Katherine Kane

Receiving Wide Coverage ...More ‘Muppets’: Greg Smith’s not-so-fond farewell to Goldman Sachs remains the talk of the town. Over at JPMorgan, CEO Jamie Dimon emailed colleagues on the operating committee to warn them against indulging in schadenfreude. “I want to be clear that I don’t want anyone here to seek advantage from a competitor’s alleged issues or hearsay — ever,” he wrote, according to the FT. “It’s not the way we do business ... We respect our competitors, and our focus should be on doing the best we can to continually strengthen our own standards.” The headline for another FT story says some of Goldman’s clients are “stand[ing] by” their investment bank, though it turns out these customers are not so much defending the firm as acknowledging they have no illusions about whom they’re dealing with. “They are indeed very aggressive and you better not turn your back on them,” one industrial executive says of Goldman. In other words, these clients won’t be taken for “muppets,” the term Smith says his former colleagues used to describe gullible clients. FT columnist Frank Partnoy (whose 1990s Morgan Stanley memoir “F.I.A.S.C.O.” described traders bragging about “ripping faces off,” rather than just the figurative eyeballs that Smith claims his Goldman colleagues gleefully gouged), says that beyond the visceral reactions, the Smith kiss-off points to a fundamental issue in financial reform: “What does it mean to be a client? … There are clients, and there are clients.” He means there are fiduciary relationships and non-fiduciary ones. The “clients” in the latter arrangement are really just counterparties, and a trader “is not obliged to act in a disadvantaged counterparty’s best interests, any more than a savvy poker player is obliged to show a poor player his good cards,” Partnoy writes. “The tough question for the future is whether less sophisticated institutions should be entitled to more protection. In other words, should they be treated as true clients?” The discussion is more than just theoretical, since Dodd-Frank requires regulators to write standards of conduct for derivatives dealers that trade with municipalities, pension funds, and other potential rubes. In the Journal, “Heard on the Street” considers the Smith critique of Goldman’s culture in an even broader context. “More Than Culture Shifted On Wall Street,” declares the headline for a column that’s really about the outsized role the financial sector has come to play in our economy. Indeed, we at the Morning Scan long thought that having an economy driven by finance was at least one step too far removed from the real world. Kind of like … well … watching a cartoon about the Muppets. In the Times, which got the whole meme started a few days ago when it ran Smith’s op-ed, a news article reports that the bad publicity for Wall Street is yet another impediment to financial firms’ recruitment efforts on college campuses, and columnist Floyd Norris is incredulous that, despite everything, Congress is seriously considering a rollback of regulations for IPOs and private placements. On American Banker’s BankThink blog, our own columnist Joel Sucher says that homeowners who tried to get loan modifications from Litton Loan Servicing, a former Goldman unit, were also treated like muppets. And finally, Southern California Public Radio points out that the Muppets actually were Goldman clients once — in 2003 the firm advised Jim Henson’s family on the acquisition of a merchandising company.

Receiving Wide Coverage ...Stress Relief: As banks announced a wave of dividend increases and stock repurchase plans after getting their stress test marks from the Fed, an article in the Times foregrounded criticism that the capital payouts are too much and too soon. Luminaries, including Stanford's Anat Admati, denounced the central bank for irresponsibility and appeasement, and faulted the process for failing to reckon with potentially nightmarish legal liabilities. In the Journal, an article focused on the egg on Citi's face after the Fed blocked it from delivering on its long-time promise to begin returning capital to shareholders this year. "Heard on the Street" looked at leverage ratios under the most severe stress scenario, and commented that they appear "eerily reminiscent of levels seen at investment banks before the crisis."

