible disruption

Answer 70

New rules governing how swaps are traded kick in Oct. 2.

Swaps, derivatives tradiditionally not traded on exchanges, which corporations and financial institutions use to protect against, or speculate on, changes in everything from fuel costs to int rates.

Mandated out of Dodd Frank, new rules would require most swaps to be traded through registered venues (Swap execution facilities), routed through central clearing-houses and reported to data warehouses known as trade repositiories.

Industry officials are grumbling asking for an extension since the platforms aren’t ready yet.

Question 71

BATS Takes on the Big Bell Ringers

Answer 71

BATS Global Markets Inc. based in Lenexa, Kan, announced an all-stock deal to merge with smaller U.S> rival Direct Edge Holdings.

BATS only 8 yrs old. NYSE trace roots to 1792 and formlly founded in 1817.

This deal would topple Nasdaq OMX Group as the second largest U.S. exchange in terms of trading activity.

Combines Direct Edge’s two exchanges with BATS existing 2 to give them 1/5 of the U.S. market.

BATS CEO Joe Ratterman

Direct Edge CEO William O’Brien

Question 72

SEC Aims to Get Tougher on Fraud

Chairman White, Fleshing Out Goals, Touts Settlements That “Have Teeth” and Deter Wrongdoing

Answer 72

SEC chairman Mary Jo White plans to ramp up policing of financial institutions.

In her enforcement agenda, she said the agency wil seek charges against more individuals and pursue larger fines against companies that commit wrongdoing.

Says admissions of guilt will accompany settlements from now on.

Required JP Morgan Chase to admit it violated securitieslaws as part of its $200m settlement over a London Whale incident.

Under current law, SEC levied fines are based on a firm’s profits from the misconduct, not investor losses.

White advises her staff to start with the individual and work out to the entity.

Question 73

Accountant Linked to Madoff Is Indicted

Answer 73

Paul Konigsberg
was indicted Thursday for allegedly keeping false books that helped Madoff cover up fraud for decades.

He pleaded not guilty and was released on bail.

**Nine people, including Madoff, ** have pleaded guilty to criminal charges in connection with the scheme.

Question 74

For Dish’s Ergen, It’s HIp to Be LightSquared

Answer 74

Dish Network bid $2.2b for certain spectrum assets of LightSquared, a wireless holding company that recently filed for CH.11.

Charlie Ergen CEO

As video-subscriber growth slows and progrmming costs rise, Mr. Ergen hopes to transition Dish into a new business by putting its spectrum to use in a wireless network.

Dish recently applied to Federal Communications Commission for rights to download information on existing spectrum. Meanwhile, LightSquared applied for permission to use some of its spectrum for uploading.

If bid and applications are approved, then Dish would have a network it could sell to a cellular company such as AT&T at a premium. Creating as much as $10/share in value.

Question 75

Cashing out After Post Fed Rally

Answer 75

Even as stocks rise to record highs in recent weeks, some money managers are moving out of stocks and into cash.

Looming tapering and uncertainty about brinkmanship in Washington are reasons.

Part of the flwo into cash is from the summer’s bond-market sell-off.

Scott Clemons, CIO of Brown Brothers Harriman’s WEalth fund says cash makes up 15% of his clients portfolio this year.

Question 76

Bank of America Executive Faces Criticism in Libor Case

Alex Wilmot-Sitwell Said He Didn’t Recall Tom Hayes, But Was Included on Emails About Star Trader

Answer 76

Alex Wilmot-Sitwell, president of BoA for Europe, faces criticism from U.K. law enforcers about his time as a UBS executive back in 2009, when Tom Hayes was rigging libor.

Sitwell claims he doesn’t remember the emails about convincing rainmaker Hayes from jumping to Citigroup however parliamentar

Tom Hayes left for Citigroup in 2009 and was paid $3m upfront before being fired a year later for rigging Libor.

Question 77

Ukraine’s Troubles Hit Bonds

Answer 77

Ukraine’s bonds recently took a tumble.

Problems: a wide budget deficit, a wider trade deficit, dwindling reserves of foreign currency and debt coming due that needs to be repaid with it.

