Toomre Capital Markets LLC

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JPMorgan

AIG Hires Peter Hancock to Oversee Risk, Financial Products

American International Group Inc. named Peter Hancock, described by former employer JPMorgan as an “architect” of the derivatives business, to oversee finance and risk, including the insurer’s money-losing credit-default swap unit on Monday, February 11th 2010. Mr. Hancock spent 20 years at one of the predecessor banks that now make up JPMorgan Chase & Co and eventually rose to be CFO and head of risk management before stepping down in 2000.

Morgan Stanley Plans Expansion in Fixed-Income

During 2009, Morgan Stanley dramatically underperformed both Goldman Sachs and JPMorgan in the performance of its securities business, particularly in the area known as FICC (fixed-income, currencies and commodities). The Financial Times article from February 1st 2010 entitled Morgan Stanley In Hiring Push has more details.

According to Morgan Stanley's new chief executive, James Gorman, Morgan Stanley plans to hire several hundred new traders over the next several years to hopefully close the gap with Wall Street trading rivals. Rather interestingly, he stated "We are not showing clients enough. We don't have people on the ground. We are not sufficiently penetrated with large clients and there are some smaller clients we are missing out on." He continued: "We need to seriously grow our footprint in products like currencies, equity derivatives and commodities. We could easily be 25 percent bigger than we are. [Investor's] bias is to do more business with [Morgan Stanley], the burden is on us to deliver."

What Toomre Capital Markets LLC ("TCM") finds so interesting with the article is the degree to which Morgan Stanley under-performed. Apparently, in 2009 Morgan Stanley had revenues of $5bn in fixed income trading (or $8.8bn excluding an accounting loss) compared with $17.6bn at JPMorgan and $23.3 recorded by Goldman Sachs. Put another way, Morgan Stanley's FICC unit only generated revenues one half of JPMorgan's revenues and thirty-eight percent of what Goldman Sachs recorded. WOW!! Clearly Morgan Stanley is not even close to its two rivals in this business area, which is counter to what many market participants perceive.

The article concludes with the thought that the need to add more traders and sales people to better staff the basic product areas of this business unit is an admission that at least one of former CEO John Mack's decisions was wrong. His decision to focus on various complex derivatives and associated products popular before the credit crisis left Morgan Stanley ill equipped to benefit from the pick-up in the trading of simpler fixed-income products.

President Obama Wants Big Bank Limitations

President Obama continues to try to curb risk taking on Wall Street. Today, one year after his inauguration, he has proposed a plan to limit the size and activities of big commercial banks. "While the financial system is far stronger today than it was a year one year ago, it is still operating under the exact same rules that led to its near collapse," said President Barack Obama at the White House. Mr Obama continued his populist rhetoric with the statement:

My resolve to reform the system is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low, and cannot refund taxpayers for the bailout. It is exactly this kind of irresponsibility that makes clear reform is necessary.

According to congressional sources and administration officials, this proposal is designed to return — at least in spirit — to some of the curbs that were instituted with the Glass-Steagall act back during the Great Depression. This plan has been backed by former Federal Reserve Chairman Paul Volker and is designed to limit the amount of risk that customer deposit activities might be exposed to.

Apparently President Obama wants to prevent commercial banks and institutions that own banks from owning and investing in hedge funds and private-equity firms. Similarly he hopes to limit the amount and type of proprietary trading that they might do for their own accounts. As a result of these proposals, the common equity securities of the large banking institutions have sold off as investors are unsure about what type of business models these banks might pursue in the future and hence what "normalized" profits might be.

Toomre Capital Markets LLC ("TCM") wonders whether any of these populist proposals will eventually be enacted into law. As Ace Greenberg, the retired CEO of Bear Stearns, said on CNBC today about the possible return of Glass-Steagall: "The egg has been scrambled and I don't think they can put it back in the shell." However, they are sure to appease those on Main Street that are disappointed with the bank bailouts and the large Wall Street bonuses.