Receiving Wide Coverage ...The Muppet Show: Greg Smith is leaving Goldman Sachs today, and oh man is he going out with a bang. In an incendiary op-ed/open resignation letter in the Times, Smith, who was an executive director and head of equity derivatives for Europe, the Middle East and Africa, laments that the firm’s “moral fiber” has deteriorated. “I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them.” In addition to reporting the use of standard trader slang like “ripping eyeballs out” and “hunt[ing] elephants” (wasn’t that one in Oliver Stone’s original Wall Street movie?), Smith reveals that his former colleagues have coined a wryly condescending name for their unwitting clients: “Over the last 12 months I have seen five different managing directors refer to their own clients as ‘muppets,’ sometimes over internal e-mail.” In response, Goldman Sachs is telling reporters: “We will only be successful if clients are successful. This fundamental truth lies at heart of how we conduct ourselves.” The op-ed is naturally generating a great deal of blogosphere buzz this morning. There’s already a parody on the U.K. humor site The Daily Mash, entitled “Why I am leaving the Empire, by Darth Vader.” Speaking of Goldman’s treatment of clients, the CFTC has fined the firm $7 million “for failing to diligently supervise accounts that it carried for a brokerage client.”New York Times, Wall Street Journal, Financial Times, Reformed Broker, Business Insider, The Daily Mash.

Breaking News This Morning ...BB&T modifies its agreement to acquire BankAtlantic

Receiving Wide Coverage ...B of A’s Side Deal: Bank of America has pledged to make bigger cuts to borrowers’ mortgage balances than the other servicers in the $25 billion robo-settlement, the papers report. In return, federal and state officials agreed to reduce B of A’s fines under the pact. The Journal notes there is likely to be some controversy about this side deal because, like the broader settlement, it allows B of A to reduce principal on loans it services for others but doesn’t own. An anonymouse from the Obama administration assures the paper that “principal reductions will be done only when there is a benefit to investors, meaning that the cost of the principal reduction will be less over time than taking the loan through foreclosure.” A Journal reader responds in the comment thread: “We shall see.” Of course, as we’ve said before, all of this information is as reliable as hearsay until the settlement documents are made public. Both the Journal and the Times say the legal papers could finally be filed today — nearly a month after the press conference fanfare. Also coming as soon as today is a report from HUD’s inspector general, which anonymice tell the Times “is likely to find a broad pattern of mistakes, and … could ignite fresh outrage toward the banks.” Meanwhile the Post analyzes the various housing policy changes the administration has announced in recent months and finds the White House has softened its stance against providing relief to those who didn’t “deserve” it — i.e. speculators and people who took on too much debt. Administration officials “have concluded that it is important to prevent homes from going into foreclosure whether owned by an investor or a family — because rising foreclosures of any kind hurt communities,” the Post says. Maybe the president’s advisers dusted off one of their Ivy League economics textbooks and brushed up on “negative externality,” a concept that’s at least as powerful as moral hazard. Or maybe they visited a forlorn neighborhood in Florida or Nevada. Or just studied the poll numbers. Like Clint Eastwood says in “Unforgiven,” “deserve’s got nothing to do with it.” Also in the Times, “BreakingViews” defends Ed DeMarco, the head of the Federal Housing Finance Agency, who’s been criticized for resisting principal reductions. Other types of loan modifications often work just as well, without producing as big a loss for Fannie and Freddie, the column says. “Critics are also ignoring DeMarco’s mandate to minimize losses from bailing out the two mortgage agencies. By attacking him, they are trying to force him to put struggling homeowners’ needs ahead of all taxpayers.” Wall Street Journal, New York Times, Washington Post

