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Friday, February 3

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Receiving Wide Coverage ...

‘A Lowly Clerk’: Lawmakers grilled Michael Stockman, who was chief risk officer of MF Global when the brokerage collapsed last year, in a tense hearing Thursday. (OK, that sounds a little hackneyed – are these hearings ever anything other than “tense” and “testy”?) One lawmaker called Stockman a “yes man.” Another said Stockman was apparently hired to tell Jon Corzine “what he wanted to hear,” and chided him that he should have controlled the CEO’s risk-taking: “You were not a lowly clerk.” Some of the headlines make much of the revelation that in early October, weeks before its bankruptcy filing, MF Global drew up a “break-the-glass” emergency plan mapping out what the firm would do if it got downgraded to junk. But this kind of what-if contingency planning seems fairly standard, or at least we’d think it should be; what’s more surprising to us is that, according to the Journal, Stockman told lawmakers “he had little role in its preparation and didn't see it before MF Global's Oct. 31 bankruptcy declaration. He said the firm's treasury and finance departments were primarily responsible for the document but added that a senior member of the risk-management team was involved in its preparation.” Uh, isn’t this exactly the kind of exercise the chief risk officer should be intimately involved in preparing? Also at the hearing, Stockman’s predecessor, Michael Roseman, described his unsuccessful attempt to warn the board about the dangers of Corzine’s gambles on European sovereign debt (which was around the same time Corzine began the search to replace Roseman, a search that ultimately led to Stockman's hiring). Even though we’ve already plugged not one, but two, DealBreaker stories this week, we’re going to give the last word on this to that site’s Matt Levine, because we can’t resist a headline like this: “Jon Corzine Was The Mark Zuckerberg Of MF Global, But In A Bad Way.” Noting that only about six months ago Corzine “was viewed as essential to MF Global’s business plan, so much so that they were going to pay bondholders more if he left,” Levine quips: “in hindsight maybe they should have paid bondholders more when Roseman left.”

Wall Street Journal

The Journal considers the hefty contribution that releases of loan-loss reserves have been making to banks’ profits. These “rainy day funds,” the article says, are being depleted, and fundamentals don’t bode well for operating profits.

An update on Liborgate: The Swiss Competition Commission is investigating 12 banks over allegations they colluded to manipulate the London (and Tokyo) interbank offered rates. U.S. and European Union regulators have been conducting similar probes.

“Swiss private bank Wegelin was indicted on charges that it facilitated tax fraud by U.S. taxpayers, the Justice Department said.”

Financial Times

Sebastian Mallaby advises Mitt Romney that he can win by declaring war on America’s leverage addiction — not just federal borrowing but also household and bank debt. “He could point out that the mortgage bubble was encouraged by government tax relief for home loans; appealing to the struggling middle classes, he could point out that these subsidies serve to coddle millionaires,” Mallaby writes. “Romney should take on the mortgage-industrial complex, confident that the facts are on his side.” Similarly, “however much bank bosses shriek that leverage limits are ‘anti-American,’ banks could support job creation with far less debt and far more equity. A lender’s capacity to hold assets is independent of its mix of liabilities: a bank that wants to lend $100 can do so by raising $1 of equity and $99 of debt, putting the entire economy in jeopardy, or it can raise $20 of equity and $80 of debt, sparing taxpayers the risk of a bail-out.” This message would be “both staunchly capitalist and stirringly radical, pro-business and yet mad as hell.”

New York Times

The SEC is all too forgiving, it seems. Over the last decade, the agency has granted 344 waivers of restrictions to banks and securities firms that had settled fraud cases, the Times reports. These waivers allowed the financial institutions to quickly raise money from public investors, underwrite security offerings, and manage mutual funds — things they would otherwise have been barred from doing under the settlements.

And, Lastly …

Milken Institute Review: The latest issue of this quarterly economic policy journal (available as a free pdf here) has interesting articles on two of our favorite topics: regulatory capture and Bitcoin. First, on page 61, there’s an excerpt from “Guardians of Finance,” a forthcoming book by three former regulators, which argues that “regulatory abdication” was a primary cause of the crisis. Bank supervisors are too close to their charges, like sports referees who “systematically make calls that please the home crowd,” the authors write, and the public lacks the information to assess how regulators are doing their jobs. Their proposed solution is to create something called “the Sentinel,” a sort of uber-inspector general for the entire financial regulatory system. Its sole power would be to gather any information it deems necessary to evaluate the effectiveness of regulation, and officials at the banking agencies could be fired for stonewalling its requests. The Sentinel’s only responsibility would be to deliver annual reports to Congress and the president, casting the disinfectant of sunlight on the eponymous “Guardians.” The writers admit that their vision sounds a bit like the new Office of Financial Research — except that the OFR is housed inside the Treasury Department, potentially compromising its independence, and the Sentinel would pay its staff market salaries to attract the best and brightest, rather than the civil service pay rate. And those staff experts would be barred from working for the industry for at least five years after leaving the Sentinel, so there’s no revolving door. This entity would also be funded either through the Federal Reserve (a la CFPB) or fees paid by banks, to avoid the political influence that comes from Congressional appropriations. It’s an interesting idea, and one that we hope stimulates debate about an issue that Dodd-Frank failed to fully address. Or, you could just give up on banks and join the underground economy built around a decentralized, digital peer-to-peer currency; for those so inclined, the article on page 22 of the Milken pdf is a solid primer on the theory, practice and growing pains of Bitcoin

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Q1 Earnings Outlook to Put Focus on Lawsuits, Stress Tests, Lending
With JPMorgan Chase (JPM) and Wells Fargo (WFC) set to issue the initial round of first-quarter earnings reports Friday, big bank CEOs are bracing to answer questions about executive departures, capital shortfalls, seemingly unending legal risks and oh, yeah how they are going to make money.

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