Katherine Kane

Breaking News This Morning ...Hudson City Warning: The New Jersey bank expects to post a fourth-quarter loss after extinguishing costly debt.

Receiving Wide Coverage ...Flight from Europe, to Safety: The stats in this morning's papers speak volumes: Three-month LIBOR hit its highest level since July 2009. (And if history is any guide, we gather some banks' actual borrowing costs could be worse than the index suggests.) The exchange rate for the euro fell below $1.30 for the first time since January. And cash on deposit at foreign-owned banks in the U.S. has fallen for six straight months, the first time this has happened in nearly a decade. The upshot of all this: confidence in Europe and in the global banking sector remains fragile, last week's accord among the continent's leaders notwithstanding.

Receiving Wide Coverage ...Fed Leaves Rates Unchanged: Recent data "suggests that the economy has been expanding moderately," the central bank said after the last policy meeting of the year, though it left its policy options open for 2012. A return to purchases of mortgage-backed securities remains a possibility, but for now the Fed will simply continue to reinvest principal repayments in new MBS. Wall Street Journal, Financial Times, New York Times, Washington Post

Receiving Wide Coverage ...Fortress Fed: Ahead of the central bank's policy meeting today, the Journal has a lengthy feature taking stock of Ben Bernanke's six years as chairman. Among his current goals, the story says, Bernanke "wants to transform the Fed by making its murky decision making more transparent." He's already taken steps in this direction by initiating quarterly press conferences; potential strategies include disclosing the Fed's forecasts for short-term rates and adopting a formal inflation target. (There's also a sidebar with details on Bernanke's home mortgage.) Yet the Fed remains secretive in other ways. On the FT's "Money Supply" blog, Robin Harding writes that he made a Freedom of Information Act request for the Federal Reserve Board's reviews and examinations of the 12 regional Fed banks since 2000. The board rejected his request, arguing that the regional banks are "financial institutions" and thus information about them is confidential and exempt from FOIA. "This is a ludicrous catch-22 because the regional Fed banks are themselves financial supervisors of hundreds and hundreds of other banks," Harding writes. "Their performance in that role is a matter of public interest." Well said, and we might add that while confidentiality on bank-supervision matters may be necessary to avoid panics, it's hard to imagine a run on the New York Fed. We hope Harding appeals. On the other hand, Reuters' blogger Felix Salmon points out that other countries' central banks are even more opaque than ours. He cites a Bloomberg News story on the Fed's currency swap program, in which it has loaned dollars to foreign central banks to relend to local commercial banks. The Fed disclosed all the transactions with its counterparts, but even it may not know the identities of the ultimate borrowers; a Fed spokeswoman tells Bloomberg there's "no formal reporting channel" for it to get this information. And of course the foreign central banks don't publish it. At least the Fed is now bound by law - Dodd-Frank, to be exact - to identify borrowers from its discount window (after a lag of two years, to avoid stigmatizing them). God bless America, and good luck to Bernanke and Harding alike in their efforts to open more curtains at the Fed and let in that glorious sunlight.

Receiving Wide Coverage ...ClusterSwap: European banks are even more exposed to the risk of government defaults than you think. According to a story in today's Journal, regulatory data released last week shows these institutions have been big writers of credit default swaps on government bonds of the continent's dodgier countries. And it's not just investment-banking-heavy multinationals like Barclays and Deutsche Bank that have been selling this insurance; smaller European institutions, like Landesbank Baden-Wurttemberg in Germany, have also been taking sovereign credit risk this way. Granted, CDS sellers typically hedge this risk by buying CDS on the same bonds. But as we've learned from the recent discussion of "gross" versus "net" exposure, those hedges are only as good as the counterparties behind them. And by and large the CDS-seller European banks appear to have bought their offsetting hedges from, well, other European banks. It is somewhat reassuring, though, to read this bit in the Journal story: "Some big banks … say they buy only from banks outside the countries in which they are seeking protection"; for example, "Deutsche Bank wouldn't buy Italian swaps from an Italian bank." No bank would do anything that foolish … right? Also in the Journal, the "Heard on the Street" column notes that the cost of a swap insuring against a default by Bank of America is higher now than it was in the dark days of early 2009. Moreover, there isn't as much difference between the cost of insuring B of A's senior and subordinated debt as there was then. These developments, the column says, suggest the market now believes two things: that the U.S. of A is less likely to stand behind B of A should the bank falter; and that regulators could well exercise their new resolution powers under the Dodd-Frank Act to wind down a giant institution, a scenario in which senior bondholders stand to lose money. Bottom line: "Investors aren't so sure 'too-big-to-fail' banks will always deserve that moniker." Lastly on the topic of CDS: it ain't exactly the smoothest five pages of text we ever read, but a new report by Nicholas Vause, a senior economist at the Bank of International Settlements, is worth the time. Data from June 2011, Vause writes, suggests that derivatives dealers have been transferring "multi-name credit risk" (the CDS market's equivalent of index funds, roughly speaking) to shadow banks (a broad category that includes insurance companies, pension funds and money market mutual funds, all of which lack the same public backstops and supervision of traditional banks). "These types of CDS can be difficult to value and have experienced significant price jumps in the past" (never a good thing if you've been a seller). Morning Scan translation: there may be more AIG-style blow-ups waiting to happen out there. Underscoring the aforementioned concerns about counterparty risk, Vause also writes that banks and security dealers have been net sellers of credit protection on financial-sector debt. "The risk of simultaneous default of protection sellers and reference entities is often higher when these institutions come from a common sector, rather than different sectors. As the financial sector is broad, however, this risk could have been mitigated by careful pairing of reference entities with counterparties." Morning Scan translation: let's just hope no one bought insurance against default by an Italian bank from another Italian bank. Or the same one.