Receiving Wide Coverage ...Pandit on the Pulpit: In a speech at an investor conference yesterday Citigroup CEO Vikram Pandit played the goody two shoes, defending much of the Dodd-Frank regulatory reform law that his peers have complained about. For some time, “Pandit has struck a more humble tone than his competitors, perhaps because his bank relied so heavily on taxpayers to stay afloat at the height of the financial crisis,” the Times notes. In a separate Times article, columnist Peter Eavis politely calls Pandit’s bluff on transparency. The CEO reiterated his call for regulators to require new disclosures from banks that would help investors make apples-to-apples comparisons. “That’s an admirable aim, but Citigroup could start by catching up with other big banks and releasing how much capital it has supporting its investment banking unit” as JPMorgan does, Eavis writes. To be fair, he notes that the figure at JPM “has been at $40 billion exactly for several quarters, raising questions about the number’s usefulness.” Meanwhile, FT columnist Robert Shrimsley makes light of Citi’s deal to use IBM’s Watson supercomputer. Among the questions raised by this arrangement, he writes, “will be whether Watson is executing unauthorised trades and covering them up thanks to its personal relationship with the database server at the Federal Reserve — the two were Intel chips together when young.”

Receiving Wide Coverage ...Housing Stimulus No. 4,080: The Obama administration is cutting FHA mortgage insurance premiums on “streamlined” refinancings — those that replace FHA loans in good standing and thus don’t require appraisals, credit checks or income verification. The cuts could save borrowers $1,000 a year, not counting the savings from refinancing into a lower interest rate. “It’s like another tax cut that will put more money into people’s pockets,” the president said. The catch: The lower fees only apply to refis of FHA loans originated before June 2009. This excludes an estimated two-thirds of the FHA’s portfolio. But unlike the mass refi plan Obama announced in his State of the Union address, this comparatively modest one doesn’t require legislation. Wall Street Journal, New York Times, Washington Post

Receiving Wide Coverage ...Money Market Funds: Luis Aguilar, a Democratic member of the Securities and Exchange Commission who usually sides with its chairman, Mary Schapiro, tells the Journal in an interview that he’s wary of her proposal to tighten regulation of money market funds. He doesn’t quite come out and say he’d vote against it, but if he did, it’s likely to fail: The five-member commission consists of Schapiro, Aguilar, one other Democrat and two Republicans, neither of whom is expected to support the chairman’s plan. Meanwhile, the Journal’s “Heard on the Street” column says that of two reforms she’s pushing, the one to make money funds trade at a floating share price rather than a fixed $1 per share is eminently more sensible. The other idea, to require the funds to hold capital buffers, sounds great in theory except that “capital is a regulatory construct” that can create a false sense of security. Such a false sense of safety is the problem with money funds to begin with. “New regulations should dispel the myth that these funds can't suffer losses and are akin to bank accounts, a fallacy that could turn them into a systemic threat.”

Receiving Wide Coverage ...Crisis, Reform and Redress: In an op-ed in the Journal, Treasury Secretary Timothy Geithner says financial companies that complain about regulatory reform must have “crisis amnesia”: “My wife occasionally looks up from the newspaper with bewilderment while reading another story about people in the financial world or their lobbyists complaining about Wall Street reform or claiming they didn't need the Troubled Asset Relief Program. She reminds me of the panicked calls she answered for me at home late at night or early in the morning in 2008 from the then-giants of our financial system.” Of course, one can agree on the need for reform while questioning the kind of reforms that have been enacted. For example, in an op-ed in the FT, former FDIC head William Isaac and former Wells Fargo chief Dick Kovacevich argue that imposing “breathtaking” capital requirements is a less-than-ideal way to discourage reckless risk-taking. Equity holders, they note, have less power, and less incentive, to control risk than creditors do. As an alternative, Isaac and Kovacevich suggest requiring big banks to regularly issue senior and subordinated long-term debt, whose holders would absorb losses ahead of the FDIC and hence shield taxpayers. The mandatory debt issuance would subject banks to “market discipline”: “A risky bank would have to pay higher interest and ultimately might not be able to issue debt, which would curtail growth and force it to adopt a new strategy.” (The piece does express some qualified support for Dodd-Frank’s “living wills,” however.) The question of how to prevent another meltdown to one side, Phil Angelides, who chaired the Financial Crisis Inquiry Commission, wants to make sure those responsible for the one we just went through get their just desserts. “After the savings-and-loan debacle of the late 1980s, more than 1,000 bank and thrift executives were convicted of felonies. But today the rate of federal prosecutions for financial fraud is less than half of what it was then,” Angelides writes in the Times. The president’s new mortgage securities fraud task force holds promise, Angelides says, but the Obama administration must give it the proper tools, mandate and budget to succeed in investigating and prosecuting mortgage mischief. Wall Street Journal, Financial Times, New York Times.

