Morning Scan
Tuesday, September 8, 2009
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Receiving Wide Coverage ...
Group of 20: The G20 agreed to new capital requirements for banks "that would force many institutions in Europe to raise tens of billions of euros in capital in the coming months." The FT, citing unnamed sources, said half of that must be common equity, according to an agreement reached by the Basel committee. It said there could also be a ceiling on borrowings "of no more than 25 times assets." A separate analysis piece looked at individual European banks, including UBS and Royal Bank of Scotland, in light of the possible new capital rules. The first targets of the new rules will be banks that are already partly owned by governments. Another article says European banks may face an extra challenge posed by the amount of hybrid securities they hold — which appear to be less desirable for fulfilling capital requirements. An editorial praised the G20 finance ministers' meeting for making "headway" on new capital rules. "Ministers have done well to maintain the momentum for reform without sinking into populism."
The papers' weekend coverage focused on differing views on capital rules among the G-20 countries going into the finance ministers' meetings Friday and Saturday. The FT's weekend lead described the "rift over how big banks should cushion themselves against financial shocks" that became apparent as finance ministers from the G20 countries met in London. France has come out in opposition to ideas for new capital requirements put forth by Treasury Secretary Timothy Geithner and backed by British authorities. The rift "could complicate" the regulatory reform effort. A separate story in the FT laid out the G20's bank regulatory reform agenda. Governments will try to agree on proposals to limit executive pay and possible new capital requirements. A story in Saturday's Post looked at the administration's proposal to require giant companies to hold more capital reserves than what other banks set aside. "Administration officials say that large financial firms can offer important benefits to customers, such as the convenience of a one-stop shop for multiple services, but they want to rein in the excesses that produced a global recession." A Post editorial previewing the G-20 meeting said Europeans and Americans are still far apart on an approach to regulatory reform, with France and other nations focused on bonus limits and the U.S. emphasizing the need for more capital.
GSEs: A front-page story in Monday's Post examined the impact on credit availability of the government's giant hand in the mortgage system. With the government's takeover of Fannie and Freddie, and a greater role for the Federal Housing Administration, "nearly 90 percent of all new home loans are funded or guaranteed by taxpayers." But with a greater demand on government resources, some borrowers are not getting loans. "The government has the power to decide who is qualified for a loan and who is not. As a result, many borrowers among both poor and rich are frozen out of the market." A story in the weekend edition of the Journal looked at concerns about mounting losses on loans insured by the FHA. "As it tried to help shore up the ailing housing market during the past year, the FHA increased its exposure, particularly to mortgages in high-cost states that have also seen some of the sharpest price declines. Now concerns are mounting that the agency — and the U.S. taxpayer — may have to pay the price." In the Sunday Times, "Fair Game" columnist Gretchen Morgenson marked the anniversary of the Treasury's rescue of Fannie Mae and Freddie Mac by looking at an additional cost for taxpayers: "As a result of the Fannie takeover, taxpayers are paying millions of dollars in legal defense bills for three top former executives, including Franklin D. Raines, who left the company in late 2004 under accusations of accounting improprieties. From Sept. 6, 2008, to July 21, these legal payments totaled $6.3 million."
AIG Update: While AIG's new CEO preaches patience on selling big-ticket assets, the hobbled insurer is still leaving open the option of quick spinoffs and is shedding smaller units like the asset-management division it agreed to sell to prominent Hong Kong businessman Richard Li on Saturday. The price tag is well below the roughly $800 million some potential bidders had discussed paying for the asset-management unit several months ago. "The range in values shows one risk confronting Mr. Benmosche — that AIG's battered image will make its businesses worth less over time." In the Times, "BreakingViews" considered a rally in AIG's stock but said, "Real progress is sluggish. A return to health looks a long way off — and any investment return to taxpayers is even more distant."?
