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Mortgage Demand Weakens; Europe Approves New Regulator

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New EU Regulator: Over strong German objections, the European Union went ahead Thursday with plans to create supranational agency empowered to regulate the continent's banking industry and shutter failing banks the New York Times reported. Approval of the so-called single bank resolution system represents a huge step on the road to a European banking union. Creation of such a powerful agency was important enough that it should have required changes to the European Union treaty, German Chancellor Angel Merkel argued. Germany and other critics of single bank resolution pointed out taxpayers across the continent would bear the financial burden of shutting down individual banks. They also wanted to retain as much national control over their banks as possible, but their position was weakened by a legal opinion that concluded the EU already possessed the authority to implement single bank resolution. The Financial Times obtained a copy of the confidential document. New York Times, Financial Times

Wall Street Journal

Labeling it a disappointing trend for bankers, the paper reported mortgage applications plummeted 13.5% during the week ending Sept. 6. Quoting numbers released Wednesday by the Mortgage Bankers Association, the Journal concludes higher rates have all but tamped out demand for refinances, while the market for home purchases remains weak, too. Interestingly, the Journal waited to reveal what one might consider the biggest news in the piece until its 24th paragraph. It quotes MBA chief executive David Stevens opining that the slowdown is not a temporary development but rather a "substantive change in the cycle of our industry." Banks are reacting by downsizing their mortgage operations. As the article notes, Wells Fargo, Bank of America and JP Morgan Chase have each announced significant job cuts. One potential silver lining amidst the mortgage industry gloom that the paper did not mention was the prospect for a jump in home-equity lending. Consumers still need credit, says Dustin Lutin, president and chief executive at $895 million-asset Simplicity Bank in Covina, Calif. As ehigher rates choke off demand for refinances, Lutin expects interest in home equity loans to grow.

In a development sure to warm investors' hearts, the Journal reported the results of an executive compensation study it conducted in partnership with research firm Equilar Inc. The bottom line: executive compensation is moving more in line with corporate performance. The study focused on 459 stock grants issued between 2008 and 2010. All carried performance conditions. Most of the CEOs exceeded the performance thresholds set by their respective boards and their take jumped accordingly. The relative few execs that failed to measure up, though, failed to receive any shares.

The Securities and Exchange Commission is ready to close the books on investigating what it termed financial crisis misdeeds, the paper reports. Chairman Mary Jo White vows to take a hard line on misconduct, tossing out a policy that permitted defendants to settle cases without admitting wrongdoing. But as Jean Eaglesham reports, the agency's results over the past four years appear to fall significantly short of White's tough-talk rhetoric, as well as that of her predecessor Mary Schapiro. The SEC filed 138 cases in that span and garnered penalties totaling $2.7 billion, but that is a far cry from what many expected. Eaglesham quotes Phil Angelides, former chairman of Congress' Financial Crisis Inquiry Commission as saying the banking industry in particular got off nearly scot free. There have been "almost no legal, political or economic consequences," Angelides says.

Financial Times

A one-time Morgan-Stanley auditor has sued the giant investment bank claiming it ignored pre-crisis warnings it was taking on too much credit risk, the Financial Times reports. Saeed Ahmad filed the suit Wednesday in a New York court, and is seeking whistleblower protection as well. In an account Morgan-Stanley denies, Ahmad claims his warnings about lax underwriting standards were swept under the rug by a "deliberately slow" investigation on the part of the company. In the midst of it all, a stressed-out Ahmad was forced to take long-term disability leave. He is seeking two times the back pay he says he is due as well as unspecified damages. Tracy Alloway's account wraps up by noting Ahmad's tales of sloppy underwriting come just as Morgan-Stanley gears up to increase lending by its private bank.

Columnist Jonathan Guthrie betrays his exasperation at the fact some banking regulators have begun discussing capital adequacy standards for Basel IV even though the Basel III regime has yet to be put in place. The talk, Guthrie opines, is an example of regulatory hyperactivity and he likens the phenomenon to the seemingly endless procession of technological advances. That said, Guthrie concludes that banking has only itself to blame since it triggered the 2008 financial crisis and "gamed" many of the safeguards proposed in its wake.

New York Times

Two Native American tribes claim in a lawsuit filed Wednesday in Federal District Court in Manhattan that New York superintendent of financial institutions Benjamin Lawsky overstepped his authority when he moved to shut down their online lending operations. Peter Lattman reports that the Otoe Missouria and Lac Vieux Desert Band of Lake Superior Chippewa Indians claim their sovereign status insulates them from New York banking regulations. "My clients' businesses are being destroyed because New York has decided that tribal sovereignty doesn't matter to them," the tribes' lawyer, David Bernick argued. In papers it filed with the court, New York argues that accepting the sovereign immunity argument would leave New York consumers at the mercy of businesses that charge exorbitant rates for short-term, small-dollar loans.

The Times continues its retrospective look at the financial crisis with an appreciation of the late Wynne Godley, a Levy Economics Institute economist widely credited with creating a model of the downturn before it hit. Godley put banks in the center of the storm, both promoting growth and purveying risk, the Times says. The British-born Godley died in 2010, before his model gained widespread acceptance among academics. The key to Godley's success lies in identifying unsustainable economic trends, his disciples say, adding that he accurately forecast the recession that slowed the American economy at the end of President Bill Clinton's term in office, as well as the Great Recession and the Euro Zone meltdown.

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