TIME wall street

This JP Morgan Exec Makes More Than the Bank’s CEO Jamie Dimon

Day Two Of The Institute Of International Finance Spring Meeting
Bloomberg—Bloomberg via Getty Images Daniel Pinto

When it comes to base pay, at least

Maybe banking regulations are Un-American, after all, Jamie Dimon.

In this country it’s pretty standard to have a lower salary than your boss. But then again, nothing about compensation in the financial services industry looks all that normal to the rest of us.

Take, for instance, the example of Daniel Pinto, CEO of JPMorgan’s corporate and investment bank, based in London. Though he technically works for Jamie Dimon, his base salary of $7.4 million, well above Dimon’s base pay of $1.5 million, according to a report in Bloomberg News.

The difference is the result of differing regulations on executive pay between the U.S. and Europe. According to Bloomberg:

With chief executives at Standard & Poor’s 500 Index firms making 331 times more than their workers, an increase from 46-to-1 in 1983, according to the AFL-CIO, the U.S. and EU policies are looking to narrow the widening gulf in incomes.

That’s what the policies have in common. EU rule makers say they’re trying to avoid reckless behavior that could trigger a 2008-like meltdown, while the U.S., which approved the legislation in the 1990s, requires salaries greater than $1 million to be performance-based to qualify for corporate tax deductions.

Of course, the above examples show just how miserably lawmakers are failing when it comes to reining in Wall Street’s excesses. Jamie Dimon’s total pay in 2014 came to a cool $20 million, a sum that should soothe the banker’s anger over regulation — and pretty much anything else, for that matter.

TIME Greece

The Athens Stock Exchange Dropped by Almost a Quarter Upon Reopening

After Three Weeks Of Forced Closure Greek Banks Reopen Ahead Of Tax Rises
Milos Bicanski—Getty Images People queue to get money from ATMs as Greek banks reopened on Monday morning after three weeks of closure on July 20, 2015 in Athens, Greece

Analysts blame Greek bank shares for the plunge

The Athens Stock Exchange reopened Monday morning to a huge loss, with the Athex dropping by 22.8% to 615.16 points — a total loss of 182.36 points — within minutes.

According to the BBC, Greek bank shares are to blame for the plunge. Piraeus Bank, National Bank, Alpha Bank, and Eurobank, who represent the country’s largest lenders, all saw a 30% fall in their share values.

The exchange was closed for the past five weeks as Greece was renegotiating its debt load with international creditors. The BBC says traders had predicted a drop in share value upon the exchange’s reopening.

According to the European Commission, Greece is expected to enter into a recession this year.

[BBC]

MONEY stocks

Making Sense of Bank Stock Valuations

JPMorgan Chase & Co. And Wells Fargo & Co. Bank Branches Ahead Of Earnings
Bloomberg via Getty Images A man uses an ATM outside of a Wells Fargo & Co. bank branch in Los Angeles, California, U.S., on Tuesday, July 7, 2015.

"The techniques used for valuing bank stocks tend to be a moving target," explains bank analyst Richard Bove.

What causes bank stocks like Wells Fargo WELLS FARGO & COMPANY WFC -0.39% to trade for significantly higher valuations than bank stocks like Bank of America BANK OF AMERICA CORP. BAC -0.37% ?

The easy answer is that because Wells Fargo has a long history of shrewder management and higher profitability than Bank of America, it seems reasonable to expect the former to earn more money than the latter, and to thus produce a higher shareholder return going forward.

While this answer captures the essence of why some banks trade at valuations that are twice or three times the valuation of other banks, this explanation is too general. A more precise answer is that different things drive bank stock valuations at different times.

This is a point that Richard Bove of Rafferty Capital Markets discussed in a recent note to clients. His breakdown is excellent and well worth sharing with the broader investing world.

A brief primer on book value
The difference between a bank’s assets and liabilities is its equity, or book value. This is the amount of money that, theoretically speaking, would be left over to distribute to shareholders after a bank sells its assets and pays its liabilities.

Importantly, however, this is not what a bank is “worth” on the public markets. This estimate comes instead from a bank’s market capitalization, which is its current share price multiplied by the number of outstanding shares.

As you can see in the table below, there can be large differences between banks’ market capitalizations and their book values. Wells Fargo’s market capitalization exceeds its book value by $107 billion, or 57%. Alternatively, Bank of America’s market capitalization is $65 billion, or 26%, less than its stated book value.

Metric Wells Fargo Bank of America
Outstanding shares 5.15 billion 10.47 billion
Current price per share $57.50 $17.66
Market capitalization $296 billion $185 billion
Book value $189 billion $250 billion
Valuation 1.57 times book value 0.74 times book value

DATA SOURCE: YAHOO! FINANCE.

