Katherine Kane

Do you ever have that recurring dream that it's almost the end of the semester and you have yet to write a 2,000-page essay about your death? Or is that just me and maybe a handful bank officers?

Receiving Wide Coverage ...Treasury's Bad-News Blog: How do you get out word that you're throwing in the towel on the Troubled Asset Relief Program and conceding that unloading stakes in hundreds of bailed-out small banks is going to cost taxpayers real money? In the case of the U.S. Treasury, the answer as of yesterday was to get an underling to blog about it. The federal agency let word fly Thursday that most of the small banks bailed out by Uncle Sam during the financial crisis likely will not be able to repay the Treasury Department—something the Financial Times described with terms like "conceded" and "admission." In contrast to the government's profitable investments in big banks—including Citigroup (NYSE:C), JPMorgan Chase (JPM) and Goldman Sachs (GS)—it has received back only $8.5 billion of the $15 billion invested in smaller institutions, the FT notes. Its new strategy for recouping losses: "Make it the private sector's problem," according to the New York Times. Until now, small banks looking to exit Tarp did so by trying to raise outside capital. However, the 343 banks that remain mired in Tarp are finding ever fewer willing investors. As a result, the Treasury does not expect the majority that are still partly owned by American taxpayers to manage in the next 12 to 18 months to repurchase the preferred stock that Treasury received in exchange for bailing them out. Enter Plan B. It started with recent public auctions, essentially test-runs, when Treasury sold preferred stock in six banks to private investors. As part of its new-and-improved divestment strategy, Treasury will pursue restructurings and sales of its holdings, including combining ownership stakes in various banks into pools that will be sold as securities. Treasury does not expect to recoup the face value of its investments; it has already reduced the value of many of its holdings to below par. "The government shouldn't be in the business of owning stakes in private companies for an indefinite period of time," blogged Timothy G. Massad, assistant Treasury secretary for financial stability. "Replacing temporary government support with private capital is an important part of continuing to restore financial stability." Financial Times, New York Times, American Banker

Receiving Wide Coverage ...Throw a TARP Over Them: The U.S. Treasury will soon have to stop doing premature victory laps and start tallying the red ink for its Troubled Asset Relief Program. That's the politically inconvenient conclusion Christy Romero draws in a report scheduled for release Wednesday. The newly installed Tarp special inspector general, Romero declares that 351 small banks, with some $15 billion Tarp loans still outstanding, face a "significant challenge" in raising new funds to repay the government, the Wall Street Journal writes. The Small Business Lending Program, in particular, culled a large number of the healthier banks from Tarp, but left stragglers with less capital, missed dividend payments and in many cases regulatory enforcement actions to contend with, American Banker notes. Romero's comments are part of her first quarterly report to Congress since becoming special inspector general in March and are part of her push to get government and regulators to help banks raise funds to repay their Tarp loans. Just how much the Tarp program will cost taxpayers—if anything—is a hot political topic. The Congressional Budget Office in December forecast a lifetime cost of $34 billion, noting that to date Treasury had spent $414 billion on Tarp and taken in $330 billion in dividends and repayments. Unwilling to let such facts get in the way of a good story, Treasury has been bragging about Tarp's financial success ahead of November's elections and claiming the government will "at least break even on its financial stability programs and may realize a positive return," the Journal notes. Romero takes issue with such claims, stating that taxpayers are still owed $118 billion, a figure she says includes investments in AIG, General Motors (GM), Ally Financial and other smaller programs under the Tarp umbrella, in addition to the outstanding loans to smaller banks. "It is a widely held misconception that Tarp will make a profit. The most recent cost estimate for Tarp is a loss of $60 billion," the report says, as quoted by TheStreet.com. Romero also counted $4.2 billion that Treasury had written off and realized losses of $9.8 billion "that taxpayers will never get back." Wall Street Journal, The Street, American Banker

Receiving Wide Coverage ...(Investment) Bank of America: A common thread in the coverage of Bank of America's first-quarter earnings was the growing contribution from trading revenues, particularly fixed income, in contrast to weakening profits on the retail side. The report "underscores how dependent on Wall Street the bank has become," the Times says. The FT notes prominently that Bank of America lost money in the mortgage business, unlike peers that benefited from the government's refinancing program for underwater borrowers; litigation, loan putbacks and intensive asset servicing remain salient themes for B of A in home loans. (Another FT story also notes that bond trading was also a bright spot for most of the investment banks and diversified financials.) Still, if you strip away a big accounting hit, revenues and earnings were better than expected (even though revenues dropped significantly, another contrast to the rival megabanks). … But should you strip out that accounting adjustment? Peter Eavis of the Times notes that B of A flagged the item prominently in its press release — "asking analysts and investors to effectively ignore that loss" — but didn't go to such lengths in its third-quarter report last year, when the debt valuation adjustment went the other way and added $1.7 billion. Moreover, the DVA loss this time around could theoretically be seen as good news, since it means the value of B of A's debt is rising because investors see the bank as more creditworthy, and its chief financial officer certainly talked up this interpretation in the press release. The rub, according to Eavis, is that the adjustment is based partly on pricing in the credit default swap market, whose reliability as a gauge of broad investor sentiment has been hotly debated for years. In the actual long-term debt markets, the columnist notes, B of A has been paying more to borrow money — a development the company did not go out of its way to highlight. (OK, to be fair to B of A, the CFO's quote specifically mentioned tightening credit spreads, a term which can refer to pricing on CDS or on bonds, and bond spreads can improve, from the borrower's perspective, even when absolute rates on debt worsen — if the benchmark rates rise. Did they? We'd look it up but we've spent too much time on this DVA stuff already.)

