The bigger picture
The onetime engine of Wall Street’s enviable performance, fixed-income trading, is still sputtering, thanks to new regulations, disruptive technologies and calmer markets.
More from Emily Flitter and Kate Kelly in the NYT:
Five years ago, fixed-income trading — so called because its keystone product, bonds, typically provides a fixed payout — generated nearly $103 billion in income for the top 12 investment banks, according to Coalition, a London research firm. By 2016, that had fallen to less than $76 billion — down $27 billion from the peak.
JPMorgan takes hit tied to Steinhoff’s woes.
Tucked into JPMorgan’s earnings this morning was a $143 million mark-to-market loss the bank disclosed on a “margin loan to a single client.”
That client is Steinhoff International Holdings, according to reports.
Early last month the giant South African retailer, which owns American mattress maker Sleepy’s, said it had discovered accounting irregularities. Its shares tumbled 78 percent on the news.
How does this effect J.P. Morgan? The bank was not among the initial group of lenders on the margin loan “to an entity controlled by Steinhoff’s then chairman Christo Wiese to purchase additional shares in the company in the fall of 2016.” But, as the WSJ reports, “losses from the margin loan were expected to have been spread among a wider group of banks.”
“The borrowing entity pledged 628 million Steinhoff shares as collateral on the loan, according to a company statement at the time. After the share price collapse, however, that collateral has little value relative to the debt.”
U.S. Supreme Court will hear a challenge to S.E.C.’s in-house judges.
How often does the Supreme Court agree to review a decision in which the two sides agree the lower court was wrong?
That odd situation will play out in Lucia v. Securities and Exchange Commission in which the justices will consider whether administrative law judges used by the S.E.C. are “officers” under the Constitution Appointments Clause. If they are, then they can only be put in office by the president, a head of a department, or the judiciary.
This obscure provision burst on the scene about two years ago when defendants challenged how the S.E.C. picked its in-house judges [link below].
The S.E.C. became more aggressive in pursuing administrative cases in the wake of the Dodd-Frank Act. The law expanded the S.E.C.’s authority to bring most cases in its administrative court rather than going into a federal district court, depriving defendants of discovery rights and a jury to decide the case.
Defendants argued the judges are not mere employees but “officers” so the proceeding was unconstitutional. Needless to say, the S.E.C. disagreed and argued before the appeals courts that there was no issue regarding their constitutional status.
The S.E.C. won the case before the federal appeals court in Washington, D.C. but lost in the Tenth Circuit. Then the Justice Department flipped the script. In late November, the solicitor general’s office filed a brief [link below] with the Supreme Court stating that the judges had not been properly appointed because they are “officers” under the Constitution.
The key issue is whether other agencies beyond the S.E.C. that use in-house judges will also have to change how they are appointed. The impact of the decision could be significant if previously decided cases will have to be reheard before a properly appointed judge, creating a mess that could take years to sort out.
— Peter J. Henning
BlackRock is now a $6 trillion firm.
Continuing to cash in on the boom in exchange-traded funds, the world’s largest money manager ended 2017 with $6.3 trillion under management up 22 percent for the year.
BlackRock reported adjusted net earnings of $3.7 billion for the year on Friday, up 16 percent for the year and easily beating analyst expectations. The firm also reported a $1.2 billion tax benefit for the fourth quarter, resulting from the recent tax cut package. Including the tax benefit, earnings were up 59 percent for the year.
BlackRock has been one of the main beneficiaries of the current bull market. Money has flowed over the past nine years into passive investment funds that track a wide variety of indexes and strategies at minimal cost.
Of the $367 billion in net inflows that BlackRock took in last year, $245 billion came via the firm’s iShares suite of E.T.F.s.
Increasingly investors are using E.T.F.’s to make bets on the stock and bond markets as opposed to buying the individual securities themselves.
— Landon Thomas Jr.
T. Boone Pickens Calls it Quits.
The famous oilman and investment manager is shutting his energy-focused hedge fund as his health declines, the WSJ reports.
Mr. Pickens wrote in a letter that he plans to publish soon and was reviewed by The Wall Street Journal:
“It’s no secret the past year has not been good to me, from a health perspective or a financial one. If you are lucky enough to make it to 89 years of age like I have, those things tend to put life in perspective.”
