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As Punishment for Liborgate, Barclays Must Act Like a Goody-Goody

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Sick of Liborgate Yet? We know some readers are, and we’re starting to feel some fatigue too. But the scandal continues to dominate headlines, and if you cut through the salacious trader emails (admittedly a good bit of fun) and the sometimes sanctimonious commentary, it is undeniably an important story that touches on so many of the big issues in financial services today: regulators’ proper role, reputational risk, client trust, etc. The most original angle we saw on our rounds this morning comes from the FT: There’s an unusual provision in Barclays’ settlement with the U.S. Commodities Futures Trading Commission, under which the U.K. bank, in addition to the usual monetary penalty and promise to revamp compliance, also agreed to “take on a role as an advocate for increased oversight for the industry.” Barclays will “encourage” the British Bankers Association and other publishers of interest rate benchmarks to reform the processes for Libor and other indexes. The FT frames this as “the latest example of the controversial practice of using enforcement pacts as a road map to change compliance,” of which the 2003 Wall Street research settlement may be the most famous example. The comment thread on this article is rich, too, e.g. this suggestion for making Libor more accurate: “A revised method could be adopted whereby the rate of borrowing polled is combined with a rate at which a willingness to lend is derived from a separate group and the ZOPA is used to establish the Libor.” (We are pretty sure that by “ZOPA” the commenter is referring to the negotiation concept “zone of possible agreement” and not recommending that the British peer-to-peer lending pioneer Zopa should get involved.)

Most of the other headlines today are pretty self-explanatory:

Britain’s “embattled” regulator, the Financial Services Authority, is “Under Fire for Libor Policing,” or lack thereof. Wall Street Journal

“Traders' Messages Provide Grist for Investigators,” and not just at Barclays: Royal Bank of Scotland, for example, is fighting a court order to hand over emails. Wall Street Journal

We’re definitely sick of gemological puns. “Barclays Unlikely to Sparkle Even After Diamond's Departure.” Wall Street Journal

Barclays Bank Bash”: The Journal editorial page casts a skeptical eye on the evidence presented against Barclays. Those seemingly damning emails, the editorial suggests, “given appropriate context, might represent mere humor or Master-of-the-Universe bravado. And we can almost guarantee that this case will prove to be less simple than the media consensus that a culture of corruption in banking has now been proven.”

“Questions left hanging about Libor,” an explainer in FAQ format. Financial Times

“Trade Group for Bankers Regulates a Key Rate.” Explains for a general audience the British Bankers Association’s role in computing Libor. New York Times

And last but not least: “The rotten heart of finance: A scandal over key interest rates is about to go global,” and an editorial with the succinct, if not exactly original, title “Banksters,” both in The Economist. The latter article is accompanied by a “Reservoir Dogs”-style illustration of dodgy financiers wearing dark suits, sunglasses and power ties.

OCC Risk Report: The Office of the Comptroller of the Currency identified payment shock on existing home equity loans in coming years and banks’ reaching for yield in the current low-rate environment among the emerging risks to the financial system. Wall Street Journal, Financial Times

The CFPB: The headline for this Journal op-ed almost says it all: “Consumer Financial Political Bureau.” Rather than protecting customers, the agency is serving as a tool to help Obama get re-elected, the writer asserts, citing “bank inspections that emphasize legally questionable interpretations of nondiscrimination statutes [and] the release of unverified customer complaints against credit-card companies.” Meanwhile, an article in the Times details the CFPB’s plans to make over the mortgage market.

Wall Street Journal

The paper profiles Willem Buiter, Citigroup’s outspoken chief economist.

“Who Wants to Start a Bank? No One”: Columnist David Weidner laments “the demise of small banks” and the lack of investor interest in chartering new ones.

Financial Times

The “living wills” required by Dodd-Frank have prompted some large banks to rethink the way they issue debt. They are exploring “whether they might be able to issue bank notes that are backed by collateral.… Such notes would be issued at the bank level, rather than with the holding company, to help protect investors.”

Metro Bank, the U.K. upstart founded by American retail banking iconoclast Vernon Hill, “paid a heavy price for investing in the business as it suffered a sharp increase in losses in its first full year” of operation. The bank spends twice as much on each branch than is typical in the U.K. market and “has tried to woo customers with the promise of better service and a more pleasant experience,” as Hill’s Commerce Bank did successfully. Some individual Metro branches are making money, and the bank expects to be profitable as a whole in two years.

New York Times

Commercial mortgages securitized in the heady days of 2007 are coming due, and columnist Floyd Norris says it’s becoming clear how lax standards were at the height of the market. He focuses on a loan secured by a portfolio of Manhattan apartment properties that “had produced cash flow of $5.4 million in 2006, but they secured a loan of $204 million, on which annual interest payments of $12.7 million would be required.” The underwriters assumed that rents would surge and that operating costs would remain stable. Like in the Johnny Cash song “Don’t Take Your Guns to Town,” you know right away that the story isn’t going to end well.

 

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