Breaking News This Morning ...Earnings: Bank of New York Mellon, PNC, First Republic, New York Community

Breaking News This Morning ...Earnings: U.S. Bancorp, Comerica, Goldman Sachs, Northern Trust, State Street, Webster

Receiving Wide Coverage ...Two More Years of This? Try Three: Janet Yellen, the Fed’s vice chairwoman, emphatically supported the central bank’s plan to keep rates super-low through late 2014 and suggested easy money may need to continue “until late 2015.” Wall Street Journal, Financial Times, New York Times, Calculated Risk.

Receiving Wide Coverage ...DeMarco Blinks. No, He Doesn’t: Just reading some of the headlines about Ed DeMarco’s speech yesterday, you’d think the Federal Housing Finance Agency’s indefinitely acting director had flip-flopped and endorsed principal reductions by the GSEs. “Analysis: Write-Downs Would Benefit Fannie, Freddie.” “Housing regulator argues for debt forgiveness.” “New Stance on Forgiving Mortgages.” Well … not quite. The stories make clear that DeMarco remains unconvinced the benefits of having Fannie Mae and Freddie Mac reduce mortgage principal (e.g. the borrowers would be more likely to make payments) would outweigh the costs (e.g. other borrowers might be more likely to miss payments if they see they can get a break). His “new stance” seems to be “meh.” “This is not about some huge difference-making program that will rescue the housing market,” he said. “It is a debate about which tools, at the margin, better balance two goals: maximizing assistance to several hundred thousand homeowners while minimizing further cost to all other homeowners and taxpayers.” DeMarco, who’s been under pressure from the administration to allow the GSEs to write down mortgages, said he’ll make a final decision on the matter this month. Wall Street Journal, Financial Times, New York Times, Washington Post.

Receiving Wide Coverage ...Who Knows What Dangers Lurk in the Heart of the Financial System? The FT knows. The paper has a package of stories today on the global shadow banking system, which it says "has recovered more rapidly" than the regulated banks "and is poised to usurp banks in a variety of ways." (If you don't have time to read all the stories, there's also a handy cheat sheet.) Banks have been selling assets to shadow institutions to meet new heightened regulatory capital requirements, for example. In Europe nonfinancial companies, including manufacturers like Siemens and retailers, have begun funding their suppliers and other smaller firms. A poster child for the resurgence in shadow banking is GSO, a unit of the private equity firm Blackstone, which "has emerged as one of the biggest providers of capital to companies with sub-investment grade ratings in Europe and the US as well as a significant financier of high-profile acquisitions." However, the FT says old-school broker-dealers are unlikely to stage a comeback and that hedge funds, while recruiting star proprietary traders from banks soon to be subject to the Volcker rule, are keeping a lid on leverage. Yet another story recaps the SEC's proposed new regulations of money market funds, though we ought to duly note that former bank regulator and current money fund advocate Jerry Hawke disputes any characterization of his client's industry as "shadow banks." Most interesting to us is a very brief story in the FT package about how financial institutions like Goldman Sachs and Deutsche Bank are acquiring insurance businesses in Europe for a stable source of funding — even more reliable, perhaps, than deposits. "Life insurers and pension schemes make very long-term promises to pay out money to people, but only when certain things happen — for example, retirement or death. So they are extremely unlikely to suffer a run." And to think that a few years ago insurance companies here were applying for banking charters. The grass is always greener … Finally, the FT’s banking editor, Patrick Jenkins, cautions in an op-ed that bankers who complain about the growth of shadow banking ought to keep an eye on their own houses. He warns that the seemingly low-risk business of M&A advisory, where banks like UBS have been placing more of their chips, has its share of hazards, not least of which is that the more firms are trying to win business, the less profitable it will be.

Receiving Wide Coverage ...Dream State: Just stop for a second. Put down your coffee and consider this: the head of the government said the nation’s biggest banks are too strong, make too much money and need to be broken up.

