Katherine Kane

Receiving Wide Coverage ...Double Duty: Fed chairman Ben Bernanke defended the central bank’s dual mandate — control inflation and unemployment — in testimony before Congress. He reassured Republican lawmakers that the Fed is balancing the two goals rather than giving employment a higher priority. New York Times, Washington Post

Breaking News This Morning ...UBS Profits Tumble: The Swiss bank’s “wealth management unit failed to make up for a loss in investment banking” in the fourth quarter, according to the Times. Wall Street Journal, Financial Times, New York Times

Receiving Wide Coverage ...Refis, for Real? President Obama unveiled the details of the new refinancing plan for underwater borrowers he mentioned in the State of the Union address last month. (Or rather, the new new refi plan, since it’s only been three months since HARP 2.0 came out.) Close to 15 million homeowners would be eligible for the latest initiative. To qualify, one would need a credit score of at least 580 and have missed no more than one mortgage payment over the last six months. The new loans would be insured by the FHA, whose loan limits (which range from $271,050 to $729,750, depending on the region) would apply. Interestingly — and barely mentioned in the coverage we’ve read — the plan would encourage people to refinance into mortgages with a 20-year term instead of the customary 30 years, so they can rebuild equity faster. As an incentive, the government would cover closing costs for those who choose the 20-year option “with monthly payments roughly equal to those they make under their current loan.” Of course, this means the borrower’s cash flow wouldn’t improve off the bat, which doesn’t sound like much of a Keynesian spending stimulus to us, but it’s a nice contrast to the heady days when people were seriously talking about 50-year amortization schedules to make mortgages more “affordable.” The administration reiterated that the cost of the new refi program (estimated at $5 billion to $10 billion) would be paid for by a “financial crisis responsibility fee,” assessed on “the largest financial institutions.” It’s still unclear how many of “the largest” ones would have to pay the tab, but the fee would be based on a company’s size and “the riskiness of their activities.” (By what measure? VaR?) Back to reality: We’ve been careful to use the conditional “would,” because all this requires legislation, and Congressional Republicans are having none of it. Here’s House Speaker John Boehner, talking to reporters: “One more time? One more time? How many times have we done this?” (Hey, that could make a catchy song!) This reaction probably explains why a lot of the news coverage is focused on Machiavellian political analysis — the Journal suggests the President is “setting up a contrast with Republicans over government's role in helping Americans who, in Mr. Obama's words, ‘play by the rules.’” You know, it’s an election year and all that. But isn’t it a lot more interesting to think about the socioeconomic implications of 20-year mortgages than listen to another Washington horse-race narrative? No? Anyone? Wall Street Journal, New York Times, Washington Post

Receiving Wide Coverage ...Volcker Haters: Woe is Paul Volcker, the former Fed boss who came up with the eminently sensible and elegant idea of banning taxpayer-backed banks from acting like Las Vegas card sharks. Enter Washington pols and the Dodd-Frank Act's Volcker Rule has been turned into a multi-hundred page monstrosity that its recently silent namesake almost assuredly hates. So too do most of the world's leading financial policymakers. Their gripe is that as the Volcker Rule's rules take shape, it's beginning to look like it will have a chilling effect on liquidity and market activity. So chilling, in fact, that the U.S. government has been left with only one logical option—exempt its own debt from the Volcker restrictions. That ploy has left foreign government officials hopping mad, as the New York Times reported out of Davos late Monday. This morning the Wall Street Journal reports that the U.K. Chancellor of the Exchequer, George Osborne, has added his voice to the chorus rising up against Volcker. The regulation, "would appear to make it more difficult and costlier" for banks to buy and sell non-U.S. sovereign bonds on behalf of clients, Osborne, said in a recent letter to Federal Reserve Chairman Ben Bernanke. Osborne's critique follows similar objections from the European Commission, Japan and Canada. Under Dodd-Frank, five regulators, including the Fed, the Securities and Exchange Commission and the Commodity Futures Trading Commission, are charged with crafting the rules. With its initial implementation set for July, and with banks having several years to comply, this kerfuffle is likely to be around for a long, long time. New York Times, Wall Street Journal