What drives these differences? The answer is that investors aren’t looking simply at a bank’s current book value; they’re projecting it into the future. A bank expected to grow its book value at a fast pace will trade for a higher valuation than a bank expected to boost book value at a slow pace, or perhaps even see its book value decline.

What drives book value?
The key to the entire analysis is to determine which factors have the biggest impact on the expansion or contraction of a bank’s book value. And it’s here where Bove’s analysis is so insightful.

Bove argues that the most important factors impacting a bank’s book value are a moving target, alternating between three options:

  • When the economy is headed into a recession, and thereby triggering higher loan losses, a bank’s loan quality is the most important factor in its valuation. This is because loan charge-offs come directly out of a bank’s book value.
  • When loan quality is stable, as it is now, then the onus switches to the direction of interest rates. Although climbing rates have a tendency to depress book value in the short run, as the value of a bank’s assets generally goes down when rates rise, the exact opposite is true over the long run, as asset-sensitive banks are positioned to earn more net interest income when rates are high.
  • Finally, when both loan quality and interest rates are stable, then a bank’s earnings has the biggest impact on book value, and thus becomes the most important variable for bank investors to analyze.

If you think about where we are right now, this all starts to make sense. As credit losses from the financial crisis have bottomed out, most bank analysts and commentators (me included) have shifted to talking about the impact of higher interest rates on banks’ book values and bottom lines. When I’ve been interviewed of late, this is always one of, if not the, principal questions I’m asked.

The lesson for bank investors is accordingly twofold. First, you have to be flexible in your analysis to account for the evolving impact of credit losses, interest rates, and earnings on bank valuations. And second, you need to have a rough idea of where we’re at in the credit and interest rate cycles, as that will tell you where to focus your energy and analysis.

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MONEY credit cards

Citibank Must Pay $700 Million to Consumers for Illegal Credit Card Practices

cfpb-citibank-consumer-credit-card-illegal
Bloomberg—Bloomberg via Getty Images

If you have a Citi card, you might be owed some cash.

The Consumer Financial Protection Bureau ordered Citibank Tuesday to reimburse about 9 million consumers for deceptive marketing and incorrect charges associated with credit card add-on services.

These holders of Citi cards—or those of a Citi subsidiary that issues store-brand cards for Macy’s and Bloomingdale’s—were victims of misleading sales tactics, the CFPB alleges. In many cases, confusing text on credit card applications got consumers to sign up for extra debt-protection services they didn’t necessarily want to pay for.

In some cases, says the CFPB, Citi charged customers for benefits, like credit monitoring, that they weren’t actually receiving. The company also implied to many customers that they were protected from fraud and identity theft, when, in fact, they were not, says the Bureau.

If you signed up for a Citi card between 2003 and 2012, there’s a chance you are eligible for money back.

“We continue to uncover illegal credit card add-on practices that are costing unknowing consumers millions of dollars,” CFPB Director Richard Cordray said in a statement Tuesday.

Any affected customers will automatically receive a statement credit or check, according to Citibank. And if you used to have a Citi card but no longer do, you still might be eligible for reimbursement; Citi says it will mail you a check in that case.

“Citi cooperated fully with the CFPB … and has taken extensive steps to address each issue that affected customers,” Citibank said in a press release.

In addition to $700 million in refunds to customers, the CFPB is demanding Citi pay a $35 million fee to the CFPB’s Civil Penalty Fund.

MONEY Millennials

If You Have $500, You Can Start Investing. But Should You?

woman counting her savings
Getty Images

Here's better idea: Build up a bank account first.

Still trying to get started saving for retirement? Your task just got a little easier.

Online financial adviser Wealthfront is now offering people with as little as $500 to invest a convenient and cheap way to build a portfolio of stocks and bonds. And for accounts up to $10,000, the service is free.

That’s sounds like a great deal, and in some ways it is. Of course, Wealthfront isn’t doing this to just be nice—they’re hoping to turn you into a paying client down the road. And while it’s great to get started on retirement saving early, if all you have to to put away right now is $500, you may have priorities besides putting money in the stock market.

Wealthfront is one of a new breed of web-based financial advisers, often called roboadvisers, who aim to automate work once performed by flesh-and-blood stock brokers and planners. The service, which has grabbed $2.5 billion in assets since it was founded in 2008, helps investors purchase a portfolio of low-cost, exchange-traded index funds. The mix is based on an investor’s age and answers to online questions about risk tolerance.