Receiving Wide Coverage ...“Uneven and Modest”: That’s how Fed chairman Ben Bernanke characterized the economic recovery in his semi-annual Humphrey-Hawkins testimony before Congress. Bernanke also said during his testimony that regulators are likely to delay implementation of the Volcker rule, which is supposed to take effect in July. The Dodd-Frank Act allows the agencies to delay implementation by up to two years, he said. Wall Street Journal, New York Times, Washington Post, Financial Times

Receiving Wide Coverage ...M&A, or Lack Thereof: It is now harder for U.S. banks to make acquisitions “than at any point in at least the last 20 years,” thanks largely to regulation, the FT reports. Aside from longstanding antitrust and accounting rules, a new impediment is the Fed’s consideration of “financial stability” in approving merger applications, as required by Dodd-Frank. Although the regulator approved PNC’s deal for Royal Bank of Canada’s U.S. retail business and Capital One’s takeover of ING Direct, the Fed “put both banks through the wringer and showed a much more conservative approach to new ‘financial stability’ responsibilities than anyone in the sector thought.” Meanwhile, JPMorgan Chase is worth less than the sum of its many parts, in the estimation of veteran banking analyst Mike Mayo. He released a note making the case for breaking up the company ahead of JPM’s investor conference scheduled for today. Quips a Times reader in the comment thread: “Great idea. Once it's broken up, there will be an immediate opportunity to improve the value of the business through consolidation.”

Receiving Wide Coverage ...Woeful Results in Europe: Considerable attention was paid to Europe's biggest banking companies, which reported sizable quarterly and full-year losses in recent days as they continue to struggle with their exposures to sovereign debt and grapple with the potential fall out from another Greek bail out. Weighed down by exposures to Greek government debt and other impaired assets, Royal Bank of Scotland, Crédit Agricole and Dexia reported quarterly losses. The Financial Times made a video to cover the results. RBS however touted its progress in purging bad assets.

Receiving Wide Coverage ...Hold it, They've Got Ideas: A funny thing happened on the way to the Republican presidential debate last night - a candidate actually made a policy proposal. Before all the name-calling, piling on the front-runner du jour and renewed etymological analysis of the word "conservative," Mitt Romney offered a plan to cut personal income taxes on the same day President Obama proposed to cut the corporate tax rate (more on that in a moment). But the Romney tax plan hardly came up in the debate, the Journal reports. In fact, the economy took a backseat to social issues and the latest round of posturing among the candidates vying for the GOP nomination, the Times says.

Receiving Wide Coverage ...Like A Marine: Let's begin today with a treatise on morals involving two of the business media's favorite topics: Greece and the U.S. housing market. As the New York Times notes, contract issues are at the forefront of both.

Receiving Wide Coverage ...Greek Bailout, Act II: This may finally be it. A bailout pact to end the Greek financial drama that has threatened to end in a global economic tragedy.

Receiving Wide Coverage ...Ratings Review: Moody’s has put Bank of America, Citigroup, JPMorgan and other big financials on review for possible downgrade, citing the headwinds facing the investment banking business. Wall Street Journal, New York Times

