Crains New York - September 17, 2012 - (Page 4)

Banks cut down to size Top Goldman analyst butts heads, advises the big boys to shrink for greater gains BY AARON ELSTEIN Jamie Dimon was addressing a crowd of investors last week when he got a familiar question: Are the big banks too big? Certainly not, answered the chief executive of JPMorgan Chase & Co. and architect of what became Citigroup Inc. “There are huge benefits to size. Economies of scale, branding, diversification,” Mr. Dimon said. “Business logic drives it—not whether you like it or not.” Yet as the industry enters the fifth year of its post-Lehman Brothers funk, investors are making it clear that big banks are precisely what they don’t like, and they’re pressing for major changes. The clearest sign of this rising discontent emerged a day before Mr. Dimon’s remarks, when the lead financial-industry analyst at Goldman Sachs warned big banks that they need to take more aggressive steps to shrink in size and bolster returns. “The operating environment is unlikely to change any time soon,” wrote Goldman analyst Richard Ramsden, “and we see shareholders of challenged banks becoming more demanding in asking management big banks need breaking up. Rather, the striking thing was that the words came from a respected analyst not known for rocking the boat at Wall Street’s most prestigious firm. “I’m glad to hear Goldman say this,” said Bill Smith, president of money-management firm SAM Advisors, who called for Citi to split up long before the financial crisis.“It gives more legitimacy to the idea of breaking up the banks.” “It’s a very gutsy, big call,” said one bank investor who requested anonymity because he didn’t want to jeopardize his relationship with Goldman. “It’s going to upset some powerful people.” In the report, Mr. Ramsden argued that big banks need to shrink as they cope with a future of prolonged economic sluggishness and regulatory pressure. “Returns are more than just cyclically depressed,” he wrote. “The vast majority of the reduction in shareholder returns is attributable to structural issues.” That outlook doesn’t jibe with the views of bankers like Goldman See ANALYST on Page 24 IN THE MARKETS by Aaron Elstein teams to lay out a path to unlocking value in the near term.” It wasn’t the content of those comments that turned heads. After all, even Mr. Dimon’s mentor, former Citi CEO Sandy Weill, has said Successful seer’s surprising forecast Let’s talk expertise. Hands-on partners with years of technical and industry-specific expertise. Advisors who offer insights and ideas to help you make smarter business decisions. Unmatched integrity. Unsurpassed results. If that’s what you’re looking for in an accounting firm, talk to J.H. Cohn. Ü ber-investor Ray Dalio (above) has built the world’s largest hedge fund, Bridgewater Associates, by accurately forecasting big events—such as the housing crash of 2007, the eurozone mess and other calamities. According to Forbes, his personal income was $3 billion last year. Unsurprisingly, his public appearances draw big crowds, and last week such luminaries as Paul Volcker, Loews Corp. CEO James Tisch and rival hedge fund manager John Paulson all flocked to the Council on Foreign Relations to listen to the man who manages $120 billion. What they got was a lesson in what Mr. Dalio calls “beautiful deleveraging,” which is the relatively happy state of affairs the U.S. is in right now, thanks to heavy government globe. That’s why it’s so urgent for governments to keep borrowing and spending to fend off a crushing wave of falling prices and incomes. Of course, hedge fund managers like Mr.Dalio tend to emphasize the grim side of things. Most hedgies have been so focused on what’s going wrong in the world that they’ve badly missed the nifty rally in U.S.stocks this year. The average hedge fund was up only 4% through August, or about a quarter the pace of the S&P 500,according to research firm Hennessee Group. Although it isn’t clear what Bridgewater’s performance is this year, Forbes reported that last year it returned “in the 20% range,” while the S&P was flat. As for the U.S., Mr. Dalio sees encouraging progress. “We were in a car crash and the intensive care unit,” he said, referring to the events of 2008. “We’re healing, or largely healed, and the current pattern is largely sustainable.” Unless, he added, leaders in Washington screw things up. And the odds of that happening are tough to figure, right? Right? We turn expertise into results. Steven Mayer, Regional Managing Partner Joe Torre jhcohn.com 8 7 7. 7 0 4 . 3 5 0 0 spending offsetting the economic drag of American consumers and companies paying down their debts. Unfortunately, Mr. Dalio said, this precarious equilibrium is threatened by the dreaded “fiscal cliff.” That’s the Jan. 1 witching hour when tax cuts from both the Bush and Obama eras expire and spending cuts to resolve last year’s brutal fight over the debt ceiling are slated to take effect. “There’s more of a risk of a depression than a recession if we go over the fiscal cliff next year,” Mr. Dalio warned. The stakes are high because, as sluggish as the U.S. economy might look, it’s a veritable growth machine compared with Europe or China. Europe, Mr. Dalio predicted, faces a “lost decade” as leaders there fight over how to distribute the pain stemming from dud loans made in Spain, Italy and other places. The bill could total more than $2 trillion. As for China,“its bubble is bursting,” Mr. Dalio said, adding that the slowdown of the world’s economic engine of the past several years adds to deflationary pressures across the New Yo r k . New Jersey . Connecticut . Massachusetts . California 8/80 EIGHT TIMES EVERY YEAR, Ben Bernanke and other Federal Reserve policymakers announce what interest rates will be. Since 1994, 80% of the stock market’s gain has taken place on those select few days, according to a study from the Federal Reserve Bank of New York. 4 | Crain’s New York Business | September 17, 2012 bloomberg news ‘It’s a very gutsy call. It’s going to upset some powerful people’ http://www.jhcohn.com http://www.jhcohn.com

Table of Contents for the Digital Edition of Crains New York - September 17, 2012

IN THE BOROUGHS
IN THE MARKETS
THE INSIDER
BUSINESS PEOPLE
OPINION
GREG DAVID
SMALL BUSINESS
REPORT: REAL ESTATE
THE LIST
REAL ESTATE DEALS
FOR THE RECORD
CLASSIFIEDS
NEW YORK, NEW YORK
SOURCE LUNCH
OUT AND ABOUT
SNAPS

Crains New York - September 17, 2012