Receiving Wide Coverage ...Blame Canada: Royal Bank of Canada is accused of a "wash trading scheme" that eliminated its risk of losses on certain investments and guaranteed it certain tax perks. It is being sued in New York by the Commodity Futures Trading Commission, which says RBC coordinated "fictitious" trades with its subsidiaries. RBC denies the allegations. It could face tens of millions of dollars in fines if it loses in court. Wall Street Journal, New York Times, Financial Times

Receiving Wide Coverage ...Breach Bigger Than Reported: The Global Payments security breach was bigger than initially reported, the processing company announced Sunday night. Hackers gained access to certain account details of up to 1.5 million credit cards, and managed to export account information from the company’s systems.

Receiving Wide Coverage ...The (Slow) Death of Cash: Canada is getting rid of its penny, which now costs 1.6 times more to produce than it’s worth. Here in the U.S., meanwhile, Christian Science Monitor guest blogger Joseph Salerno declares that Washington has been waging a “war on cash” by refusing to print bills in denominations larger than $100 since 1945. And a Benjamin today sure doesn’t buy as much as it did back then. “This has made large cash transactions extremely inconvenient and has forced the American public to make much greater use than is optimal of electronic-payment methods,” Salerno writes, bemoaning the loss of privacy that comes with transacting on the grid. Even if you find Salerno’s interpretation of events a touch conspiratorial, keep reading. In the second half of his post he reports a truly amazing phenomenon: the emergence of Tide detergent as a black-market currency for the drug trade. Not any laundry detergent, mind you, just Tide. It fits the bill, as it were, for a currency, Salerno writes. “Tide is the most popular brand of laundry detergent and is widely used by all socioeconomic groups. Tide also is easily recognized because of its Day-Glo orange logo. Laundry detergent can also be stored for long periods without loss of potency or quality. … Enough can be carried by hand or shopping cart for smaller transactions while large quantities can easily be transported and transferred using automobiles.” We hesitate to call Procter & Gamble for comment. For a more optimistic perspective on the digitization of money, MIT’s Technology Review interviews former Treasury Secretary and White House economic advisor Larry Summers about his work with Square (he’s on the board of Jack Dorsey’s disruptive payments company) and the tech VC firm Andreesen Horowitz (where he’s a “special advisor,” which means contributing as “a thinker, not just as a door opener”). “Today, money can get transferred from any part of the planet to any other part of the planet, essentially instantaneously,” says Summers, who also teaches at that other university in Cambridge, we forget what it’s called. “I think for the most part that's a positive thing. People can see prices more easily, they can act on their desires more efficiently; friction is rarely a good thing.” And if you haven’t already, check out American Banker’s video interview with David Wolman, author of the book “The End of Money,” in which he talks about the moral and public-health arguments for doing away with cash, the adoption hurdles for mobile payments, and the privacy issues that quite understandably bother people like Salerno (and us as well, we should emphasize). (While we’re shamelessly self-promoting, watch the clips from our recent analyst roundtable on a meat-and-potatoes banking topic: the future of superregional banks. The latest video focuses on the risks facing this category of institutions; another video has our panel of experts explaining why they nevertheless consider the mid-tier banks the best-positioned group in the new environment.)

Receiving Wide Coverage ...Lord Blankfein: The financial commentators pan Goldman Sachs' "compromise" of appointing a "lead" director to avoid a shareholder vote on severing the chairman and CEO roles, currently both held by Lloyd Blankfein. While the lead director will do some of the things a nonexecutive chairman would, "BreakingViews" in the Times notes that the investment bank "has in the past argued that one reason it was opposed to splitting the chairman and chief executive roles was that it had a presiding director, John Bryan, who effectively performed these duties already. … Goldman appears to be doing little beyond changing the name of the role." And "Heard on the Street" in the Journal provides a nice précis of why having a nonexecutive chairman is considered a best practice for corporate governance: "The chief executive runs the business and is the main advocate of management's view. The chairman has a primary interest in long-term strategy and protecting the interests of shareholders. While those goals are usually aligned, they can diverge. This is particularly true at financial firms where executives can pursue risky short-term plays in the hope of securing bigger payouts, even if doing so comes at the long-term expense of the firm and shareholders." Yet among the six largest U.S. financial firms, the column notes, the only two that have separated the chairman and CEO jobs are the damaged goods: Citi and B of A. Wall Street Journal, New York Times.

