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Money Market Debate Drags On; Blankfein Speech as a Game of Telephone

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Money Market Funds Redux: Take 2 on money market funds is coming from the Financial Stability Oversight Council. The SEC couldn't get its act together on regulating money market funds — which have a longstanding tradition of telling investors they have a fixed value even though they kinda don't — so FSOC's stepping in. The council has told the SEC to pick the issue up again, though it's not being didactic. The SEC still can choose whether a floating net asset value or capital buffers would be appropriate. But if the agency doesn't act, the FSOC says it will. The concern for the money market industry is that, at some point, regulators get so fed up that the FSOC simply delegates the issue to the Federal Reserve and imposes a fluctuating asset value on the funds. That's "the easiest solution," one expert tells the Washington Post. While the mandate to the SEC is being viewed as the first instance of the FSOC flexing its muscles, we're not sure that it's proof of the council's robustness. Ever since a major fund "broke the buck" during the financial crisis and caused a massive dislocation in the short-term credit markets, pretty much everyone aside from the funds themselves has agreed that money markets are in clear need of greater regulation. The Financial Times provides a reminder of how slow and cautious the FSOC process is: the body is still working to determine whether AIG is systemically important, though the determination is under "advanced consideration."

What Did He Say? Did Goldman Sachs Chief Executive Lloyd Blankfein give three speeches yesterday? Because none of the major papers seem to quite agree on what he said. The New York Times says that Blankfein told a Merrill Lynch financial services conference that his investment bank and trading powerhouse is going to get slimmer in the face of increased regulation. "For the first time, it's clear that size and complexity come with a higher cost," Blankfein said, citing Basel III as something that would require banks to use more "discipline" about how they allocate capital. Blankfein also spoke "optimistically" of the Volcker Rule, The Times says, saying it would stabilize the firm's earnings and be a net positive. Something sounds a little odd here.

The Journal's take on Blankfein's comments are more focused on his suggestion that Goldman will thrive even as bond trading becomes computerized and margins shrink. Automation offers "more earnings for the winners of the concentration sweepstakes," Blankfein said. "It's our aspiration, and we have achieved it to some extent, to be the low-cost provider of these kinds of services." Goldman Sachs: the Charles Schwab of investment banking? Somehow, that’s hard to believe.

Finally, the Financial Times' estimable Tracey Alloway sums up Blankfein's talk as urging the industry to "not go overboard" in cutting staff. Alloway also highlights that Goldman's gotten very stingy about granting new partnerships to its employees. If you read just one of these three articles, go with this one.

The Wall Street Journal

The Securities and Exchange Commission is investigating whether Knight Capital Group Inc. "did enough to police its trading systems before computer errors nearly destroyed the brokerage." Setting aside the hilariously obvious answer to that question, the article suggests a greater focus by the SEC on electronic trading slips — Knight's board already tried to settle with the SEC, but was met with silence.

The Financial Times

Everybody in the banking industry hates Basel III. The Financial Times has a brief but strong roundup of the 1,100 comment letters sent to the Federal Reserve on the subject of adopting the international capital standards. Objections range from JPMorgan's claim that Basel would put "significant limitations" on US institutions' competitiveness to PNC's request that its stake in Blackrock not be counted for capital purposes to Deutsche Bank's request that its German domestic regulator be given deference, to small banks' continued bafflement that they're facing international capital regulation in the first place.

Bank of America is ever so slightly undercutting the fee on Square with a new mobile payment product that costs 2.7 cents, rather than the 2.75 cents Square current charges. The move is a defensive one, the paper declares, because most of the expected customers will be drawn from B of A's existing stable. The hope is that this would supplement their existing payment systems.

The Fed's influential vice chair Janet Yellen has supported a threshold strategy for setting interest rates, in which the Fed would promise to maintain low rates not for a given time but until certain targets are reached, such as a drop in unemployment. Yellen's "dovish" support for the idea could be endorsed by colleagues as soon as the Fed’s December meeting.

New York Times

"On a recent shopping trip to Costco, Lilly Neubauer picked up paper towels, lentils, carrots — and a home mortgage." Yup — it's a look at big-box stores pushing into financial services — or at least dabbling in them. Though it doesn't lead with it, the story seems pegged to Amex's and Walmart's Bluebird prepaid card.

Plenty of banks did strong work responding to Hurricane Sandy, but the New York Stock Exchange? Not so much. The Commodity Futures Trading Commission's Bart Chilton has urged the creation of a financial services industry/government task force that would convene in the instance of hurricanes and other disasters. Not everybody fell down on the job, though, and there's evidence that regulators (the Financial Stability Oversight Council) and some industry groups (SIFMA) responded admirably. The whole story leaves us wondering whether it might be better for regulators to skip a new regulatory body and just slap around systemically important institutions which don't pass muster on disaster preparedness.

The Washington Post

Small banks will make the case this afternoon that regulatory capital requirements are pushing them out of the mortgage market, leaving the field to just behemoths and non-banks.

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