Receiving Wide Coverage ...
Basel: Following U.S. regulators' delay in implementating Basel III, the Journal presents two different views on the international capital standards' applicability in this country. In the "Heard on the Street" column, David Reilly focuses on the Basel III requirement that capital calculations include unrealized gains or losses on securities. Community banks want to be exempt from this rule (along with the rest of Basel III), arguing that since they intend to hold most securities to maturity, counting paper gains and losses would paint an unnecessarily volatile picture of capital. But Reilly argues that granting this particular exemption would be a mistake. "As many banks learned during the financial crisis, market storms have a way of swamping intentions. A bank facing a funding crunch may be forced to sell holdings, and recognize losses, even if it didn't originally plan to do so." Transparency is particularly important now, as banks try to compensate for low rates and squeezed margins by loading up on ever-longer-dated securities, Reilly says. An editorial in the Journal, on the other hand, says the U.S. should follow FDIC director Thomas Hoenig's advice and scrap Basel altogether. The writers take particular issue with the capital standards' complexity and incentives for banks to invest in particular instruments, such as sovereign debt. "What banks should own are assets that are judged safe by markets, not by politicians or regulators. The world has already run the latter experiment, with disastrous results" (i.e., the mortgage bubble, which previous iterations of Basel are said to have abetted by encouraging banks to pile in to supposedly safe triple-A-rated mortgage securities).
Exonerated: A federal jury rejected SEC fraud charges against Bruce Bent and his son, the former managers of the Reserve money market fund, which "broke the buck" during the 2008 panic. Wall Street Journal, New York Times, Washington Post
Jefferies Sells: The investment bank Jefferies Group agreed to sell itself to the conglomerate Leucadia for $2.5 billion. The FT frames the story as one of capitulation (headline: "Jefferies loses autonomy in $3.6bn deal"). The deal "is likely to set off a wave of speculation about the prospects of other independent investment banks that fund themselves in the capital markets," the paper says, noting that it follows KBW's agreement to sell itself to Stifel. "The experience of these independent investment banks – so-called because they are not part of bank holding companies – confounds predictions they would benefit from the tighter regulation of larger competitors that followed the Dodd-Frank regulatory reforms of 2010." But Times columnist Peter Eavis notes that at 1.2 times tangible book value, Leucadia's offer is well above the market's valuation for Goldman Sachs or Morgan Stanley. This, he writes, "suggests that the government's soft-handed approach to the 'too big to fail' problem may be working. Instead of forcing size explicit limitations on large banks, the overhaul focused on rules that effectively gave financial firms incentives to opt for simpler businesses and avoid excessive growth. A simple, small balance sheet meant Jefferies could sell itself for a premium price." The Journal says joining the Leucadia family – a smorgasbord of businesses involved in real-economy activities like meatpacking, plastics and timber – will give Jefferies "access to a steady river of cash that could ease concerns about the company's access to volatile funding markets" after a scare last year over the brokerage's European sovereign debt exposure. Wall Street Journal, Financial Times, New York Times