Ukrainian Prime Minister - Mykola Azarov

Main transit point for natural gas from Russia to Europe. Has asked Russia to lower gas prices, russia urges customs union.

Ukraine looking to EU for trade union and potential bail out from IMF

Question 78

Bad-Loan Revival Unburdens Banks

Rising Values Let Lenders Shed Foreclosed-Property Portfolios

Answer 78

As real-estate prices have risen, and demand from buyers rebounded, banks are able to seel their OREO-other real estate owned…industry jargon for foreclosed properties.

Western Alliance Bancorp booked a profit on a 30,000 sqft property it recently marked down.

Commercial real-estate market didn’t deal same blow as residential since banks held onto their properties long enough to recoup some value.

The great majority of properties sold have been purchased by mom-and-pop investors, immigrants and other smaller players, property brokers say.

Question 79

N.Y. Panel Urges Tougher Penalties for Code Theft

Duplication of Wall Street Trading Software Would Risk More Prison Time Under Group’s Proposal

Answer 79

Under proposed changes, recommended Tuesday by New York’s White Collar Crime Task Force, the “unlawful duplication of computer-related material” would essentially be treated like any other type of larceny, with potentially serious prison time, depending on the value of the stolen code.

Sergey Aleynikov, former Goldman trader who copied copmputer code before leaving, previously convicted but was overturned after serving one year.

Question 80

ICAP Staff Face Criminal Charges Tied to Libor

Charges Could Come Wednesday Against Past or Present Employees in Rate-Rigging Case

Answer 80

Look at other ICAP cards for more info.

Regulators have said that a quarterly “fixing fee” payment of about $27,000 by UBS to ICAP, which was shared among several employees at the brokerage, was a reward for their help in a Libor-rigging plot.

Question 81

High Time For Profits to Catch Up to Stocks

Answer 81

S&P 500 up 5.7% since June

13 out of last 18 quarters have been positive

Troubling: Earnings growth has satlled recently.

Market’s P/E is 19.3, 47% above long-term average.

Question 82

Argentina Bonds are in Demand

Answer 82

Argentina defaulted in 1992, and then again in 2001 on nearly $100b of bonds. Yet J.P. Morgan and investors are piling into Argentine bonds.

J.P. Morgan Chase & Co. raised the portion of Argentina’s debt in its IShares J.P. Morgan USD Emerging Markets Bond ETF to $4m this month.

Argentina’s bond expiring 2033 has traded at a two-month high of 66 cents on the dollar.

The Bonds are rallying even as Argentina awaits a U.S. Supreme Court ruling on its appeal of a previous ruling which required it to pay out both groups of bondholders (Aurelius Capital Management and Elliott Management Corp’s NMI).

Question 83

Companies Find It Doesn’t Hurt to Be A Little Less Public

Answer 83

New rules under the Jumpstart Our Business Startups Act allow companies < $1b in rev to file their IPO listings privately with regulators and reveal to public as little as 21days before price range is proposed.

So far, shares of companies that choose this option have performed similarly to those that didn’t.

Twitter qualifies for the new treatment, and has said it filed secretly.

RetailMeNot Inc (e-commerce) and Trulia (real-estate comp) used the new rule and have done well. Trulia +124%.

“Roadshow” - formally pitches its stock to investors.

Goal of legislation: Make it easier for companies to consider going public without scrutiny of competitors and public.

Attractve to Tech companies who have been harshly scrutinized of late (Groupon had to change its accounting practices)

Question 84

Staying Alive - Weak Banks Hang On

Government Is Allowing Weak Lenders to Hang Around Longer

Answer 84

Overall, the banking industry is getting healthier, but troubled banks are being allowed to linger for longer periods.

Capitol Bancorp, hit hard by housing bubble. 64 offices before crisis and now down to 6. Most recently, Sunrise Bank of Arizona, was closed. Plans to sell remaining banks in an auction.

The risk, regulators’ slow approach can cause banking executives to take extreme risks to survive and can lead to bigger price tags for the govt if they ultimately fail.

In 2013, 13 of 22 banks that failed were deemed “significantly undercapitalized” for at least a year before failure - meaning Tier 1 capital ratio < 3% of assets or a total risk-based capital ratio of less than 6%.