Receiving Wide Coverage ...Collections Crackdown: The Federal Trade Commission announced its second-biggest settlement with a debt collection agency. Asset Acceptance agreed to pay $2.5 million to settle allegations that it strong-armed consumers into paying debts that had expired under statutes of limitation. That’s a widespread industry practice, according to the government, and a Justice Department official tells the Journal that “more cases are on the way." Wall Street Journal, New York Times

Receiving Wide Coverage ...Davos Dispatches: Lots of interesting news is coming out of that World Economic Forum junket in Switzerland. Jamie Dimon says JPMorgan Chase considered pulling out of Europe’s troubled peripheral countries, the so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain), though he diplomatically referred to them as “the euro five.” The decision to stay was “largely social and partially economic,” the CEO said, according to the FT. … Too-big-to-fail behemoths of the world, unite! The Global Financial Markets Association, an umbrella group for trade associations in the U.S., Europe and Asia that’s kept a low profile to date, is reinventing itself as a lobbyist on international regulatory issues for the world’s biggest banks. The group is chaired by Blythe Masters, the head of commodities at JPMorgan and a pioneer of the credit default swap. … The European Union plans to raise objections to the Volcker rule with U.S. Treasury Secretary Tim Geithner, the Journal reports. European officials worry the regulation will restrict U.S. banks’ ability to trade European sovereign debt on behalf of clients, hurting liquidity for these countries at a time when they really need it. Of course, the rule is supposed to ban only proprietary trading by banks, not old-school market-making, but banks have protested that there are gray areas between the two. … The Times profiles Treasury undersecretary for international affairs Lael Brainard, who’s in Davos “trying to coax European leaders to contribute to a financial firewall.” … BreakingViews reports that the plight of the 99% has cast a pall over the annual convocation. … But Reuters’ blogger Felix Salmon says that the Davos attendees really don’t care what the Occupy Wall Street crowd has to say. ... And if you care, wine tastings are once again being held at Davos, the Times reports. Fine, but please don't tell us what kind of shoes the female attendees we wearing. It can't be important.

Receiving Wide Coverage ...Great Rates to Continue: "Great" if you're living on debt, like the U.S. government, that is. If you're a saver or retiree on a fixed income, or a bank trying to earn an interest rate spread, things don't look quite so peachy.

Receiving Wide Coverage ...State of the Union: During the (surprisingly brief) discussion of the housing mess in his speech last night, President Obama announced yet another mortgage refinancing program. “Responsible homeowners” could take advantage of low rates and save $3,000 a year without having to jump through bureaucratic hoops or deal with “runaround from banks,” he said. And if you coughed or sneezed at the precise moment, you might have missed this: “a small fee on the largest financial institutions” would pay for this program. Subsidizing these refis “will give banks that were rescued by taxpayers a chance to repay a deficit of trust,” Obama said. Zing! The president gave no other details on the refi plan, but the Times got the goods, or some of them, from an anonymous “senior administration official”: The program would cost no more than $10 billion. (How many of “the largest” banks would share that cost? The top four? The Big 19 TARP recipients? Unclear.) FHA is to guarantee the new loans. Unlike the revamped HARP program, which is available only to homeowners whose existing mortgages are held by Fannie and Freddie, the new plan (should it be called HARP 3.0 or HARP 2.5?) could benefit two to three million people whose loans are owned by private investors, the Times reports. Legislation would be required to allow FHA to refi the underwater mortgages and to authorize the bank fee. Notably, the president did not utter the word “foreclosure” once in his speech. New York Times, Businessweek, Associated Press, Washington Post (op-ed by economist Mark Zandi), Wall Street Journal.

