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BNY Faces IRS in Court, Citi Faces Tough Questions on Call

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Breaking News This Morning ...

Earnings: Citigroup, M&T

Receiving Wide Coverage ...

Tax Tussle: Today Bank of New York will face off against the IRS in court over a transaction that allegedly served as an artificial tax shelter, the FT reports. It was one of a series of complex cross-border transactions that Barclays executed with a half dozen U.S. banks, most of which are contesting the IRS’ decision to disallow tax credits from the deals. BNY’s case is the first of these to go to trial. The government says it lost billions in revenue as a result of Barclays’ structured trust advantaged repackaged securities, or “Stars,” the mechanics of which are concisely summarized in this infographic. (The British bank isn’t a party to any of the suits.) And if you’re feeling déjà vu, it may be because the FT and the nonprofit news organization ProPublica did a big joint investigative piece on the Stars transactions last year.

Early Indications: It’s another case of dueling interpretive headlines. “Solid Results at 2 Banks Bode Well for the Industry,” the Times said of Friday’s first-quarter numbers from Wells Fargo and JPMorgan, citing improvements in revenue at the first two institutions to report earnings this season. “Bank Earnings Worry Investors,” said the Journal, citing the drop in bank stocks (including shares of Wells and JPM) and the tough questions asked by analysts about swelling legal and other expenses. (Another Times headline acknowledged the market’s verdict with a hint of puzzlement: “Despite Good News, U.S. Bank Stocks Fall.”) Both banks disclosed they had, at regulators’ behest, reclassified as nonperforming their second mortgages that are current but stand behind first liens that are not. Times columnist Peter Eavis notes that the megabanks are believed to have been “freeloading” by refusing to write down second mortgages when losses are suffered by the holders of the associated first liens. In a separate piece, Eavis notes that JPM’s cost of borrowing in the long-term debt market rose in the first quarter, whereas Wells’ had fallen; bond financing could get even more expensive for JPM, the columnist warns, if it is downgraded by Moody’s or if Dodd-Frank reforms make investors think the bank would be less likely to get bailed out in another crisis. Finally, the FT notes that mortgage banking made a significant contribution to earnings at JPM and Wells, as homeowners refinanced to take advantage of lower rates. Jamie Dimon, JPM’s chief executive, declared the housing market “very close to the bottom.” The big question for Citi executives on today’s conference call will be whether it intends to ask again later this year for regulators’ permission to return capital to shareholders after being rebuffed last month, the Journal says. Early takes indicate Citi missed estimates but got a revenue boost from fixed-income trading.

Financial Times

Big banks are lobbying the Fed to reconsider its plan to limit their exposures to specific companies and governments. Dodd-Frank caps a bank’s exposure to any counterparty at 25% of regulatory capital; the Fed wants to go further and lower the cap to 10% for institutions with $500 billion or more in assets. The banks are arguing that liquidity would suffer and markets would be rattled if they had to dump government bonds, for example.

 

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