A “well capitalized” - Tier 1 of at least 5% of avg assets and 6% of risk-based assets, and Total Capital of at least 10% of risk-based assets.

Regulators aren’t required to start process of closure until reach “critically undercapitalized” tangible capital of <2% of assets.

Question 85

Marquee IPOs Target Taste for Risk

Big-Name Offerings And Strong Market Tap Small Investors

Answer 85

Money is moving back into the U.S. stock market as stock funds have taken in a net $151b this year, better than $431b that headed out 2008-2012.

Busiest year for IPO market since 2007. So far, 156 companies have gone public.

Notable offerings this fall: Twitter (Nov), Hilton Worldwide Holdings (World’s largest hotel chain) and Chrysler Group.

Midasplayer International Holding, maker of wildly popular online game Candy Crush Saga will soon be selling shares.

Facebook’s IPO last year had scared individual investors, however recent success of Rocket Fuel, FireEye, and Benefitfocus has industry experts expecting individual investors to get back in the IPOaction.

Most Successful 2013 IPOs: Stemline Therapeutics +331%, Insys Therapeutics +314%,Textura +178%

Question 86

Facebook, Google Live in Pinteresting Times

Answer 86

Pinterest,
almost social networking equivalent of window-shopping. Good opportunity for advertisers.

According to tech firm RichRelevance, which tracks online traffic for retailers, customers which came to sites from Pinterest spent $140-$180 an order. Compared to $80 for FB and $60 for Twitter.

Basically serves as an online catalog users fill with stuff they want to buy by clicking “pin” button.

Pinterest presents a unique opp for advertisers..downside is doesn’t appeal to many men.

Top 100 most downloaded apps for iPhone and Android users.

Andreessen Horowitz (VC firm), gave Pinterest a $2.5b valuation despite generating no revenue.

J Crew and Target already tapping into potential by posting catalogs and pricing on Pinterest.

Question 87

Signs Raise Threat of a Red October

Answer 87

• In coming month, markets face four tests: Washington debt crisis, release of September employment data, 3rd Qtr easrnings releases and the Federal Reserve’s next policy.
• Washington - Most worrisome is if Congress refuses to raise debt ceiling and U.S. defaults. Could send global markets for a dive.
• Earnings - Fear for soft earnings reports. Analysts will have their eyes on sales forecasts since most early earnings growth following crisis came from cost cutting measures.
• Jobs - Sept Job creation and unemployment data are due from Labor Department Friday. Strong -> taper…soft ->maintaining stimulus.
• Fed Meeting - Oct. 29 & 30, depends likely on debt-ceiling, govt spending, and sept job data. General consensus is FEd will bend over backwards to keep the economy out of recession.
  *

Question 88

Bank Examiners to Face Rigorous Reviews

New Program From Comptroller Reflects Criticism of Regulators for Lax Oversight Before and After Financial Crisis

Answer 88

Office of the Comptroller of the Currency (OCC), which regulates national banks, is rolling out a program that will subject bank examiners and other personnel to the same level of rigorous review the agency currently puts banks through.

Comptroller of Currency - Thomas Curry

Response to Capitol Hill’s criticism of the lax oversight the OCC had pre financial crisis. Missed London Whale trades, a troubled mortgage foreclosure review, and mistakes enforcing money-laundering rules.

Separate initiative will allow regulators from Canada, Singapore, and Australia to perform their own independent evaluations of OCC.

Focus on the areas of the ageny’s operations that pose the greatest risk.

Question 89

Mizuho Draws Regulatory Scrutiny

Japanese Bank Comes Under Fire for Dealings With Members of Crime Syndicate

Answer 89

Bankers at Mizuho Bank, a core-unit of Japan’s second largest lender, lent money to crime-syndicate members for more than two yrs without cutting them off or alerting authorities. Mizuho Financial Group.

Mostly auto loans totaling $2m, the Financial Services Agency said.

Ordered to submit a plan to improve its operations by Oct. 28th.

yakuza - Japanese crime syndicates.

In 2007, FSA suspended activities of bank of Tokyo-Mitsubishi UFJ after it was found to have made loans to yakuza.