Wealthfront’s service was already free for investors with less than $10,000. (Investors with more money pay an annual fee based on 0.25% of the amount invested above the $10,000 threshold. All investors pay fees for the underlying funds.) But while it had previously required investors commit at least $5,000, the company on Tuesday lowered that threshold to $500.

Wealthfront isn’t alone. A similar service called Betterment has no minimum, although investors with less than $10,000 pay $3 a month, or 0.35% a year if they sign up to have $100 a month transferred in from a bank account.

Both companies are fighting aggressively to capture young investors, even if those customers don’t pay much at first. Here’s why: Millennials are already the biggest cohort in the workforce. One recent study predicted that as much as $30 trillion in wealth will trickle from boomers to millennials over the next several decades. Online advisers are looking to sign up young people now with the hope of collecting the real money later as their assets grow.

Wealthfront’s diversified, index-fund based approach is very sensible. But for people just beginning to save, most financial planners suggest your first priority for money outside your 401(k) is to build an emergency savings fund, ideally one large enough to cover six months of living expenses, in case you lose your job or face a health emergency.

That money should be in something safe, like a simple bank account. Banks do have their flaws: Wealthfront chief executive Adam Nash recently wrote an essay on Medium touting his service over checking accounts that slap investors with with fees for overdrafts and account maintenance. But it’s still possible to find a free bank account. Our annual Best Banks feature recommends both checking and savings options.

Investment portfolios are volatile—don’t forget stocks more than lost half their value in the last recession, just as many people lost their jobs. Meanwhile, money in a savings or checking account, while it won’t earn much at today’s interest rates, will always be there when you need it.

The upshot: If you’re financially secure and looking to sock away an extra $500 or $1,000 mostly as a way to build your saving habit, Wealthfront’s new offer is worth considering. If that $500 is really all you’ve got, start with something simple and safer. And then keep going.

You Might Also Like:

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What Every Investor Should Know About Schwab’s “Free” New Advice Service

What Millennials are Getting Right About Retirement

TIME Greece

Greece Gives In To Creditors But On Its Own Terms

The Greek governments newest bailout proposal to creditors is almost the same as the one its voters rejected less than a week ago

The deal Greece proposed to its creditors on Thursday amounted to a cap-in-hand capitulation. On nearly all points, the government of Prime Minister Alexis Tsipras agreed to the same harsh austerity measures that he had asked his own electorate to reject in a July 5 referendum. On Friday he faced the task of selling the proposal back home – and within his own party – so he might then seal a final agreement with European leaders to save Greece from defaulting on its debt and crashing out of the euro currency union.

Some members of Tsipras’ own party, the Coalition of the Radical Left, stated their intention to resist the Prime Minister. “We are not Europe’s hostages,” said Energy Minister Panagiotis Lafazanis, one of the most influential and hardline figures in the party, which is better known as Syriza. If the new bailout proposal includes harsh austerity measures and cuts to the welfare system, Lafazanis said the government must reject it.

But the Prime Minister’s deft political maneuvering over the past week has helped him secure a strong public mandate and broad support within parliament. Ahead of the July 5 referendum, he urged his electorate to reject an earlier deal from Greece’s so-called troika of creditors. In doing so, Tsipras argued, the Greek people would give him a stronger hand in negotiations for a better deal going forward. More than 60% of voters followed his reasoning and voted No at the polls, which provided the nation a chance to vent their frustration over five years of punishing austerity, recession and joblessness.

Armed with the people’s verdict, Tsipras then redoubled his efforts to secure a bailout deal this week. He began by asking his combative finance minister, Yannis Varoufakis, to step down, suggesting that his departure would ease the mood in the negotiating room with creditors. “It is clear that the government is trying to take back the initiative, demonstrate its commitment to reforms, and win back some of the trust it has lost over the past few months,” Demetrios Efstathiou, an analyst at Standard Bank, wrote in a note to investors on Friday.

Some of the European leaders then seemed willing to meet Greece halfway. On Wednesday, when Greek negotiators were scrambling to finish their bailout proposal, French officials were by their side, helping make sure the deal could be sold to Europe’s more stubborn leaders, especially the German Chancellor Angela Merkel.

The 13-page offer they came up with differed only in details from the deal that the Greek government had received and rejected from its creditors in June. It agreed to 13 billion euros in cuts to public spending, including on the military, as well as numerous tax hikes. In exchange, the proposal foresees creditors offering Greece a third bailout worth 53.5 billion, enough to cover Greece’s debts for the next three years and to avoid a messy Greek exit from the euro zone.