“Trading oil is not as intriguing to me as it once was.”
C.E.O.s hoping for an immigration deal will have to keep waiting
Yesterday morning, six senators looked near a bipartisan deal on how to protect the class of young unauthorized immigrants known as Dreamers. That would have pleased the 142 business leaders who had pleaded for one.
Leaving aside the controversy over the vulgarity, President Trump’s reported remarks — which he says weren’t quite like that — exposed his skepticism about the contours of a proposal presented to him by the senators Lindsey Graham, Republican of South Carolina, and Dick Durbin, Democrat of Illinois.
Democrats want a clean bill to protect the immigrants, but Mr. Trump questioned why immigrants from Haiti and parts of Africa should be protected too.
Other Republicans expressed skepticism as well. Senator John Cornyn of Texas said, “We need to have more than six votes for a proposal.”
The Washington flyaround
• Inside the fractious relationship between the president and his party. (Time)
• Steven Mnuchin defended Mr. Trump’s planned visit to the World Economic Forum in Davos, Switzerland, with the improbable assertion that it isn’t “a hangout for globalists.” (Axios)
• How Mr. Mnuchin is expanding his influence within the administration, to colleagues’ consternation. (Politico)
The small print on Walmart’s tax gesture
The retail giant initially won praise for announcing that it was raising hourly wages to $11, expanding parental leave benefits and offering U.S. employees bonuses of up to $1,000.
• People calculated how much — or little — it would all cost. The $300 million bill for the new hourly rate amounts to “just 0.3 percent of the company’s sales and administration costs.” One analyst calculated Walmart’s overall tax savings at about $2.2 billion.
• Critics pointed out that Walmart would probably have had to raise wages anyway, given the tight labor market and competition from rivals like Target.
• Walmart said it was closing 63 Sam’s Club stores, and trying to find jobs for affected employees.
The tax flyaround
• Fiat Chrysler announced $2,000 bonuses for about 60,000 workers and plans to move some truck production to Michigan from Mexico. (WSJ)
• Delta said yesterday that the tax changes would help it in two ways: via a lower corporate rate, and via other businesses spending some of their savings on travel. (Reuters)
• Bill Dudley, the New York Fed’s president, said the cuts would probably prompt rate increases. (FT)
• The Treasury Department is encouraging companies to incorporate the new, lower withholding rates as soon as possible, so benefits will show sooner. (NYT)
• Companies like Apple whose fiscal years don’t match the calendar year could use a loophole for even bigger gains. (Bloomberg)
All eyes are on Dropbox’s I.P.O.
With its confidential filing with the S.E.C., the online file storage company will be the latest Silicon Valley unicorn to attempt a transition to the public markets — by spring, it hopes.
One big question: What will Dropbox be valued at? Private market investors reckoned $10 billion. And can it command a higher valuation than its rival Box?
What’s next: Dropbox has already hired Goldman Sachs and JPMorgan Chase as underwriters, and will appoint more. It will then work on formalizing its prospectus and arrange meetings with analysts and, eventually, prospective investors.
The other big question: Will Dropbox be more like Stitch Fix (up 66 percent since its I.P.O.) or Snap (down 40 percent)?
Publishers worry about Facebook’s latest shift
What to expect: More status updates by family or photos of your friend’s Bernese mountain dog. And fewer posts by publishers.
What publishers fear, as expressed by Jason Kint of Digital Content Next to Sydney Ember and Sapna Maheshwari of the NYT:
“If this change is as significant as they describe it, news organizations will go out of business or succeed based on a change that they didn’t necessarily have input on,” Mr. Kint said. “It reads as something that will drive up engagement and probably push away policy risk, because they’re not allowing news properties to have the same sort of presence in their feeds.”
Mark Zuckerberg acknowledged that could hit Facebook’s business in the short term. Its shares were down 2.6 percent in premarket trading this morning.
The bigger point
The company and Mr. Zuckerberg are considering how to reshape their products in the face of an array of critics, from Congress and other governments to user privacy advocates. “We want to make sure that our products are not just fun, but are good for people,” Mr. Zuckerberg told Mike Isaac of the NYT.
