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Fiscal Cliff Deal Extends Tax Break for Megabanks; New Day at B of A

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The Fiscal, Uh, Valley: The budget deal reached at the beginning of this year extends an obscure but important tax break for U.S. banks that do business overseas, according to the FT. Under the "subpart F exception for active financing income" (rolls off the tongue, don't it?), income earned on certain transactions outside U.S. borders is taxed only when brought back into the country. The exception was introduced in the late 1990s as a "temporary" measure, but it's been extended every few years since. The latest extension is forecast to cost the Treasury some $9 billion this year. Megabank lobbyists argued, as lobbyists often do, that continuing the relief was necessary for U.S. companies to remain competitive with foreign firms taxed at lower rates. We suspect this news may rub salt in the wounds of some community bankers, in light of Congress' failure to similarly renew the also-originally-temporary TAG program, which expired at yearend. The big banks are in good company, though: "Hollywood, the railroad industry and rum producers" also retained tax breaks as part of the budget deal according to the Times. And the drama isn't even over yet: "Fresh Budget Fights Brewing," says the Journal); "Lawmakers Gird for Next Fiscal Clash, on the Debt Ceiling," per the Times. The Journal's "Heard on the Street" column warns investors that Wednesday's relief rally may be premature. The same point, more or less, is made in the Post: "Business leaders say the agreement won't ease economic uncertainty and warn that the market gains could evaporate once lawmakers move on to the next battle over raising the federal borrowing limit." On the Journal editorial page, economist Martin Feldstein faults the Fed's bond-buying program for (among other things) keeping long-term rates low and thus taking the pressure off Congress and the president to deal with deficits.

B of A: The FT has a pair of stories this morning about Bank of America. One takes stock of CEO Brian Moynihan's progress in shoring up the institution three years into the job. (Wonder where they got the idea for such a piece?) The other article says that after two years of retrenchment B of A is ramping up corporate and mortgage lending, and aims to overtake JPMorgan in the direct mortgage business within six months.

Wall Street Journal

"Regulators Cut J.P. Morgan Community-Lending Grade" — i.e., its CRA ratings — twice in the last six months. It's "a rare occurrence for any large U.S. bank" and "the latest sign of a more aggressive approach from the OCC."

"Risk Seen in Some Mortgage Bonds." They mean commercial, not residential, mortgages.

Newspaper stories about M&A tend to focus on the sexy stuff — breaking the deal before the official announcement, dishing details about what the CEOs ate as they negotiated the price. But what happens after the deal closes is oft overlooked, and perhaps more important. A feature story looks at the lessons Pittsburgh's PNC has learned while expanding via acquisition into the Southeast, where its brand is less familiar and competition is fierce. "Judging a rival's loan book and customer relationships is difficult for even the most seasoned banker."

Financial Times

"Speedier dissolution of Citi unit urged." The unit is Citi Holdings, of course, and it's analysts who are doing the urging. Well, at least one analyst: Mike Mayo. "We'll soon be five years after the financial crisis. Let's get on with it," he tells the FT. "If there's one message that comes out loud and clear from the Japan experience it comes down to three words — 'take the pain.'"

The "Lex" column compares recent "long-armed" U.S. regulatory actions against European banks to military drone strikes. Our regulators "can strike where and when they want," since "it takes only a business connection with the US for banks to be exposed to a host of legal risks" under laws like the Foreign Corrupt Practices Act.

Vernon Hill, known in this country as the maverick who built Commerce Bank of New Jersey, was named chairman of Metro Bank, the disruptive, service-oriented U.K. institution he founded two years ago. Hill will oversee Metro's plans to expand and go public next year.

"Shadow banks tap into distressed shipping." By "shadow banks," they mean private equity and hedge funds here.

Washington Post

"Financial reform battle continues over Dodd-Frank law." According to this broad overview, possible modifications this year include a bill calling for a GAO study of the benefits of being "too big to fail" and proposed restrictions on banks' size and scope or non-deposit liabilities.

Elsewhere ...

Macleans: This is Canada's equivalent of Time or Newsweek. An article entitled "Why Bitcoin is the banking industry's newest, biggest threat" provides a solid overview of one of your Morning Scanner's favorite topics, but doesn't quite deliver on the promise of the headline. The piece does note that "If a buyer and seller are running the software on their computers, they can directly exchange Bitcoins, anonymously and with no taxes or bank fees." We'd add that there's now a dispersed network of computers out there that performs some of the most basic functions of banking (storing ones and zeroes; moving ones and zeroes around the globe; making sure no one spends ones and zeroes they don't have) except cheaper, faster and with greater privacy for the customer. For that reason alone, it's worth reading up on.

National Public Radio: "Justice Wants Banks To Be Quasi Cops." ("Justice" as in "Department of…") As a former colleague of ours tweeted yesterday, this story won't be news to bank compliance officers whom the government has deputized as "quasi cops" for decades under anti-money laundering laws. But the comment thread is great. Re the consequences of AML regulations for customers: "I spent 25 minutes explaining why I was sending $72.00 to a friend. How come the odd number? Who was my friend? How long have I known him? Was he really a friend, living on the West Coast (I reside East). What was the money for? Why was I sending it at this time? (it was 1:30 a.m.) — and it went on and on." Now, reread the Macleans item directly above.

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Comments (1)
In regards to the OCC's downgrades of JPM Chases's CRA ratings, it will be interesting to see whether this action is evidence that Curry has a Congressional mandate to demonstrate that the OCC can function as an independent regulator rather than a puppet of the TBTF banks, or if it is a diversion. The proof will be in what happens next. The "outstanding" CRA ratings for banks despite 5 years where the US credit markets were solidly frozen demonstrated a deplorable abuse of regulatory authority. If the Chase CRA downgrades remain isolated events, we will know they were "just for show" and that the OCC is still a "captured" agency. Same if future rating downgrades are limited to smaller institutions rather than to other Too Big To Behave Banks.
Posted by jim_wells | Thursday, January 03 2013 at 11:57AM ET
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