Receiving Wide Coverage ...Deal or No Deal? There was brief speculation Monday that President Obama would announce a settlement of government probes into foreclosure abuses in his State of the Union address tonight. Those hopes (or fears, for some consumer advocates) were dashed when Iowa Attorney General Tom Miller, the leader of the multistate task force negotiating with the top five mortgage servicers, went out of his way to say there would be no deal reached this week. For the skeptical consumer advocates, that’s just as well; they “fear the pending settlement would allow banks to pay only a fraction of what is warranted and escape legal culpability for a wide range of abuses that have yet to be fully investigated,” according to the Post. An additional objection is that the banks reportedly would be allowed to earn “credits” toward the $25 billion settlement amount by writing down first mortgages they service for investors, but would not have to swallow losses on the second mortgages the banks themselves own. “This reverses the contractual hierarchy that junior lienholders take losses before senior lenders. So this deal amounts to a transfer from pension funds and other fixed income investors to the banks, at the Administration’s instigation,” writes “Naked Capitalism” blogger Yves Smith, who rarely makes a point she doesn’t feel the need to italicize. And yes, those “credits” mean the industry isn’t necessarily going to pay the whole $25 billion out of pocket; the cash portion might be as small as a fifth of the total. On Monday administration officials pitched the tentative terms reached with the servicers to all the states’ attorneys general. A handful of AGs, including California’s Kamala Harris, remain wary of potentially giving away the store. Anonymice tell the Journal that the timetable for a deal is now early February. Wall Street Journal, Washington Post, Naked Capitalism, Financial Times

Breaking News This Morning ...Earnings: PNC, U.S. Bancorp, Bank of New York Mellon, State Street, Goldman Sachs

Breaking News This Morning ...Earnings: Citigroup, Wells Fargo, First Republic

Editor's Note: Morning Scan will not publish on Monday, Jan. 16 in observance of the Martin Luther King holiday. We’ll be back on Tuesday, Jan. 17.

Receiving Wide Coverage ...Defending the Financial Sector: The Economist and the upcoming issue of the Times’ Sunday magazine both have articles warning against excessive banker-bashing. “Could fair criticism warp into ugly prejudice? And could ugly prejudice produce prosperity-destroying policies?” asks The Economist’s “Schumpeter” column, which offers historical evidence for the affirmative on both counts. The “ugly prejudice” part is salient – the piece notes that over the centuries, hatred of moneylenders has often been intertwined with anti-Semitism in the West and anti-Chinese bigotry in Asia. “This is not to say that the Occupy protesters are guilty of ethnic prejudice: they belong to a class and a generation that is largely free from such vices. But demonisation can easily mutate into new forms. … Railing against the 1%—particularly when so many of them work for companies with names like Goldman Sachs and N.M. Rothschild—can unleash emotions that are difficult to cage.” The Times piece focuses on the economic case – without “Wall Street,” writes Adam Davidson from NPR, “the poor would stay poor … there would be no middle class … [and] lots of awesome things would never happen” (e.g. the development of lifesaving drugs that require risk capital). We’ve put air quotes around “Wall Street” because Davidson defines it broadly to include commercial banks and even insurance companies along with investment banks. But he at least defines his terms, so we’ll refrain from our usual rant about the limited descriptiveness of this ambiguous category. The Economist, New York Times Magazine

Receiving Wide Coverage ...Force-Placed Insurance Probe: Citing anonymous sources, the papers report that New York State is investigating the force-placed insurance practices of the big banks, including JPMorgan Chase, Bank of America, Wells Fargo and Citi. According to the Times, the state’s Department of Financial Services “has already turned up instances where mortgage servicing units at large banks steered distressed homeowners into insurance policies up to 10 times as costly as the homeowners’ original plans. In some cases, those policies were offered by affiliates of the banks themselves, raising questions about conflicts of interest; in other cases, there may have been kickbacks between unrelated companies.” No one disputes that force-placed coverage is necessary to protect collateral when a borrower fails to obtain regular homeowners insurance. But the arrangements being probed pose potential conflicts “because companies may have an incentive to place homeowners in policies offered by their affiliates rather than looking for the best rates on the open market,” the Times writes. Fittingly, the probe is being conducted by an interdisciplinary regulator, which was created last year by combining the state’s separate banking and insurance agencies. A spokesman for Governor Andrew Cuomo tells the Times the merger was meant to address the “sometimes problematic overlap between banking and insurance.” The new agency, led by Benjamin Lawsky, issued subpoenas in October (nearly a year after American Banker ran an award-winning investigative article about the very same issues with force-placed insurance, we note modestly). New York Times, Wall Street Journal.

Receiving Wide Coverage ...Meet the New Boss… William Daley, a JPMorgan Chase alumnus, resigned as White House chief of staff after about a year on the job. He was succeeded by Jack Lew, a Citigroup alum, whom President Obama must really, really like and trust and respect given the optics of having another ex-banker in that job at a time when anti-Wall Street sentiment runs high. Exhibit A would be this headline from Gawker: “Citigroup Replaces JP Morgan as White House Chief of Staff.” It didn’t take long after the White House announcement for this Huffington Post story from July (when Obama nominated Lew to lead the Office of Management and Budget, a position he’s leaving to take the White House job) to show up on our Twitter feed. The article details the activities of Citi’s alternative investments unit during the years Lew ran it, and makes much of the fact that a “fund of funds” managed by said unit invested in John Paulson’s hedge fund. The implication is that Lew helped Citi indirectly profit from Paulson’s (prescient) bets against the housing market. But it’s not quite the same thing as the CDO shenanigans perpetrated by Citi’s investment bank, and even there we continue to wonder what any of the institutional investors on the other side of these trades was thinking when it was so obvious that the housing boom could not possibly end well. But we digress … The Journal’s editorial page reminds us that Daley came on to help Obama “repair relations with the business community and Republicans on Capitol Hill,” and clearly he did not succeed with the latter. You can find serious coverage of Daley’s departure in the Los Angeles Times, Wall Street Journal, Financial Times, New York Times, and Washington Post.

Receiving Wide Coverage ...Cordray's First Salvo: The day after his recess appointment as director of the Consumer Financial Protection Bureau, Richard Cordray vowed that the young agency "will make clear that there are real consequences to breaking the law." The bureau has several investigations underway, some inherited from other agencies, others that it initiated, he said. Some probes could end up being settled but others "may require enforcement actions." Cordray also dismissed doubts (expressed mostly by the administration's opponents) about the legality of the recess appointment and about the CFPB's right to police nonbanks without a Senate-confirmed director: "It's a valid appointment. I'm now the director of the bureau. … We now have our full authority to move forward." Indeed, the bureau has already begun supervising payday lenders, check cashers, and the like, he revealed. Republicans remained livid that President Obama bypassed the Senate, and business interests expressed fear of that old bogeyman: uncertainty. "We won't be sure what the rules are," the ABA's Wayne Abernathy told the Journal. "We'll know what Cordray wants the rules to be, but we won't know what they really are." Wall Street Journal, New York Times, Washington Post

Receiving Wide Coverage ...Fight at Recess! President Obama defied Congressional opponents and made good on an earlier threat to make a recess appointment of Richard Cordray as the first director of the Consumer Financial Protection Bureau. His legal grounds for doing so are a matter of dispute (hinging, apparently, on whether Congress is truly “in recess”) and a court challenge seems likely. But media outlets called Obama’s move politically savvy, following Senate Republicans’ filibustering of Cordray’s nomination. “In one fell swoop, Obama managed to tap into voter frustration with Washington, distance himself from an unpopular Congress, buck up the liberal base and reassert himself as a latter-day Teddy Roosevelt, fighting for a ‘fair deal’ for the middle class,” Politico wrote. The headline of the Journal’s editorial pretty much summed up the writers’ take: “Contempt for Congress.” An analytical story in the Times led with the upshot for nonbank financial firms such as payday lenders: they’re fair game for the bureau now that it has a permanent head. But wait … some on the right are arguing that the CFPB’s authority over the shadow lenders doesn’t actually kick in unless the director is confirmed by the Senate. Oboy. It seems like there will be peace in the Middle East before this fight is settled. Additional coverage: Wall Street Journal, New York Times, Washington Post.

