Receiving Wide Coverage ...
Breakthrough in MMF Debate: You might have missed this over the long holiday weekend: Charles Schwab is now backing reform of money market mutual funds. Specifically, the brokerage's CEO, Walt Bettinger, wrote in a Journal op-ed that his company would support requiring a floating net asset value for "institutional prime" money market funds. "Institutional" meaning funds whose shares are concentrated in the hands of relatively few holders, making them more prone to runs than more-distributed retail funds. "Prime" meaning funds that invest in riskier paper, like corporate obligations, making them more likely to "break the buck." The "nonprime" MMFs, which invest in safer stuff like Treasuries, could continue to report a stable NAV of $1 under Schwab's plan, as could "retail prime" funds, though the latter would be subject to additional oversight. (Funny how in MMF-land, "prime" and "nonprime" mean more or less the opposite of what they mean in lending.) Schwab manages institutional and retail prime funds, so its break from the industry pack to propose a compromise with reformers could be viewed as a "Nixon in China" moment. Or it could be viewed as Schwab blinking, given that the Financial Stability Oversight Council recently put its weight behind reform. The Journal's editorial board, which favors floating NAVs for all money market funds, nevertheless lauded Schwab's openness to change.
OpRisk: Following the fraud conviction of UBS trader Kweku Adoboli, the FT offers a pair of stories taking a broad look at operational risk at large global banks. One article focuses on the difficulty of defining and guarding against this category of risk, and notes that extra capital offers little in the way of protection from nuts-and-bolts dangers like hurricanes or ATM network outages. The other piece is mostly about the likely regulatory reaction to recent scandals, which may well include requiring banks to, well, hold more capital.
Auto Lending: The auto loan business is booming, as evidenced by General Motors' deal to buy the international operations of its onetime subsidiary Ally and a rumored plan by Banco Santander to take its U.S. consumer finance unit public. According to the Journal, "The business is particularly attractive because car sales are on the rise after years of decline. Auto loans are considered relatively safe compared with other loans. Consumers are seen as more likely to default on credit-card debt and even a mortgage before car loans. And delinquencies are near record lows." After all, in the worst of circumstances you can live in your car, but you can't drive a house to work. Private equity firms are investing in the subprime sector of the market, causing concern that competition will drive lenders to compromise standards and underprice risk. Wall Street Journal, New York Times
Wall Street Journal
Here's a more encouraging form of competition — skilled "old-fashioned" commercial lenders are in hot demand among community banks.
When your friends in other professions ask you incredulously why no one has gone to prison for the financial crisis, show them this editorial, which notes that several crisis-related cases against individuals have failed in court. In the writers' view, "the prosecutors have simply been given a difficult assignment trying to find criminality among bankers who were doing what everyone else was doing in a financial mania fueled by government policy." Granted, it's a stretch to say there was no crime during the bubble years. But the editorial is a useful reminder that the government is supposed to build evidence and convince a jury of someone's guilt before locking him or her in a cage. Even if that person works in financial services. Remember the Blackstone ratio: "Better that ten guilty persons escape than that one innocent suffer" (sorry, one more pretentious citation coming). Which is more important anyway, punishment of the guilty or restitution to the defrauded? As another wise person once said, "Mistrust all in whom the impulse to punish is powerful."
Well, here's a reassuring sign: The Chicago Board Options Exchange's Volatility Index, or VIX, which serves as a proxy for investor anxiety, "has traded below its two-decade historical average of 20, its longest such streak in more than five years." Somewhere, a trader is a scoffing, "Pfft … technicals."
Some Barclays shareholders are urging the new CEO to split off the investment bank. A sign of things to come for U.S. megabanks? Discuss.
Now here's a wry headline: "Capital rules curb lending, say lobbyists." (The story's about U.K. rules specifically.)
The "Lex" column says global regulators, through measures like the capital surcharge for large, interconnected institutions, are providing a disincentive for these banks to grow. "If consolidation happens at all, it will be through continued shrinkage as banks retreat to core markets and play to their strengths."