Receiving Wide Coverage ...Volcker Day: Initial coverage of the public comments filed on the Volcker Rule proposal only scratched the surface of a rich debate. “Heard on the Street” in the Journal suggests that foreign governments objecting to the rule may have a point, since the ban on proprietary trading by banks would include most sovereign debt but would exempt U.S. Treasury bonds – a point that Paul Volcker didn’t quite address in his FT op-ed. The rule’s namesake scoffed at concerns that it would hurt liquidity for foreign government debt, but the carve-out for Treasurys is “an implicit acknowledgment that Washington believes this risk is real,” the Journal column says. A reader follows this train of thought into the realm of geopolitical intrigue, writing in the comment thread that the “unfair” treatment of foreign sovereign debt “could be correctly or incorrectly [interpreted] as hostile,” inviting a “retaliatory response, which will only make the markets less liquid and more expensive and uncertain.” Meanwhile, despite CFO David Viniar’s recent favorable remarks about the Volcker rule, Goldman Sachs wants some changes. A less obvious group of critics are the regional banks — PNC, U.S. Bancorp, Capital One, SunTrust, BB&T, Fifth Third, Regions and KeyCorp — that jointly filed a comment letter. Their main beef is that they’d have to very quickly put in place all sorts of compliance chazerai “simply to ‘prove a negative’ that we are not engaged in impermissible proprietary trading or funds activities.” (We found that one at Politico’s Morning Money, which is worth a look on those days when you have time after your requisite dose of Morning Scan). The FT reports that the big banks, including Bank of America, are lobbying for regulators to revise the Volcker Rule to explicitly allow market making in exchange-traded funds. Or rather, activities that the banks consider market making but don’t fit the proposal’s definition of it. Some market watchers have called the “opaque” ETFs a source of systemic risk, the article notes. Elsewhere, Times columnist Peter Eavis laments that the comment letters on the Volcker rule, both pro and con, are long on abstract arguments but short on hard numbers and real-world examples. And John S. Reed, perhaps seeking to atone for his role in creating FrankenCiti, is urging regulators to make the Volcker rule tougher. For example, a bank’s CEO and top trading, risk management and accounting executives should be required to sign a SarbOx-like statement each quarter “stating that, to the best of their individual knowledge, the operations of the trading unit were conducted within the letter and spirit of the Volcker Rule,” Reed writes. Traders should be paid “based on the results of their market making and hedging activities after those positions are fully unwound,” rather than collecting bonuses for short-term appreciation of assets held in inventory. And penalties for violating Volcker ought to be “severe,” Reed says. You can download a pdf of his letter here.

Receiving Wide Coverage ...Volcker Rule: A flurry of comment letters, both for and against the ban of proprietary trading by insured commercial banks, were filed by the midnight deadline — including one by the old lion who conceived the rule, rebutting critics’ “futile stonewalling.” Paul Volcker also wrote an op-ed in the FT responding specifically to foreign governments that have complained the rule will hurt liquidity for sovereign debt. Noting that the regulation will allow market making and underwriting of securities, the former Fed chairman writes that banks also “can continue to purchase foreign sovereign debt for their investment portfolios — should I say à la MF Global? What would be prohibited would be proprietary trading, usually labelled as ‘speculative.’ How often have we heard complaints by European governments about speculative trading in their securities, particularly when markets are under pressure?” In the Times, “DealBook” columnist Andrew Ross Sorkin reiterates the industry argument that the line between acting as a middleman and acting as a principal is sometimes hazy: “Historically, [a] bank could buy, say, 1,000 bonds and hand over the 889 that its client had requested. The 111 other bonds would sit on the firm’s balance sheet until it could parcel them out to other clients who wanted to buy them. Now, such trades may become impossible — or at least, impossibly expensive.” In a Fox Business interview, a casually dressed Jamie Dimon makes this same point, likening his bank’s securities operations to “these stores down the street — when they buy a lot of polka dot dresses, they hope they’re gonna sell. They’re making a judgment call. They may be wrong.” The JPMorgan chief is also reliably irreverent: “Paul Volcker, by his own admission, says he doesn’t understand capital markets. Honestly, he’s proven that to me.” Dimon’s bank submitted a 67-page comment letter that said the regulation “appears to take the view that banking entities, their customers, and the economy must pay almost any price in order to ensure absolute certainty that there can never be an instance of prohibited proprietary trading,” and that the Volcker rule could "chill legitimate market making and impose needless costs." The pension giant CalPERS was one of the rule’s notable defenders, calling the costs of the rule “acceptable” in light of the reduced risk to the financial system. Wall Street Journal, Financial Times, New York Times.