Japan passed laws in ‘91 making yakuza activity illegal and obligating banks to check customers’ identification and report information of money laundering.

Failure to make adequate efforts to identify a client can lead to a 1yr prison term or a fine of up to 1million yen.

Question 90

J.P. Morgan Insider Aids U.S. Probe

Answer 90

Unidentified cooperating person (woman),
provided information in criminal investigation over JPMC’s mortgage securities division.

Suggests the bank overstated quality of mortages that were being bundled into securities and sold to investors before the financial crisis.

DOJ is pushing for admission of wrong-doing and the settlement is in ballpark of $11b, $7b in cash and $4b in relief to consumers.

One scenario - bank gets a deferred prosecution agreement with the govt in which it assits in investigation of individuals.

NY Attorney Eric Schneiderman and Federal Housing Finance Agency also filing suits involving mortgage-bonds.

Question 91

Old WOund Nags Seemingly Spry Walgreen

Answer 91

Walgreen Co, nation’s largest drugstore chain by # of stores, growth today is exagerrated by its rebound from the 2012 spat with pharmacy-benefits manager Express Scripts.

Question 92

Stock Investors See Slimmer Pickings

Answer 92

“We’re having a hard time finding things to buy” - Warren Buffet

Stock investors warn that the air is getting thinner for U.S. stocks. Up 18% this yaer, the DJIA is at its loftiest levels in years when compared with corporate profits.

S&P 500 is trading at 14.3 times the value of next 12 months earnings.

Slow pace in corporate earnings growth…and even this figure has been inflated by stock buybacks.

Question 93

Paradigm Shift in Banking

Answer 93

Robert Bemosche, wall street’s contrarian-in-chief, who becam CEO of American Internation Group (AIG) after its bailout, says too big to fail is a thing of the past.

FDIC has new plan for a bank on brink of failure. Take over bank’s holding company while trying to keep alive its operating subsidiaries. (units that run branches and welath management)

This would stave off a potential bank run, but the pain would be felt by the shareholders, creditors and management. (better than the taxpayers!)

Martin Gruenberg, FDIC Chairman, confident his agency could pull of a bank rescue.

New Paradigm: Spreads on bank bonds holding companies are higher than their subsidiaries. (inversion) Bondholders, shareholders, and creditors will be on the hook for losses.

Question 94

Magnate’s Woes May Jolt Funds

Answer 94

**Pimco, Blackrock, Loomis Sayles & CO, Lord Abbett & Co, Ashmore Group, and Spinnaker Capital Group, some of world’s biggest bond-fund managers ** are bracing for Eike Batista’s empire’s expected default.

They hold roughly half of the $3.6b in $-denominated debt issued by OGX Petroleo e Gas Participacoes SA, Mr. Batista’s flagship oil company.

Company plans to skip an interest payment of $44m due soon as it continues talks of debt-restructuring. Has 30 days after missed payment before penalties kick in.

Lazard and Blackstone Group bankers tapped to work on restructuring.

Question 95

KKR Makes Another Investment in China

Answer 95

U.S. PE firm KKR takes a 10% stake in Qingdao Haier, listed unit of Haier Group China’s largest appliance maker, at a 15% discount to listed price and attains 1 out of 9 board seats.

KKR recently raised a $6b Asia fund. Announced it will pay $1.7b for an 80% stake in Panasonic. (its biggest deal ever in Japan)

Haier wishes to compete with Western and Japanes names, using acquisitions as key strategy.

Owns most of Fisher & Paykel Appliances Holdings, and in 2011 bought Sanyo Electric’s Co’s household appliances unit for $130m from Panasonic.

Question 96

Shutting Down Emerging Markets

Answer 96

American exceptinoalism remains alive and well in the U.S. bond market at least: as govt looks like it might shut down, its cost of borrowing actually falls.

Yields on 10yr Treasury actually fell slightly as govt nears shutdown.

In contrast, emerging markets such as India, Brazil, Turkey have seen their stock markets and currencies battered.

Shutdown could result in less trade which would further burden emerging economies.

Emerging markets staged comeback in Sept as Fed delayed taper, pushing more investors into higher yielding assets.

