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Worries Mount over State of China's Banking System

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China's Banking Woes: Multiple stories this morning touch on concerns about China's banks, and not just about credit quality. Finishing up a two-part series about China's banking sector, the Journal reported the growing risk from banks selling bonds to raise cash. China had tried to limit its currency supply in June to constrain funding for "shadow banks", but that created the "unintended consequence" of banks "scrambling for cash. The bond market was drawn into the turmoil when some lenders rushed to sell bond holdings, especially short-term bonds, which tend to be more liquid." The Times explored the fears about China's shadow banking more broadly, as several cities face a "painful credit crisis" and an overall hit to their business sectors. The FT had two stories about the county's flood of non-performing loans. One looked at the more prominent role played by asset-management companies funded by the state and established over a decade ago to assume the bad debts of the nation's largest banks. "This role in buying a broader set of non-performing loans and receivables from across the financial sector is what many bankers and analysts see as the market-based future of how China will deal with bad debts." The paper also reported talks that Goldman Sachs, Morgan Stanley and Deutsche Bank have held with Huarong, one of China's largest troubled banks, about making a big capital infusion in the institution. "The move is one sign that the Chinese government will not entirely bail out the next round of problem loans emerging from China's credit boom, but will instead rely more on market driven remedies."

More on 'London Whale' Case: The Journal looked at the next steps in the criminal case against Javier Martin-Artajo and Julien Grout, the two traders accused of trying to hide JPMorgan Chase's "London Whale" losses. Authorities must weigh options for how to bring the two defendants to the U.S. to face prosecution. Meanwhile, the defendants have a potential strategy in arguing that valuing the complex derivatives at the heart of the case is a gray area. In the FT, an op-ed by Harvard law professor Mark Roe suggested the indictments could give policymakers a "false sense of security" about the state of the banking industry. "The indictments run the risk of giving some lawmakers and the public a breather: 'we nailed them', some may think, 'so we can relax.' The danger is that the indictments fulfill the public's urge for a satisfying conclusion and relieve lawmakers from pressure to build a sounder financial system."

Wall Street Journal

St. Louis Fed President James Bullard said Thursday the U.S. central bank's pullback from its bond-buying program could be a gradual one rather a wind-down that moves too quickly. "Mr. Bullard's comments suggest a compromise could be in the works at the Fed in which it reduces the program, but only by a small amount at first in case the Fed's optimistic economic forecasts don't prove correct. Mr. Bullard said the size of the Fed's initial move would send an important signal to the market about how the central bank will proceed."

"Heard on the Street" looked at the weakening loan quality at banks in India, where "state-owned banks will probably be hardest hit by deteriorating asset quality."

Regulators are paying more attention to individual investors' use of alternative investment products that for years had been limited to wealthy families and institutional investors. "Outside scrutiny is intensifying on securities firms' sales practices and whether so-called alternative products ranging from certain types of mutual funds to vehicles that invest in highly indebted companies are suitable for all of the Americans flocking to them."

Mutual-fund manager Bruce Berkowitz is "doubling down" on a bet that mortgage giants Fannie Mae and Freddie Mac will be sold back to private investors. "For Mr. Berkowitz's bet to pay off, he and other investors need one of two things to happen: persuade Congress and the White House to revamp or liquidate Fannie and Freddie in a way that will preserve value for the shares, or win a fight in court."

Citibank is moving to open access to its Asia branches to life insurers. "The bank is trying to capitalize on growing sales of basic life insurance and savings products to a burgeoning middle class in many Asian countries."

Financial Times

UBS is moving to buy back a toxic asset fund "after the fund repaid a loan it received from the Swiss National Bank."

PNC Financial Services announced it is adding to its board Andrew Feldstein, a hedge fund manager who had profited off of betting against JPMorgan Chase's risky derivatives trades that suffered heavy losses last year.

New York Times

An editorial blasted banks for not taking part in the "shared sacrifice" of Detroit's bankruptcy. The scathing critique focused on Detroit's settlement with Bank of America and UBS requiring the city to pay $250 million to end a "soured derivatives contract." The paper said whatever hit banks took on the derivatives deal is small compared to the city's losses, municipalities are now "prey" for Wall Street and the "special treatment banks receive when debtors are in or near bankruptcy is unfair and economically destabilizing."

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