Receiving Wide Coverage ...MF Money Still Gone, Congress Still Piqued: A congressional hearing today offers up JPMorgan's view of the MF Global meltdown, with a deputy counsel for the bank describing JPM's haggling over the source of the transferred funds. Diane Genova is expected to testify that, after JPM noticed that it was being paid with $200 million in customer funds, "it would be prudent and appropriate to ask MF Global to confirm that these transfers had been made in compliance" given that the company was tanking. Evidently the response was so convincing, Genova's prepared remarks say, that JPMorgan "reached out to Mr. Corzine to explain J.P. Morgan's understanding of how the London overdrafts had been covered," and to request confirmation that everything was on the up and up. When the letter was not returned signed, JPM called MF Global's deputy general counsel, Dennis Klejna, who assured that the funds were tranferred from excess money in company accounts and the leeter went unsigned because it was too broad. Meanwhile, it looks like some MF Global employees were aware of a stated shortfall in customer accounts well before the company's collapse. But key officials say they were assured it was just an accounting mishap. Wall Street Journal, New York Times

Receiving Wide Coverage ...Jobs Slow, Rates Low, Get Used to It: Chairman Ben Bernanke indicated the Fed must continue its easy-money policies, notwithstanding the strong employment gains of recent months. “Further significant improvements in the unemployment rate will probably require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies,” he said, dashing speculation that the Fed might start tightening monetary policy as soon as next year. Wall Street Journal, Financial Times, New York Times, Washington Post

Receiving Wide Coverage ...Landlord of America? Bank of America is testing a “mortgage to lease” program that lets struggling borrowers stay in their homes by signing over the deeds and renting the properties back from the lender, the papers report. The bank could eventually sell the homes to investors willing to keep them as rentals. It’s a small program for now — on Thursday, B of A sent 1,000 offers to homeowners in three states — but a big departure from the usual strategies for avoiding foreclosure (loan modifications, short sales, procrastination). Wall Street Journal, New York Times, Naked Capitalism.

Receiving Wide Coverage ...Deutsche Ditches Dodd-Frank: When it comes to avoiding the odious capital requirements of the Dodd-Frank Act, those who can are voting with their feet. Germany's Deutsche Bank (DB) has become the latest big non-U.S. financial institution to ditch the bank holding company status of its Yankee subsidiary, Taunus Corp. That's according to disclosures by the bank and Federal Reserve's website, as reported in the Wall Street Journal.

Receiving Wide Coverage ...Class Is in Session: Ben Bernanke reprised his old role as college professor in the first of an unusual (for a sitting Fed chairman) series of economics lectures at George Washington University. While taking care to note he wasn’t giving a policy speech, the Journal emphasized the window the lecture offered on Bernanke’s thinking. He noted the Great Depression is often thought of as two recessions, the second one brought about by premature monetary tightening — suggesting he’s in no hurry to raise rates as the current recovery continues to gather strength. The Times depicted the lecture as part of Bernanke’s campaign to burnish the Fed’s public image, while the Post made much of his dated cultural references (“It’s a Wonderful Life,” Life magazine) that went over the heads of his undergraduate students. And in a year when the presidential campaign has raised Ron Paul’s stature, Bernanke explained the problems with the gold standard, noting it did not prevent financial panics and actually promoted booms and busts. It took us way too long to find the 50 slides from his talk — a Google search turned up a lot of clutter — so we’ll spare you the trouble by linking to them right here. Coverage in the Wall Street Journal, New York Times, Washington Post.

Receiving Wide Coverage ...Goldman Reflections: Columnists and bloggers keep parsing Greg Smith’s bombshell op-ed in the Times last week, in which he announced he was quitting Goldman Sachs because in his view the firm had ditched “customer focus” for a profit-at-all-costs mentality. The Journal’s Francesco Guerrera has a somewhat jaded reaction: “Those who venture on Wall Street should, by now, expect to be treated more like counterparts than clients.” Goldman erred by denying this reality and publicly insisting it puts clients first, Guerrera argues; its executives would have done better by dropping such pretenses and “explain[ing] how the business of finance really works.” In the FT, Tom Braithwaite compares Smith’s broadside to the campaign waged by a group of former Morgan Stanley executives and directors against its then-CEO Phil Purcell seven years ago. Smith’s “fretting over the ‘toxic’ culture at Goldman appealed to the consciences of his banks’ stakeholders; the Morgan Stanley group appealed to their wallets,” and largely for this reason Smith probably won’t have as much impact, Braithwaite writes. He also reminds readers that despite the portrait Smith painted of Goldman as a ruthless, bloodless profit machine, its recent financial performance has been so-so. CEO Lloyd Blankfein “should worry less about the criticism of Mr. Smith and more about making money,” Braithwaite writes. In the Times, law professor and “White Collar Watch” columnist Peter J. Henning uses the Smith allegations, and a recent court ruling assailing Goldman’s work advising El Paso on its sale to Kinder Morgan (a company in which the investment bank held a large stake), as a springboard to look broadly at how Wall Street firms manage conflicts of interest. The Times separately profiles Three Ocean Partners, a new boutique investment bank that has insulated itself from Kinder Morgan-style conflicts by taking on just one client per industry.