Behind Harold Ford’s ouster from Morgan Stanley
Being accused of harassing a female journalist — Lauren Tara LaCapra of Reuters said he tried to pull her into an elevator to go to a cocktail lounge — helped hasten a downfall years in the making.
What Morgan Stanley officials felt, according to Kate Kelly and Andrew in the NYT:
Even though the harassment charge was never corroborated, they said, the bank found evidence that Mr. Ford had misled executives about some of his behavior, which itself constituted cause to remove him. And they say Mr. Ford already had received a final written warning about abuse of his expense account and other conduct.
Mr. Ford and his lawyers argue otherwise and said Ms. LaCapra’s account was false.
Where is Wall Street’s #MeToo moment?
Keep waiting. More than most industries, finance can force cases into arbitration. And there’s the money, as the wealth manager Jennifer Hatch told Max Abelson of Bloomberg:
“People spend their entire educational and professional career trying to get to this pot of gold, and some guy dropping his drawers is not going to get in the way of that,” she says.
The misconduct flyaround
• DFJ has apologized for an event hosted by a co-founder, Steve Jurvetson, that a book by the Bloomberg reporter Emily Chang described as featuring rampant sex and drug use. (Recode)
• Daniel Ek, the C.E.O. of Spotify, has backed the #MeToo movement, saying his company had a lot to do on gender bias. (Politico)
• University students and faculty worldwide have been describing harassment in an anonymous crowdsourced spreadsheet. (WSJ)
Bitcoin newbies start worrying about taxes
Tax professionals are getting more questions from Bitcoin sellers, and the I.R.S. is also showing interest.
More from Brian Fung of the WaPo:
In a recent court battle, the I.R.S. forced Coinbase, one of the largest U.S.-based exchanges where consumers can buy bitcoin for dollars, to provide taxpayer information on more than 14,000 customers. The I.R.S. did not single out any customer for suspicion in the suit but did say it believed gains from virtual currency “are underreported.”
The digital money flyaround
• Shares in the money-transfer services provider MoneyGram rose after it said it was testing Ripple’s XRP. (MoneyGram)
• At least a dozen Chinese companies played down their blockchain connections amid signs that regulators are trying to limit speculative surges. (Bloomberg)
• The top Wall Street lawyer Rodge Cohen said it was a matter of time until U.S. regulators began a sweeping response to Bitcoin. (Bloomberg)
• Coin miners are straining the infrastructure of a small county in Washington state where electricity is cheap. (CNBC)
The Speed Read
• Peter Thiel offered to purchase some assets from what’s left of Gawker. (Reuters)
• The rapper Drake wants to take his whiskey company public through a Regulation A+ offering, a type of crowdsourced fund-raising. (FT)
• The French conglomerate Kering said it would spin off the sports brand Puma, and focus on luxury. (NYT)
• Goldman Sachs’s private equity arm and Vestar Capital Partners are exploring a sale of the food manufacturer Hearthside Food Solutions, for about $2.5 billion, according to people familiar with the matter. (Bloomberg)
• Maoyan Weying, China’s biggest online film ticketing platform, is planning an initial public offering in Hong Kong that could raise about $1 billion, according to people with knowledge of the matter. (Bloomberg)
• Fidelity Investments, Principal Funds and BlackRock disclosed lower valuations for Uber after SoftBank purchased shares at a 30 percent discount. (Recode)
• The for-profit health insurance company Centene was sued by customers who said it had failed to provide adequate access to doctors in 15 states. (NYT)
• Dish Network, CBS, 21st Century Fox, Netflix and Starz have given the Justice Department information for its case against AT&T’s proposed deal with Time Warner, according to unnamed sources. (WSJ)
• Fujifilm, which is in talks with Xerox, has reinvented itself and plans to spend more than $4 billion over the next three years on acquisitions. (WSJ)
• The alleged theft of exchange-traded funds worth $1.4 billion has raised an question for the industry: Who owns an E.T.F.? (WSJ)
• Qualcomm is set to clinch conditional E.U. antitrust approval for its $39 billion acquisition of NXP Semiconductors as soon as next week, according to unidentified sources. (WSJ)
• Iran’s protests were fueled by anger over losses at loosely regulated credit institutions, which affected millions of people. (WSJ)
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