Opposition mounts as CME looks to slim down its board

The exchange has proposed axing six board director seats elected by traders, but its old guard objects to the move.

Futures exchange operator CME Group postponed a November shareholder vote aimed at eliminating board members, as opposition to the proposal mounted, though voter apathy might have something to do with the decision, too.

Chicago-based CME, which operates the biggest futures market in the world, had planned to tally the vote at a Nov. 5 special meeting, but postponed the poll to Nov. 29. A spokeswoman for the company didn’t have any comment regarding the delay.

Shareholders who oppose the CME proposal to eliminate six board directors have had plenty to say. Those B stockholders are mainly traders, or trading firms, who have had the right to elect directors ever since CME transitioned in 2005 from a member-owned exchange to a publicly-traded company. The company has changed considerably since then, shifting most of its trading off the floors in Chicago to a worldwide electronic system that allowed the company to nearly quadruple annual revenue to $3.65 billion last year.

In August, CME offered the B shareholders a collective $10 million to give up their rights to elect directors in an effort to shrink its oversized board by nearly a third. Some of the biggest B shareholders have supported the effort, but others have balked.

“While we agree this action may be in the interests of the future of the CME Group globally, the question of valuation should be determined by a mutually agreed upon financial third-party analyst,” a group of 19 B shareholders said in an letter to the company last month. “As of now, the current proposal stands without our input. It behooves all B Shareholders to vote NO.”

“I would never sell my director’s chair,” says Aryeh Shender, one of the B shareholders who signed the letter, and himself a former CME director. “We are slowly being marginalized since the floor has basically disappeared. This is the last ‘place’ where we still have a voice,” he said by email.

To pass, the proposal must win the support of its common Class A shareholders, as well as a majority in each of the three categories of B shareholders. Despite the proposed million-dollar outlay, big A shareholders like BlackRock and Vanguard Group are likely to back the proposal because the company contends it will enhance CME corporate governance, streamline the process for electing board members, and reduce costs. Growth of the company’s futures business, including its recent acquisition of the London-based NEX Group, has driven up the value of CME stock for all shareholders, now with a market capitalization of $67 billion.

CME anticipated it might have trouble attracting the votes it needed in all three class B groups. In its initial filing with the Securities and Exchange Commission for the vote, it laid out a scenario in which it might win over only the B-1 and B-2 shareholders, but not the B-3 shareholders. There’s a bigger challenge with the B-3 group because there’s more shares outstanding, 1,287, as opposed to the smaller proportion of 625 B-1 shares, and 813 B-2s.

B-1 shareholders have the most trading rights and other privileges at the exchange, including the ability to elect three CME directors, while the B-2s can only elect two directors, and the B-3s just one director. If CME gains approval from just the smaller two groups, B-1 and B-2 shareholders, it said in the filing that it would eliminate just five director seats and pay a lesser $7.2 million to those shareholders.

Another B shareholder and trader, Ray Cahnman, whose Chicago firms TransMarket Group and Valkyrie Trading control four B shares, backs CME’s proposal largely because it would eliminate annual payments to directors. He said the challenge for the company is likely “apathy” among voters.

Any B share that isn’t voted is the equivalent of a vote against the proposal. Earlier this year, the company delayed reporting results in the election for B1 directors because it couldn’t attract a quorum of voters.

Stocks sink as Apple, Facebook pace the tech wreck

Weakness in some of the biggest techn companies sent markets tumbling, as pessimism about escalating trade tensions between the Trump administration and China added to concerns about potential new regulations coming for the industry.

(Bloomberg) — Weakness in some of the biggest technology companies sent U.S. stocks tumbling Monday as pessimism about escalating trade tensions between the Trump Administration and China added to concerns about potential new regulations coming for the industry. The dollar steadied and Treasuries crept higher for a fifth straight session.

All major American benchmarks closed down more than 1.5 percent. Software developers and semiconductor manufacturers were the worst performing groups in the S&P 500 Index. The Nasdaq 100 Index plunged more than 3 percent to the lowest since April on renewed concern that trade fights will tamp down global demand and disrupt supply chains for the major technology companies that have carried the bull market for almost 10 years. In addition, the biggest drop in homebuilder sentiment in more than four years hammered the housing sector.