Question 98

Dimon Stays Upbeat in Firm’s Dark Days

Answer 98

Dimon and Bill Gates appeared at a JPMC cocktail reception to tout the bank’s new socially responsible investment fund, which is backed by the Bill and Melinda Gates Foundation and will pump money into the development of drugs targeting diseases common in developing countries.

Mr. Dimon has taken every opportunity to talk up the bank’s role as a lender, supporter of loacl communities and champion charitable causes.

Question 99

More Pain Looms for Banks

Weak Trading, Mortgage Slump, Legal Costs to Cut Results

Answer 99

Analysts are scrambling to ratchet down earnings estimates ahead of the 3rd Q reports as weak trading revenue, a sharp decline in mortgage refinancing activity and tising legal costs trouble banks.

Cut profit estimates for all 6 largest U.S. banks excep Wells Fargo.

BofA suffered the biggest drop, as analysts cut earnings predictions by **27% since July 1. **

JP Morgan plans to cut as many as 15,000 jobs in its mortgage division by end of 2014.

Question 100

Jobs Understudy Takes Stage in Shutdown

Answer 100

Govt sent home 99.9% of employees at Bureau of Labor Statistics on Tuesday, which will likely delay this Friday’s jobs report.

A private sector report on payrolls will be released Wednesday by Automatic Data Processing Inc.

Over long run, ADP release shows job gains in line with the official numbers.

Question 101

Respect Still Eludes Mexican REITs

Answer 101

Mexico’s real-estate investment trust industry still struggling to find its footing.

Called fibras, these investment vehicles give developers access to public-equity markets and don’t pay corporate income taxes as long they distribute all of their income as dividends.

Fibra Uno, mexico’s largest REIT, paid $100m to buy a 49% stake in Torre Mayor complex in Mexico City. Controlled by founding El-Mann family.

Some investors are wary since mexican fibras **are externally managed and often controlled by wealthey families. In addition, they charge fees based on asset value and acquisitions. Transparency an issue. **

Exception: Terrafina, an industrial Fibra founded and managed by Prudential Real Estate Investors, has a majority of independent board members.

Question 102

Worry Builds on President’s Tax-Rise Plan

Answer 102

A package of steep tax increases by Mexico’s President Enrique Pena Nieto is likely to deal a blow to Mexico’s new-home industry. Must be approved by congress on Nov. 15th.

16% “value added” tax on many home sales, mortgage interest and rents and a capital gains tax on home sales of 1.24m pesos or more.

Mortgage interest payments no longer tax deductable.

Mexican government subsidises roughly 1/3 of all purchases of homes of $25k or less.

Question 103

Shutdown Puts Dollar on Defensive

Greenback sank to weakest Against Euro in Over Seven Months After Congress Failed to Avert Crisis

Answer 103

U.S. dollar has tumbled amid Washinton wrangling as investors worry about the prospect the U.S. may run out of borrowing capacity this month.

800,000 govt workers who will go unpaid due to shutdown.

Congress must raise debt ceiling by Oct. 17th or the Treasury will be unable to pay its bills.

Dollars gyrations are likely to become more violent at this date approaches.

Question 104

Ex-trader Tourre Wants a Reversal

Answer 104

Goldman Sachs Group trader Farbrice Tourre seeking to reverse a devision that found him liable for defrauding investors in a mortgage-linked deal, Abacus 2007-AC1.

Mr. Tourre filed a motion asking U.S. District Judge Katherine Forrest to dismiss each oft he 6 civil counts against him, or order a new trial, on grounds the jury’s findings weren’t supported by the case the SEC brought against him.

Matthew Martens, SEC’s chief litigation counsel plans to leave SEC this month. To be succeeded by Matthew Solomon.

Question 105

SEC Enforcer Sees Room to Get Tough

Answer 105

Andrew Ceresny, SEC co-director of enforcement, is ramping up its penalties in an agressive bid to deter misconduct.

SEC will focus on imposing tough penalties on individuals wherever possible instead of just settling with a firm.

New policy: admission of wrong-doing when deemed appropriate.

Question 106

Fed Hawks May Feast on ISM

Answer 106

One of the most forward looking data series, The Institue for Suply Management’s Manufacturing Index registered a reading of 56.2 for Sept, the highest in 29months.