Receiving Wide Coverage ...Interpretations of the Mortgage Deal: Depending on which story you read, the $25 billion settlement between the federal government, 49 state attorneys general and the largest mortgage servicers is: A potential boon to the housing market and the economy (Wall Street Journal, Financial Times, Los Angeles Times); a shot across the bow for the banks (Washington Post); a source of limited relief for the banks (“Heard on the Street” in the Journal); already largely reserved for by the banks (Journal again); a source of limited relief for homeowners (New York Times); an egregious shakedown of banks by politicians (Journal editorial page); too soft on the banks and not generous enough to homeowners (Los Angeles Times again, Matt Taibbi in Rolling Stone, Adam Levitin at CreditSlips.org); and/or the denouement of a long-running drama (Journal, Post). And yes, the Journal’s “tick, tock” story reliably tells you what they ate at the negotiating table (cookies this time). A more interesting insider detail is the role played by Wells Fargo executive Mike Heid, who’s profiled, along with the more obvious government figures, in a Journal sidebar on key players in the talks. Heid “helped close ranks and find consensus” among the five megaservicers, the piece says. This was probably quite a feat considering that Wells also argued to the regulators “that it should be treated differently because its mortgage-servicing operation wasn't nearly as troubled as” B of A’s or JPMorgan’s.

Receiving Wide Coverage ...The Servicing Settlement: It’s apparently really, finally happening, with an announcement expected today. The holdout attorneys general, including New York’s Eric Schneiderman and California’s Kamala Harris, have been brought back into the fold, the papers report. To win over the dissident AGs, “the banks and other government negotiators preserved regulators’ and prosecutors’ ability to use facts assembled from foreclosure-related probes in their securitisation investigations,” the FT says. “While the banks would be released from claims involving foreclosure abuses, securitisation claims would remain.” Indeed, the Journal reports that the SEC plans to send Wells notices to several major financial institutions, warning it intends to sue them for misrepresenting mortgage-backed securities sold during the go-go years. (It's not clear which companies will get the head's up, but the agency's been looking at Bank of America, Citi, Ally Financial, Goldman Sachs and Deutsche Bank, the paper says.) Also, Schneiderman’s suit against MERS and three banks will be allowed to proceed, and he retains the right to sue other servicers for using the mortgage registry system, according to a very informative and detailed post by David Dayen on the FireDogLake blog. The papers give conflicting figures on the size of the settlement — it’s either $26 billion or $40 billion, depending on the headline. That’s because the bulk of the settlement ($17 billion) is not cash but principal reductions, and “the banks will not get dollar-for-dollar credit for every write-down,” according to the FireDogLake post. (Remember that the banks were supposed to get more credit for eating the loans they hold on balance sheet than for writing down mortgages they service for investors, though there’s still skepticism whether this incentive will work.) “Housing and Urban Development Secretary Shaun Donovan believes that they will be able to get between $35-$40 billion in principal reduction in real dollars out of the settlement,” Dayen writes. The Times appears to be the only one of the major news outlets to provide an infographic breaking down the settlement amount, which a story like this cries out for. Some more interesting tidbits: a chunk of the cash portion of the settlement is to go to the states, and according to Dayen they will use at least some of that money to fund legal aid services for borrowers facing foreclosure; he also reports that Oklahoma’s attorney general isn’t participating in the settlement, because he doesn’t think the banks should be penalized at all. Since we’re quoting so profusely from his post, we should also acknowledge that Dayen regards the settlement as still overly broad in releasing banks from liability, and still insufficient in compensating borrowers. As other consumer advocates probably will, too. Wall Street Journal, Financial Times, New York Times, Washington Post, Politico.