The proposal also asks for a modest amount of debt relief, which Tsipras and his government had promised at all costs to secure. Last week, even the International Monetary Fund, one of Greece’s key creditors, agreed that Greece could never repay its mountain of debt, which is worth upwards of $300 billion. So if the Greek parliament allows Tsipras to move ahead with his proposal, it seems likely that European leaders will grant Greece a partial write-down of its debt when they meet on Sunday in Brussels.

That would no doubt be a victory for Tsipras, but a small one when measured against the pain and uncertainty these last few weeks of brinkmanship have brought the Greek people. He will, however, surely argue that his deal is better than no deal at all.

Read More: Joseph E. Stiglitz: The U.S. Must Save Greece

MONEY overdraft fees

Fewer People Are Paying Overdraft Fees and Banks are Hurting

overdraft-fee
Johner Images&mdash/Getty Images/Johner RF

Overdraft fees are on the decline, and it's hitting banks where they live.

Overdraft fees, one of the most hated charges in existence, are getting smaller. And the loss of revenue is costing banks dearly.

The Wall Street Journal, citing data from economic research firm Moebs Services Inc, reports revenue from overdraft fees is down 4% from last year, the largest drop since 2011. Overdraft fees tend to dwarf other consumer-related revenue streams like ATM and maintenance fees and the WSJ notes overdraft fees make up 6% of earnings at banks with at least $10 billion in assets. Total overdraft revenue has fallen from $37 billion dollars in 2009 to about $31 billion today.

Why are overdraft fees becoming less lucrative? Increased regulation has played a big role. A 2010 Federal Reserve rule has prevented banks from charging fees on purchases or ATM withdrawals that would overdraw the consumer’s account unless that customer specifically opts in to “overdraft protection.” (If a customer does not opt in, a transaction that would overdraw their account is simply declined.)

Since then, overdraft revenue has dropped, and fear of further federal restrictions is encouraging some banks to take a gentler approach with those who do incur the fees. The Consumer Financial Protection Bureau is expected to release new overdraft regulations in the next year, according to the WSJ.

The slow death of the overdraft fee is a feel-good story for most people, but the banking industry argues that consumers will pay a cost. Richard Hunt, chief executive of the Consumer Bankers Association, told the WSJ that banks may start charging higher monthly maintenance fees (and raising the minimum balance required to be exempt from those fees).

There’s something to this argument: Overdraft fees, though a big source of revenue for banks, are paid by a small fraction of their customers. A 2014 study by the CFPB found 8.3% of customers overdraft more than 10 times annually, and they’re collectively responsible for a 73.7% of all overdraft fees. Meanwhile, nearly 70% of account holders pay no overdraft fees at all.

So many bank customers will hardly notice the absence of overdraft fees. But can banks really make up for the lost revenue by charging non-overdrafting customers more? That’s not so clear. After all, if checking account holders as a group are so willing to pay higher maintenance fees, why aren’t banks charging them already? Maybe overdraft fees were just a low hanging fruit for banks—an easy fee they could charge to a small group of customers with fewer options.

As overdraft fees fade away, we’ll find out.

TIME Retirement

The Retirement Risk We All Share

one-dollar-bill-bundles
Getty Images

Our retirement system is as hard to understand, opaque, and predatory as ever

As wealth begins to get transferred from baby boomers to the millennial generation—the largest single generation in history and within five years fully half of our nation’s workforce—many social contracts that were enjoyed by the parents and grandparents will not be relied upon, or available, for their children. Two financial bubbles have burst: American cities have gone bankrupt, and the notion of guaranteed pensions has come to seem like a relic from a more innocent time in the world where society paid back its firefighters, teachers, and hard-working middle class for keeping us safe, educating our children, and ensuring the engine of our economy keeps running. So pronounced is this breakdown between our country, our corporations, and our workers that entire political campaigns are won and lost over middle class workers and the pensions they receive in retirement.

Corporations don’t want any part of guaranteed pensions. It’s too expensive, their shareholders don’t like it, and it crimps profits. Neither do governments—politicians are laser focused on the next election cycle and would rather divert taxpayer dollars toward shiny new concepts that will get them re-elected over boring old public pension funds. Today, only 1 in 5 workers in corporate America still has access to a guaranteed pension. Half of American workers have no access to any workplace retirement plan whatsoever. That’s right: in the future, we are going to own all of this risk. We’d better learn to make good decisions for ourselves.

Unfortunately, the 401(k) system is as hard to understand, opaque, and predatory as ever. Two thirds of Americans do not know that they pay fees on their 401K plans, and 90% of people could not accurately tell you what these fees are. Why? Because they never actually write a check to anyone—the fees are automatically deducted from their accounts. I challenge you to go log in to your employer’s 401(k) plan now, and figure out within 5 minutes, or 5 hours, or 5 days the total amount of fees you pay per year. You won’t find it. And it is a huge amount of money. Lifetime fees for the average American household are greater than $150,000 and can erode a third of total savings. Broadly speaking, total mutual fund fees could be the least-known and least-understood $600 billion that come out of Americans pockets every year.