“The easiest way to stop the selloff would be for Trump and [Chinese President] Xi to reach some kind of agreement, even if it’s just no new tariffs and/or keeping the rate at 10 percent through Jan. 1,” said Max Gokhman, head of asset allocation for Pacific Life Fund Advisors. “The U.S. equity market is starting to price in the supply chain disruption, which is doubly painful because of stretched margins.”

“You’re seeing weakness in semiconductors because of Nvidia’s weak earnings that were released last week,” said Ryan Nauman, market strategist at Informa Financial Intelligence. “Facebook is having some more issues with potentially covering up the Russia hack in the 2016 election. Apple, they’re getting downgraded based on demand. A lot of companies and analysts are concerned that the demand for the iPhone has decreased. The trade concern isn’t helping Apple much either with the supply chain.”

Investors are reassessing markets after several weeks of volatility spurred by fears of trade conflicts. The Asia-Pacific Economic Cooperation failed to agree on a joint statement for the first time in its history, and U.S. Vice President Mike Pence attacked China at a weekend summit, quashing optimism that relations would improve at Group-of-20 meetings starting next week. In addition, rising U.S. interest rates are pushing up financing costs and threatening global growth.

“Any margin for safety with global growth rates is gone,” said Tim Courtney, chief investment officer of Exencial Wealth Advisors in Oklahoma City. “Now we’re going into a period of slow growth. We’re in no-man’s land — sitting, stuck in a slow growing, slow inflationary environment.”

In Europe, the Stoxx 600 Index fell following a plunge in Renault SA on misconduct allegations against the carmaker’s leader, Carlos Ghosn. European bonds mostly edged lower. The pound fluctuated as U.K. Prime Minister Theresa May appealed to business leaders to help deliver her Brexit deal, and Gibraltar emerged as a fresh sticking point.

Elsewhere, the Australian and New Zealand currencies slipped after Pence’s remarks. Bitcoin fell below $5,000 for the first time since October 2017. Crude closed in on $57 a barrel as energy stocks rebounded.

Local banks get a fresh reminder that loans still can go bad

Loans can go bad, remember?

Local business banks are seeing some commercial loans blow up for the first time since their balance sheets were wiped clean following the housing bust and Great Recession. Investors aren’t waiting around for explanations before punishing the stocks of banks with even a hint of credit worries.

The good news for now is that there are no discernible trends explaining the loan busts. They’re happening to companies for myriad reasons, bankers say, and by and large loan quality remains solid by historical standards. But, with investor pressure to show loan growth still intense, some banks inevitably will fall prey to doing things they shouldn’t. It will have to wait until the next recession, when bad lending practices always get exposed, to see which ones.

Three prominent local banks that specialize in lending to midsize businesses—Rosemont-based Wintrust Financial, Chicago-based MB Financial and CIBC Bank U.S.A.—all showed meaningfully higher levels of bad loans in the third quarter compared with the previous year.

“There’s no bubble out there that we see,” Wintrust CEO Edward Wehmer says in an interview. “Credit couldn’t get any better, and you’re just seeing a return to normalcy.”

Wehmer said essentially the same thing to analysts in Wintrust’s third-quarter earnings call, but it didn’t prevent investors from slicing nearly 14 percent off the stock in the five days after the quarterly report. Wintrust since has recovered some and now is about 7 percent off its pre-earnings level.

Likewise, loan charge-offs at MB Financial jumped to $32 million from $6 million the quarter before. The bank in its earnings report blamed “one loan relationship” that went bad. Still, apart from the one big loan that blew up, MB Financial’s underlying loan quality is deteriorating as well. Bad loans at the end of the third quarter were $74 million, up from $51 million the year before. Potential problem loans—borrowers that are stressed but not yet past due—rose to $245 million from $161 million.

CEO Mitch Feiger didn’t respond to a request for comment.

Executives at Cincinnati-based Fifth Third Bancorp, which expects to close early next year on its pending acquisition of MB Financial, didn’t sound alarmed. In Fifth Third’s earnings call, Treasurer James Leonard described it as “just one credit (that) appears to be more of an isolated idiosyncratic event, which does not taint the rest of the portfolio.”