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War Is Peace, Freedom Is Slavery, Puffery Is Integrity

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Receiving Wide Coverage ...

Baleful in Basel: Banks around the world still need to repair their balance sheets by writing down dodgy assets, the Bank for International Settlements said in its annual report. In a speech, Jaime Caruana, general manager of the association of central banks, warned that excessive monetary stimulus could make things worse, by creating complacency about fiscal problems, encouraging risk-taking by the financial sector and/or unleashing inflation. Wall Street Journal, New York Times

Win Some, Lose Some: "Words such as 'honesty,' 'integrity,' and 'fair dealing' apparently do not mean what they say; they do not set standards; they are mere shibboleths.” That memorable quote comes from a judge’s ruling rejecting Goldman Sachs’ motion to dismiss a shareholder suit alleging material misstatements about conflicts of interest in CDO deals. According to the Journal, Goldman had argued that “words in the disclosures at issue were nonactionable statements of opinion or puffery.” Calling that argument “Orwellian,” Judge Paul A. Crotty of the U.S. District Court in the Southern District of New York wrote, "If Goldman's claim of 'honesty' and 'integrity' are simply puffery, the world of finance may be in more trouble than we recognize." However, as the FT notes more prominently in its story about the ruling, Crotty did dismiss a key claim of the pension-fund plaintiffs: that Goldman was obliged to disclose to shareholders it had received a “Wells notice” from the Securities and Exchange Commission warning the agency intended to file civil fraud charges. “A Wells notice indicates not litigation,” the judge wrote, “but only the desire of the [SEC] enforcement staff to move forward, which it has no power to effectuate,” since the five-member commission has final say on whether to sue. This will be a comforting decision for the many public companies that do not disclose Wells notices, the article says. Wall Street Journal, Financial Times

Bank CEO Pay: The FT has a package of content on the subject today (not to be confused with the series the paper did a few weeks ago about banker pay in general). According to the paper’s research, CEO compensation rose last year by almost 12% on average at top U.S. and European banks; the average climbed for the second year in a row, despite the weak performance of the industry. There’s also the obligatory, but still pretty neat, interactive graphic, which shows JPMorgan’s Jamie Dimon had the fattest pay of 15 international finance CEOs.

Rater Haters: Following the Moody’s downgrades late last week, several banks criticized the rating agency for “fighting the last war” and failing to duly credit improvements in their capital and liquidity, the Journal’s “Heard on the Street” column reports. Despite the markets’ nonchalant response to the rating cuts, the FT reminds readers that the downgraded banks “will have a harder time issuing commercial paper because money market funds, the biggest buyers of this type of debt, must hold the majority of their investments in the highest-rated securities.” Outside of bank ratings, the SEC is examining an eleventh-hour decision by Standard & Poor’s to yank its rating of a CMBS offering, a move that caused turmoil in that market last summer, the Journal reports. At BankThink, our “Risk Doctor” columnist Clifford Rossi argues that rating agencies remain a weak link in the financial system, and American Banker’s Jeff Horwitz says the Moody’s downgrades are merely symptomatic of “a narrative in which the perks that for decades made being a banker at a giant institution a wonderful life are inexorably disappearing.”

Wall Street Journal

An article headlined "J.P. Morgan Unit Shifts Operations" spends a lot of ink detailing how the bank's chief investment office, the source of that $2 billion trading loss, is not changing. Although the unit will improve risk management processes and eschew illiquid derivatives and certain private-equity investments, it will retain "the latitude to trade a variety of investments that have made it money in the past. These include asset-backed securities, emerging-markets debt, collateralized debt obligations and troubled corporate debt." Such instruments "have generated more gains than losses over the course of the CIO's history, despite this year's costly flub. That gives executives confidence the mistakes resulted from poor risk management, not from excessively risky investments." The story gives examples of winning trades the office has made in recent years, and goes as far as to say that "some even credit the CIO for playing a role in stabilizing certain global markets." (Since the information in the article comes almost entirely from anonymous sources, it is unclear whether that "credit" is given by people who don't work for JPMorgan.) Interestingly, the CIO has no plans to buy more Treasury securities, which (unnamed) JPMorgan executives consider due for a price correction.

New York Times

The Sunday paper included a book review of “Finance and the Good Society,” by Robert J. Shiller, the Yale economist who famously predicted the housing bubble would burst when far too many mainstream pundits were still drinking the Realtor Kool-Aid. His new work is contrarian in a different way: despite the bad name it has acquired, financial innovation is something we need more of, not less, as it helps everyday people manage risk, Shiller argues. If someone had figured out how to develop property and casualty insurance markets for poorer countries, for example, the financial and human tolls of the 2010 earthquake in Haiti might have been less severe (lack of insurance meant less incentive to enforce building codes, so more people died in unsafe structures, hence the “human” part). Shiller proposes some interesting ideas, such as mortgages with “preplanned workouts” that would automatically reduce the borrower’s obligations in an economic downturn. Also, why couldn’t countries issue equity, with dividends pegged to GDP, rather than solely raising money through debt with fixed payments that become unsupportable when the economy goes south? If Shiller is right, derivatives can be a force for good, notwithstanding what you usually read in the Sunday Times. Food for thought.

 

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Comments (1)
Notably, in Shiller's use of the term, "innovation" is apparently not (an Orwellian) euphemism for opaque complexity. - Harry Terris, data editor, American Banker
Posted by hterris1 | Monday, June 25 2012 at 10:02AM ET
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