We need to make this far simpler for people. It should be law that you can only give people advice on their 401(k) or IRA, or futures for that matter, if you owe them a legal fiduciary duty to only act in their best interest. Fees should be disclosed in terms that people can understand. Nobody understands what “basis points” or “expense ratios” are. This is purposeful. How about: “this will cost you $5 per year?” That shouldn’t be too hard, right?

Finally, hundreds of investment choices are often used as an illusion to give unsuspecting people the sense that they, too, can beat the market if they just choose right. By now, we know that beating the market is impossible and we should steer people toward the things we can control—diversification, low costs, and good savings behavior over long periods of time, and through many market cycles. Watching CNBC is a waste of time. Index funds are the way to go (although some 401(k) plans still don’t offer them).

The Obama administration and Department of Labor have been trying for years to institute protections for investors against high fees and high-risk products. But the lobbying against these protections has been vicious—billions of dollars of profits do not just go quietly into the night.

So how about a simple and effective do-it-yourself solution in the meantime? The next time someone is offering you serious advice about your retirement or the stock market, print this out and ask them to sign this statement:

“I ________, as your advisor, will act as a fiduciary and only give you advice that is in your best interest.”

If your advisor will not sign this statement—for your own good—run as fast as you can in the other direction and find one of the many advisors that will. It could save you tens of thousands of dollars and years in retirement.

In a world where we are left to fend for ourselves in retirement, the stakes are too high not to at least make sure that someone is legally obligated to tell you the right thing to do. Your 65-year-old self will thank you for it some day.

Greg Smith is president of blooom, an online service that evaluates, simplifies, and manages 401(k) accounts for individuals, and the best-selling author of Why I Left Goldman Sachs: A Wall Street Story.

TIME Companies

Goldman Sachs Is Making New Dads’ Lives Way Easier

Goldman Sachs
Hero Images—Getty Images/Hero Images Father and children using digital tablet in bed

The bank is doubling its paid parenting leave for non-primary caregivers — from two weeks to four.

New fathers working at Goldman Sachs just got some good news.

The giant investment bank is doubling its paid parenting leave for non-primary caregivers, Business Insider reports, citing an internal memo the bank sent out to employees.

Starting this week, new non-primary parents at Goldman will now get four weeks of paid leave in the first year after their child’s birth instead of two weeks. Goldman offers 16 weeks of paid maternity leave; same-sex partners are eligible for the bank’s parenting leave policies.

Laura Young, the head of Goldman’s wellness programs, told Business Insider that several factors went into the bank’s decision to offer more parenting leave to new dads:

‘Mainly, we realized that we have a number of employees where both spouses or partners are working and in order to provide opportunities for them to balance both their work and personal lives, it was important to provide individuals the opportunities to spend more time with their families,’ Young said.

Goldman is not the only Wall Street fixture to offer paid leave for new dads, as Citigroup offers two weeks of paid leave and Bank of America offers 12 weeks. Last year, Change.org made headlines by offering 18 weeks of fully-paid leave to all parents, while both California and New Jersey have installed state-wide, mandatory paid leave programs.

TIME Security

Why Using an ATM Is More Dangerous Than Ever

Breaches have risen dramatically very recently

In a time when major data hacks are on the rise—think Target, Home Depot, Sony—it’s no surprise breaches on individuals are also up. According to FICO, debit-card compromises at ATMs rose 174% from January to April of this year, compared to the same period last year.

And that’s just breaches of ATMs located on official bank property. Successful breaches at non-bank ATMs rose 317% in that period.

In other words, withdrawing money from an ATM is more dangerous than it’s been in a long time—specifically, the worst it has been in two decades, according to the Wall Street Journal, which cites a prediction from consulting firm Tremont Capital Group that criminals will make more than 1.5 million successful ATM cash withdrawals this year.

As Fortune reported earlier this year, a majority of American corporations believe they will be hacked in 2015. The questions they are all dealing with is how to prepare for them and how to deal with them when they happen, because preventing these compromises has become increasingly difficult.

Banking institutions, as well as the payment companies that connect banks to consumers, like Visa and MasterCard, have beefed up their technology more aggressively than ever in order to both innovate and securitize. But for a private consumer who simply wants to take money from an ATM, stats like these are nonetheless sobering.

Read next: 5 Easy Ways to Avoid Getting Hacked at ATMs

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