CIT Update: CIT Group disclosed in a SEC filing Friday that it extended the employment contract of Chairman and CEO Jeffrey Peek for a year. The Journal noted that Peek's extension comes amid CIT's efforts to avoid a bankruptcy-protection filing. The filing didn't state Peek's salary for 2010; his base salary was $800,000 in 2009, unchanged from at least 2006, according to regulatory filings. The FT said the extension of Peek's contract came "in spite of his decisions to expand into risky businesses such as subprime mortgages and student lending, which have been widely blamed for CIT's troubles." Wall Street Journal, Financial Times
SEC Slacking: The SEC's inspector general released on Friday the full 477-page version of his report on how the SEC missed red flags on Bernard Madoff. The weekend edition of the Journal said, "While themes of the report became known earlier in the week when an executive summary was released, the full version makes clear in painstaking detail just how many opportunities there were for examiners to find the fraud and how bungled their efforts were." An article in Monday's paper said Renaissance Technologies, the big hedge-fund firm run by James Simons, raised questions about Madoff at least as early as 2003, eventually triggering a regulatory investigation of Madoff and withdrawal of money, according to the watchdog report. An article in Monday's FT looked at the effects that the report, which highlighted the SEC's lack of resources and good training, could have on the agency.
Wall Street Journal
Attorneys for Angelo Mozilo contend that the SEC's civil-fraud suit against the former Countrywide Financial Corp. chief executive misquotes some evidence and ignores company disclosures. Mozilo's lawyers argue that the omissions and alleged inaccuracies undermine the SEC's contention that investors were misled about Countrywide's financial condition. (Weekend)
Regulators closed one bank in Arizona and four in the Midwest Friday, including an Illinois institution acquired last year by the fallen home-mortgage entrepreneur Lee Farkas. The Illinois connection to Farkas' now-bankrupt mortgage banking empire of Taylor, Bean & Whitaker Mortgage Corp. was Rolling Meadows, Ill.-based Platinum Community Bank, which went down Friday with assets of $345.6 million and deposits of $305 million. There was no buyer for Platinum's assets and the Federal Deposit Insurance Corporation approved the payout of all insured deposits, a costly outcome for the FDIC. (Weekend)
Eaton Vance plans to launch a mutual fund that will invest mostly in Build America Bonds, taxable debt instruments that are part of the federal stimulus plan, according to an SEC filing. The company declined to comment on the fund because it's still in registration, but Geoff Bobroff, a mutual-fund industry consultant, says this is the first mutual fund he's aware of that would be launched to invest primarily in the bonds.
"Heard on the Street" looked at two schools of thought about how to prevent the prudent actions of individual banks from collectively contributing to systemic risk: embedding "macroprudential" tools into the system via new capital rules, or by giving regulators discretionary tools that allow them to "remove the punchbowl when they see a bubble." It notes that both approaches have problems. "To embed the rules, regulators will need models capable of identifying risks across the financial system, not just in banks. And those models would need to be sophisticated enough to map the linkages between different asset classes and counterparties, while also calculating the likelihood of a boom turning to bust." (Weekend)
An editorial in the weekend edition said Judge Jed Rakoff, who has been skeptical of the SEC's case against Bank of America for handing out unpopular bonuses to former Merrill Lynch executives, "is doing a public service by exposing what looks like a drive-by political shooting."
New York Times
An article on the front of the business section profiled Warren Buffett, who may be coming off a year when he lost his title as world's richest man but who the paper calls one of the few people to have deftly capitalized off this crisis. "But now, only a year after the crisis struck, he seems to be worrying that the broader stock market might falter again. After boldly buying when so many were selling assets, his conglomerate, Berkshire Hathaway, is pulling back, buying fewer stocks while investing in corporate and government debt. And Mr. Buffett is warning that the economy, though on the mend, remains deeply troubled."
In "Dealbook," Andrew Ross Sorkin considered the coming anniversary of the collapse of Lehman Brothers and said, "We appear to be in perhaps no better position to manage the failure of an investment bank, a hedge fund or an insurance company than we were before. Absent any legislation that would prevent another 9/15 (as some people are calling it on Wall Street) from happening, our only options are to throw money at problem companies or arrange shotgun marriages to keep them from failing. That hardly seems like a long-term solution."
The paper said "the pace of deal-making is showing signs of rousing back to life after nearly a year," and not just because of Kraft's hostile bid for Cadbury on Monday. In the past week, several multi-billion-dollar deals have been announced. "Yet many of the bankers and lawyers who piece these mergers together, well versed in reading economic tea leaves for signs of an industry's health, caution that deal-making is likely to rise only in fits and starts for now."
