Breaking News This Morning ...
B of A Settles with Fannie: B of A has agreed to pay $10.3 billion to settle claims that it sold bad loans to Fannie Mae. Under the terms of the settlement, the bank will pay Fannie $3.6 billion, and will also spend $6.75 billion buying back mortgages from the housing giant at a discount to their original value. The settlement is likely to wipe out B of A's earnings for the quarter, the FT reports. New York Times, Wall Street Journal
Receiving Wide Coverage ...
Basel Eased: Some good news for bankers this Monday morning: global regulators have decided to implement more flexible Basel III liquidity requirements. Specifically, they have relaxed the "liquidity coverage ratio" requiring banks to have enough capital on hand to survive a 30-day market crisis. Changes to the rule will now allow banks to use less-traditional assets, including equities and high-quality (ahem) mortgage-backed securities, to satisfy up to 15% of their requirements. According to the FT, "calculation methods have also been changed in ways that will significantly reduce the total size of the liquidity buffers" many banks will have to "hold against outflows from possible depositor runs and corporate and interbank credit lines." Regulators have also elected to give banks more time to meet the rule's requirements. Now, it will not take full effect on Jan. 1, 2015, as originally planned, but will be phased in gradually until Jan. 1, 2019. European bank stocks surged, following the announcement, the FT reports.
The easing follows years of hard-lobbying from banks, based on the belief the rules were impossibly stringent for and would be the end of many community banks. (You can find more detailed arguments from industry experts against Basel III here, here and here on our BankThink blog.) This FT article also attributes the easing to the "eurozone crisis" and traders' persistent warnings "that there simply weren't enough safe assets to go around."
Comments on the Journal's article about the decision indicate at least some of the general public view the easing as another win for the "financial mafia" whose constant lobbying once again led to the weakening of another rule meant to stave off future crises. But Mervyn King, the Bank of England governor who led the negotiations, ensured reporters at a news conference that the rule had not simply been watered down, saying "Nobody set out to make it stronger or weaker, but to make it more realistic." The Journal also points out the changes don't fully address all of bankers' concerns. Still to be decided is the fate of the "net stable funding ratio," which is meant to keep banks from relying too heavily on short-term borrowing to fund long-term loans — and it looks as if that rule isn't, as many executives have postulated, simply being scrapped. King made sure to describe it as "absolutely crucial" to financial stability.
Foreclosure Pact Within Reach: The Journal and the FT are echoing earlier reports that the largest U.S. banks are nearing a $10 billion foreclosure-abuse settlement that, according to various unnamed sources close to the talks, could be announced, literally, any minute now. The deal, which would see banks pay out $3.5 billion in cash apiece, will replace an earlier settlement which required banks to review loan files in an effort to see whether a homeowner had unfairly lost their home due to robo-signing or another shortcut in the foreclosure process. But readers of American Banker will know this review process has come under fire recently for benefiting the independent consultants hired to do the work and not the homeowners who may have been affected by banks' mistakes and/or misconduct.
Here's one potential way to spot a corporate rogue (or a London Whale, perhaps?): linguistic analysis software, designed to flag phrases such as "nobody will find out" or "off the books" in worker emails. According to research from Ernst & Young, this software can be used to spot more than 3,000 potentially problematic words and phrases (though it doesn't mention if "muppets" or "structured by cows" are among them). It can also flag uncharacteristic changes in tone in electronic conversations.
New York Times
In an article that unwittingly highlights the potential need for such software, Dealbook postulates that a financial fraudster can be extremely difficult to spot, using Philip Horn, a Wells Fargo employee who "systematically executed and canceled trades in clients' portfolios, pocketing the profits" as an example of someone who long eluded detection.
Meanwhile, Matt Taibbi over at Rolling Stone, argues that government intervention in 2008 has created a "permanent bailout state" based around a Ponzi-like culture within the banking industry. "[The bailout] built a banking system that discriminates against community banks, makes Too Big to Fail banks even Too Bigger to Failier, increases risk, discourages sound business lending and punishes savings by making it even easier and more profitable to chase high-yield investments than to compete for small depositors," Taibbi writes. "[It] has also made lying on behalf of our biggest and most corrupt banks the official policy of the United States government."