Receiving Wide Coverage ...The TBTF Quarantine: The Journal leads its story about that package of Dodd-Frank rules proposed by the Fed yesterday with one that came as a surprise to the industry: limits on the top six banks’ exposures to each other. Goldman Sachs’s net credit exposure to JPMorgan, for example, would be capped at 10% of the former’s regulatory capital, and vice versa. The story quotes an analyst as suggesting this may be “a back-door way” to shrink the banks’ capital-markets businesses. A shadow Volcker rule, if you will. (Or a stealth Glass-Steagall, perhaps. Maybe a veiled Vickers. How about a Trojan Tobin?) Restricting interbank credit among those with $500 billion or more in assets could, of course, hurt market liquidity, but this is a price the Fed’s willing to pay to reduce interconnectedness among the megabanks, and thus keep any one of them from threatening to “punch a hole in the fabric of the universe” (in Matt Taibbi’s memorable phrase) a la AIG. The FT’s story, however, notes two surprise concessions to the banking industry from the Fed, both in the area of liquidity. First, the Fed said it would rely on banks’ internal modeling, rather than its own, to gauge the banks’ liquidity needs. And the central bank proposed to allow Fannie Mae and Freddie Mac mortgage-backed bonds to count as “highly liquid securities,” alongside cash and Treasuries. This was notable, the FT says, since “global regulators sought to limit the amount of Fannie and Freddie securities that could be used to meet liquidity rules.” (Those bureaucrats must be anti-American! And anti-homeownership to boot. Figures, these fancy Europeans, renting cold water flats and living their entire lives inside the same square mile, running down the block once in a while for a bottle of wine and a baguette and parking their puny SmartCars perpendicular to the curb...) Where were we? Oh, right … As expected, the Fed’s 173-page proposal includes a capital surcharge for the top eight banks, consistent with Basel III. There’s a lot more in here, including ongoing stress tests and remediation requirements for banks that show lapses. Wall Street Journal, Financial Times, New York Times, Washington Post

Receiving Wide Coverage ...Less than a Lincoln: Bank of America’s share price fell below $5, as part of a broader selloff in financial stocks sparked by a warning from the European Central Bank about dangers for the Eurozone economy. The Charlotte, N.C., megabank’s shares closed at $4.99, the lowest level since March 2009. Mortgage-related litigation risk remains a dark cloud over the company, and $5 was a “bad psychological barrier” to break, an analyst tells the FT. Another analyst is paraphrased as saying that “some funds could become forced sellers of BofA shares due to pressure from clients and fund consultants, leading to further declines.” In a Bloomberg story picked up by the Washington Post, a money manager explains that the threshold is more than psychological: “We have screens that usually prohibit us from buying stocks under $5. If we own it, we would not kick it out automatically, but generally we tend to avoid stocks like that.” The trading-focused blog iBankCoin suggests those holding the stock may have an incentive to buy: “There have been reports that the $5 level in Bank of America’s stock must be defended by institutions in order for them to continue to hold the stock, else face forced selling.” And a finance professor quoted in the Bloomberg/Post story appears to damn Bank of America with faint praise. After saying the “real danger” for a public company is falling below $1 a share, which typically means delisting, he adds that in such cases “it is usually some fundamental problem with the business model and it may go to zero, but I think Bank of America is very different from your typical small failing company.” Quips the blog DealBreaker: “That’s Your Big Pump Up Speech?” Financial Times, iBankCoin, Washington Post/Bloomberg, DealBreaker

Receiving Wide Coverage ...Capital Punishment: The Fed is expected to support the Basel Committee's plan to impose a capital surcharge on the biggest, most globally interconnected financial institutions, the Journal reports. A draft proposal could come before Christmas; JPMorgan CEO Jamie Dimon, whose bank would have to hold another 2.5% of extra capital as a percentage of risk-weighted assets (on top of the 7% required of all institutions) would probably prefer a stocking full of coal. Big banks have lobbied hard against the "G-SIFI surcharge," protesting it would dampen lending and hurt the economy. In another blow to the industry on this front, the European Union said Britain is free under EU law to impose extra capital requirements on her banks above and beyond what Basel calls for, the FT says. The U.K. government plans Monday to adopt that and most of the other proposals by Sir John Vickers' commission, including the "ringfencing" of retail banking from trading. Finally, Bank of America completed its previously announced debt exchange offer, generating $3.9 billion of capital that will count toward Basel III guidelines. The opportunity for banks to raise capital this way — by extinguishing debt at a discount to par — is an advantageous byproduct of bond investors' loss of confidence in the banks' credit. In an environment like this, you have to count your blessings wherever they come from.