An article about the implications of the deal between UBS and the IRS said, "When the Internal Revenue Service announced a deal last month that would force Switzerland to reveal the names of thousands of Americans suspected of offshore tax evasion, the agency called it a major step forward. But tax lawyers and former government officials have begun to question whether the deal might allow some large tax cheats to remain in hiding."
An Arts article profiled Oliver Stone as he prepared to shoot "Wall Street 2" in Manhattan's financial district. "Look out, Wall Street: Oliver Stone is back."
Bevis Longstreth, a former SEC commissioner, wrote a letter arguing against a federal rule to force mortgage lenders to include taxes and insurance in monthly debt service payments. "The instinct to write a law to fix every problem is understandable, but private-sector cost can quickly grow disproportionate to public gain. Where, as here, lenders have deep self-interest in restoring sound lending practices, let's give competition a chance." (Saturday)
In "Off the Charts," Floyd Norris said, "Even as the economy may be starting to recover, banks across the country are confronting a worsening outlook for their construction loans, an area that boomed for much of the decade." (Saturday)
A front-page article in Sunday's paper said investment banks are seeking to replace mortgage-backed securities with securitized "life settlements," life insurance policies that ill and elderly people sell for cash. "Even as Washington debates increased financial regulation, bankers are scurrying to concoct new products. … Financial innovation can be good, of course, by lowering the cost of borrowing for everyone, giving consumers more investment choices and, more broadly, by helping the economy to grow. And the proponents of securitizing life settlements say it would benefit people who want to cash out their policies while they are alive. But some are dismayed by Wall Street's quick return to its old ways, chasing profits with complicated new products."
In the Sunday Magazine, Paul Krugman asked how economists "got it so wrong" and where their profession goes from here. "Few economists saw our current crisis coming, but this predictive failure was the least of the field's problems. More important was the profession's blindness to the very possibility of catastrophic failures in a market economy. "
In "Mortgages," Bob Tedeschi said, "Home buyers are often advised to come up with at least a 20% down payment, or face the likely additional expense of private mortgage insurance. But this year, at least, that counsel would not have saved them as much money as in the past. Rules put in place in late 2008 by Fannie Mae and similar rules adopted by Freddie Mac are less favorable to borrowers who put down 20% to 25%, considered to be the industry minimum." (Sunday)
"BreakingViews" considered one aftershock of the collapse of Lehman Brothers 12 months ago: "the drastic reshaping of the prime brokerage business. The firm's failure shook confidence in Morgan Stanley and Goldman Sachs, driving away hedge fund clients. A year later, Deutsche Bank and Credit Suisse have emerged among the winners." (Monday)
Financial Times
Sen. Mark Warner, a member of the Senate Banking Committee, told the paper that he and his colleagues planned to significantly re-write the Obama administration's regulatory restructuring plan to make it tougher. He also emphasized he did not want the effort to be driven by partisan battles. "And if there's one area where it seems like there has been real bipartisan agreement, it has been in the reaction to the administration's proposals of further concentrating power to the Fed," Warner told the paper.
JPMorgan Chase and Germany's Commerzbank have pledged a combined $2.25 billion in funding to the International Finance Corp., an arm of the World Bank, to bolster trade. Citigroup pledged $1.25 billion to the organization in June.
Dutch economist Dirk Bezemer declared in an op-ed that, contrary to the claims made by former Federal Reserve Chairman Alan Greenspan that the financial crisis was a completely unanticipated shock, "many had seen it coming for years." Economists modeling bubbles saw one growing in the U.S. housing market, and one in the credit markets. They focused on financial flows in the economy and took into account the dichotomy between the real economy and the financial sector.
Washington Post
"Deals" columnist Allan Sloan said he sees no real differences in the way Wall Street operates a year after Lehman Brothers' failure. "Even though some once-iconic names have vanished and others are shadows of their former selves, Wall Street hasn't changed all that much. It still operates on the principle of taking care of itself first, really big and important customers second, everyone else last."
, with contributions from Joe Adler, Maria Aspan, and Emily Flitter.