Receiving Wide Coverage ...Search Me: "I simply do not know where the money is," Jon Corzine told lawmakers of that missing $1.2 billion during a tense hearing on the collapse of MF Global. The man who once ran Goldman Sachs and the state of New Jersey "appeared as befuddled by what had happened to his firm as the regulators who have been attempting to resolve the matter for more than a month," the Journal says. (In a video embedded in the Journal's main story, the commentators make light of the placard in front of the former Senator's microphone, which read "the honorable Jon Corzine.") Corzine said he was "stunned" when he learned of the missing customer funds. At the same time, he defended his stewardship of MF Global, claiming that the firm failed not because he had it wager $6 billion on European debt but because "the marketplace lost confidence in the firm." (Would it be inappropriate if we reminded readers that nearly 10 years ago, another former CEO of a failed company - Jeff Skilling of Enron - told lawmakers his firm was victim to "a classic run on the bank"?) Intent was a major theme in Corzine's testimony - "I never intended to break any rules" and "never intended to authorize anyone" to touch customers' money. (And if he did "it was a misunderstanding.") Another refrain was the possibility that others might have fumbled: "Someone could misinterpret 'we've got to fix this,' which I said"; he didn't know "whether banks and counterparties have held on to funds that should rightfully have been returned to MF Global." Corzine seemed acutely aware he was doing a lot of blaming of other people. After reassuring a lawmaker he hasn't talked much with CFTC chairman Gary Gensler since they worked together at Goldman, Corzine said, "the buck stops here" … before adding "on that score." Meanwhile the Journal reports that George Soros's family fund bought $2 billion of European debt that belonged to MF Global, for below-market prices. The palindrome probably profited on this purchase, since these bonds have gained in value in the weeks since. In the bigger picture, the Journal says "the Soros move … is something of a wager that a wider collapse of euro-zone finances will be averted" by a renowned investor. Which brings us to …

Receiving Wide Coverage ...Three-Card Monte: European nations are preparing for life after the European Union and the return to individual currencies, the Wall Street Journal reports, and those outside the EU are looking for defensive measures in case of an unraveling of the coalition. Meanwhile, on the sunny side of the Street, Treasury Secretary Timothy Geithner continued his confidence-building tour of Europe, and Germany sold $5.5 billion, of five-year securities. The Times said Geithner noted the "progress" the French and Germans were making in developing ideas for strengthening Europe. The plan calls for further central supervision of each nation's budget. But dark clouds loom: the Washington Post quoted a senior German official as saying he was not convinced that other nations would back the plan and that he was "pessimistic" there would be a deal by the end of the bellwether summit on Friday. If the euro zone collapses, it would be followed by Europe's banking system, triggering "global economic misery," an article in the Journal based on a JPMorgan Chase report noted. JPMorgan advises hedging exposure to the euro. Another Journal story looked at Poland, which still uses the zloty as its currency and has no troubles. And as far as the banks go, it's all just one more work-around: the Times reports at length on how European banks are playing Three-Card Monte with their bond holdings in a "complex maneuver" to bolster capital levels -- without actually raising additional money. The euphemism for this stunt is 'liability management.' Nice optics on that one, fellas. At least it's legal. It is legal, right? (Notice that in this entire 200-plus word discussion of Europe we haven't once mentioned Britain. There's a reason for that, as the Times suggests.)

Receiving Wide Coverage ...Espresso Love: Mario Draghi could run for President -- except he already has that title at the European Central Bank, where he's taking Frankfurt by storm. The New York Times called the first days of his term "audacious," noting he's presided over an interest-rate cut, signaled a greater willingness to flex the bank's muscles in service of a crisis solution, and turned up the burner under the politicians. Speaking of politicians, that situation continues to percolate, with meetings taking place before a two-day EU summit in Brussels and a meeting of the European Central Bank Thursday. As a European summit to figure out how to solve the European Union crisis nears, President Obama sent Treasury Secretary Tim Geithner to pressure decision-makers, the Wall Street Journal reported, even as markets shook off S&P's warnings on ratings for nations in the EU, as did German Chancellor Angela Merkel. Other officials questioned the timing of S&P's move. Another Journal story looks at various options the countries can take and what they entail. The "Heard on the Street" column suggests S&P had the right idea; treat all the countries the same. And Spain's prime minister-elect Mariano Rajoy is looking for a quick fix to his nation's bank's real-estate loan woes, which may be costly.

Receiving Wide Coverage ...E.U. or P.U.?: Standard & Poor's put Germany, France and 13 other euro-zone nations on review for possible downgrade as French President Nicolas Sarkozy and German Chancellor Angela Merkel set a week-end deadline for the 27 European Union governments to accept mandatory limits on budget deficits. The Post quotes Michael Hood, a market strategist at J.P. Morgan Asset Management, as warning of an EU breakup: "The risk is likely paralysis. You won't even know what people owe you." New York Times, Wall Street Journal, Washington Post

Receiving Wide Coverage ...Diary of Dodd-Frank: Wall Street didn't have a lot of luck in stopping Capitol Hill from imposing restrictions on its activity in the wake of the financial crisis. Now it's stepping up efforts to roll back new laws it doesn't like by challenging them in the court. The latest example came Friday when two industry trade groups-the Securities Industry and Financial Markets Association and the International Swaps and Derivatives Association-sued to block limits on speculative trading. Their suit challenges the Commodity Futures Trading Commission's so-called position limits rule. The New York Times reports that the CFTC adopted the rule in October to cap the number of contracts a trader can hold on 28 commodities and that it is a key part of the Obama administration's efforts to enforce the Dodd-Frank Financial Reform Act. Specifically, the industry lobbies accuse the CFTC in their lawsuit of failing to evaluate the rule's economic impact on Wall Street. (They did not, notably, call for any study of the economic impact on the world economy of Wall Street's derivatives-based implosion.) "The evidence is overwhelming that position limits are, at best, unnecessary and may, at worst, negatively impact commodity markets and users," ISDA chief executive Conrad Voldstad said in a statement. Countered Sen. Carl Levin, liberal Democrat of Michigan, in a retort that summed up what has been obvious for months to even the most casual observers: "The financial industry tried to water down Dodd-Frank before it was enacted, has been trying to chip away at it since it became law, and is continuing that effort." For those involved of all political stripes, the lawsuit's intent is clear-undermine Dodd-Frank's so-called Volcker Rule, which itself aims to curtail Wall Street's speculative activity by restricting proprietary trading and private equity investments. The Wall Street Journal notes that Gibson, Dunn & Crutcher, the firm representing the industry lobbies, successfully represented the U.S. Chamber of Commerce and the Business Roundtable in suing the Securities and Exchange Commission over a new rule that would have allowed investors to more easily oust corporate directors. The so-called proxy access rule was overturned in court, and the SEC decided not to appeal the ruling. The decision incited fear among regulators, and even caused several agencies to re-examine their Dodd-Frank rules, according to the Times. As an indication of how rabidly the Street opposes bids to limit its trading activity, the Wall Street Journal reported in October that industry attorneys were stuck pulling all-nighters following the release by American Banker of a draft proposal of the Volcker Rule. The CFTC's position limit proposal alone has elicited 15,000 comment letters. No letters have been received so far expressing sympathy for sleep-deprived Wall Street lawyers. New York Times, Wall Street Journal

Receiving Wide Coverage ...Super Mario to the Rescue: Could Europe at last be on the verge of a final, conclusive, ultimate fix to its slow-motion train wreck of a financial crisis? Perhaps. Light has begun to emerge at the end of the Euro financial tunnel in the guise of comments from European Central Bank President Mario Draghi indicating a willingness to ease his opposition to a central bank bailout, a la the Fed's — if, that is, European Union states commit to a closer fiscal union with the will and authority to prevent member states from engaging in more rampant deficit spending. What seems to make a deal more workable than in the past is the face-saving nature of what's emerging. It would enable fiscal hawks like German Chancellor Angela Merkel to claim they'd administered a dose of bitter budget-balancing medicine to their profligate partners while at the same time, in the vernacular of the day, bring the "big bazookas" of the central bank and Germany to bear on supporting the troubled continent. Draghi hasn't committed outright to opening the spigots, but both the New York Times and the Wall Street Journal used the term "quid pro quo" to characterize his comments during a European Parliament speech. There's lots to like here for policymakers on both sides of the pond, but Europe still isn't China — meaning what makes eminent sense to cloistered elites still has to pass muster with pensioners in Athens and the unemployed in Madrid. Throwing a bucket of Teutonic cold water on the notion that a quick solution is at hand, Germany's Merkel was quoted in a speech saying "Marathon runners often say that a marathon gets especially tough and strenuous after about 35 kilometers (22 miles)… But they also say you can last the whole course if you're aware of the magnitude of the task from the start." Wall Street Journal, New York Times

Receiving Wide Coverage ...Bad News Banks: About one of every three banks cut their work force last quarter, leading to the smallest industry growth in a year and a half. Meanwhile, Standard & