After suffering losses yesterday, stocks are bouncing back this morning, with the S&P 500 (^GSPC 0.02%) and the narrower, price-weighted Dow Jones Industrial Average (^DJI -0.11%) up 0.52% and 0.47%, respectively, as of 10:05 a.m. EDT.
Goldman and JPMorgan: More for you and me!
Last week the Financial Times reported that Dow component JPMorgan Chase (JPM 0.49%) was likely to wrest the top ranking in the first-quarter M&A league table from Goldman Sachs (GS -0.23%) for the first time in two years.
While M&A is a capital-light business, both banks are capitalizing on the aftermath of the credit crisis, in which numerous international competitors are shrinking other areas of their activity. So says Gary Cohn, Goldman president and chief operating officer and a likely successor to CEO Lloyd Blankfein. At a press briefing in Sao Paulo, Brazil, Cohn gave a frank assessment of the competitive state of the industry: "We are seeing the big international banks, outside of ourselves and JPMorgan, really taking pretty substantial steps back from the market and we haven't seen that in the entire history of banking."
He had no problem naming names, either: "If you look at what a UBS is doing or what a Credit Suisse is doing and the fact they have publicly announced they're cutting their risk-weighted assets, they're cutting their balance sheet, they are getting out of certain businesses, they are getting out of certain jurisdictions."
In October, UBS announced that it would cut 10,000 staff, effectively withdrawing from the fixed-income business, which was not deemed profitable enough under new, stricter capital requirements. As such, the remaining business becomes more attractive for remaining participants. The process Cohn is highlighting is basic economics: As supply (competition) decreases, prices (profits) increase. He did, however, remark that local institutions were providing stiffer competition in markets such as Brazil, Singapore, Tokyo, and Hong Kong.
In summary: As international banks retreat from parts of the securities industry, JPMorgan and Goldman are the biggest beneficiaries. Despite this, as of yesterday's close, Goldman's shares were valued at a minimal 7% premium to their tangible book value, which suggests that investors expect little to no economic profit. Before you conclude that this is an obvious underpricing, you may want to consider that Warren Buffett recently gave up the option to purchase $5 billion worth of Goldman shares at $115, or roughly a one-fifth discount to their current price.