The nonmanufacturing index, is due Thursday, and actually covers a larger swath of the U.S. economy. (nearly 9/10).

It hit 58.6 in August, the highest since Dec 2005.

With figures like these, it will be hard for Fed to drag its feet much longer on tapering.

Question 107

Emails at Heart of BofA Trial

Answer 107

In summer of 2007, executives at Countrywide Financial Corp. were desperate to move away from the slumping market of sub-prime mortgages and into higher quality loans.

They created a program called “High Speed Swim Lane”-HSSL, or “hustle” that pared back checks on loan quality so mortgages could be approved more quickly.

Federal Govt officials are using email exchanges between Unit’s COO Rebecca Mairone and Ed O’Donnel, former head of underwriting, in their civil case against BofA which bought Countrywide in 2008. Attempting to show Mairone and BofA committed fraud when they ignored concerns about quality to speed up sales of the loans to Fannie Mae and Freddie Mac.

“Sprint Incentive” - program introduced by Countrywide and paid employees a bonus every time they successfully rebutted a case for why a loan was bad.

Question 109

European Banks Hold Out on Detroit

Answer 109

Depfa Bank, Dexia SA, and a unit of Commerzbank AG have hired lawyers to protect their share of Detroit’s meager cash pile.

Usually banks want to avoid drawn-out bankruptcy court trials, but since some of them were nationalized in 2008 they want to recoup as much as they can for taxpayers.

Amount of Detroit pension bonds held by banks: Dexia - $305m Depfa - $175m, Commerzbank - $153m

The banks’ main objection is to Detroit Emergency Management Kevynn Orr’s agreement to pay UBS and BofA to unwind a derivatives transaction.

Depfa recently asked wall street traders to circulate offers to sell the $175m of bonds for 46 cents on the dollar.

Question 110

SEC Pulls Over the Exchange Police

After glitches and growth of ‘Dark Pools’, Agency chairman calls for Review of Self-Regulatory System

Answer 110

Stock exchanges for years have been resposible for policing their trading systems - a system known as self-regulation.

As competition among exchanges has ramped up in recent years, critics say exchanges have fallen short as they seek to attract traders to their systems.

Last month, “dark pools” and other privately run trading venues that aren’t regulated traded a record 38% of all shares.

Financial Industry Regulatory Authority - Wall Street’s self funded regulatory agency overseen by SEC - submitted a new rule that would provide a more detailed view into the activities of private trading venues such as dark pools.

Ms. White said recent technology glitches at Nasdaq and NYSE Euronext have called the integrity of the market into question. Hired Tradeworx to deliver a system that would publicly release data on all stock orders and cancellations.

Question 111

Treasury yields sink to 7-week low

Answer 111

Wrangling in Washington and an ADP National Employment Report that showed a smaller than expected increase of 166,000 jobs to the U.S. in Sept sent the yield on the 10yr treasury to its 7-week low of 2.594%.

Investors pile into treasuries as safe haven, pushing prices up and yields down.

Question 112

Electronic Shock Therapy Could Be an Answer for Big Tobacco’s Problem

Answer 112

Lorillard, #3 U.S. tobacco company by market value, behind Altria Group and Reynolds American, has agreed to pay as much as $100m for Skycig, a UK based maker of electronic cigarettes (e-cigs).

This follows a $135m deal to buy blu eCigs, a U.S. brand.

Lorillard’s main product is Newport, a menthol cig regulators have considered controlling more tightly, so pressure to diversify is likely reason for acquisitions.

FDA is also pushing new rules to reduce amount of nicotine in cigarettes, making them less addictive. E-cigarettes could be nice insurance for Lorillard.

Question 113

Loan Metrics Altered as Complaints Linger

After Claims Banks were failing to satisfy a 2012 pact, overseer adds requirements for foreclosures, Lending Changes

Answer 113

Over a year after 5 large banks agreed to pay $25b and improve their foreclosure practices, the lenders are facing criticism for failing to live up to their end of the bargain.

Landmark settlement with BofA, JP Morgan Chase, Citigroup, Wells Fargo, and Ally Financial.

Overseers of the Feb 2012 settlement rolled out new set of rules to address what regulators and consumer advocates say are problems in bank’s handling of loan modifications.

Pact led to more than 300 new standards for how banks handle these issues. Among requirements: mortgage servicers provide single point of contact for borrowers and notify borrowers of problems with their applications more quickly.

Question 114

Mr. Cuban Can’t Recall a Key Talk

Answer 114

SEC filed a civil case against Mark Cuban in 2008, charging he violated securities lawss in 2004 when he sold his 6% stake in Mamma.com after learning insider information from the CEO, Guy Faure.

Mark Cuban took the stand at his insider-trading trial, testifying that he didn’t recall a conversation with CEO of Mamma.com, a Canadian internet search company.

Mamma.com was to participate in a private placement offering (PIPE) to raise money by selling equity in the company. After hearing this, Cuban allegedly dumped his $7m stake in Mamma.com avoiding losses of $750,000 when the share price dropped after the public learned of the private stock offering.

He faces several millino in fines if found guilty.

Question 115

Ackman’s Firm Takes a $2b Hit

Answer 115

Activist hedge-fund manager William Ackman’s Pershing Square Capital Management has seen its value decline by $2b this year largely due to investment declines.

Ackman suffered setbacks with a soured stake in J.C. Penney ($600m losses) and a big bet against Herbalife that is underwater.

Main fund just up 0.5% this year net of fees, compared to 20% for S&P500.

Placed a $1b short on Herbalife in December of 2012, claiming it was an illegal pyramid scheme. Shares of Herbalife have more than doubled since then.

Recently announced he restructured the position in Herbalife to include put options that expire in 2015. These allow an investor the right to sell stock at a set price over a designated time frame.

Question 116

Puerto Rico Debt Woes

Answer 116

S&P Municipal Bond Puerto Rico Index
is down 18% this year and has caused officials at Treasury Department and Federal Reserve to hold a meeting to discuss potential consequences.

Puerto Rico owes $70b on its bonds and its rating is BBB- , just one notch above junk status.

PR’s economy has been in decline for several years, hurt by end in 2006 of tax breaks that attracted U.S. companies for decades. Unemployment: 13.9%

Unlike other muni bonds, interest on PR’s bonds is exempt from local, state, and federal income taxes.

PR governor, Alejandro Garcia Padilla.

Question 117

Investors See Plays in Political Knot

Answer 117

Money managers doubt the damage of the government shutdown will be lasting, and view any stock sell off as a buying opportunity.

So far declines in market have been modest yet the larger problem involves raising the debt ceiling.

Treasury Dept will run short of money to pay bills on Oct. 17th if ceiling isn’t raised.

Question 118

Madoff Insider to Testify

Answer 118

Frank DiPascali Jr., former CFO at L. Madoff Investment Securities, will be a key witness in the government’s prosecution of 5 former Madoff employees who they believe participated in pnzi scheme.

DiPascali plead guilty in 2009 to 10 criminal charges and hopes providing testimony will lead to leniency. He faces 125yrs at the moment.

Computer programmers Jerome O’Hara and George Perez allegedly created phony customer accounts while portfolio managers Annette Bongiorno and JoAnn Crupi concocted trading records. Daniel Bonventre, former operations director, worked with Mr. DiPascali to allegedly “gin” up phony books and records.

Lawyers for all 5 defendants say their clients had no knowledge of the fraud being carried out by Mr. Madoff, Discapali and others.

Question 119

Hedge Fund Run by Star Manager Looks Outside

Answer 119

Bruce Berowitz, star mutual fund manager and president of Fairholme Capital Management, launched a hedge-fund Fairholme Partnership LP in January and is now looking to institutional investors to grow it to $1b in assets in a yr.

Must put in $5m for 1, 3, or 5 yrs. Fund up 23% this year.

Unlike most hedge-funds, Fairholme doesn’t charge a management fee. Only performance fees…15% for 5yr tranche, 20% for 3yr, and 25% for one yr.

Berowitz known for aggressive tactics.

In 2011, he ousted board of St.Joe Co. in a proxy battle, facing off against hedge-fund manager David Einhorn. The stock of the real-estate company is down 30% this year but Berowitz insists he’s confident in the outlook for the company.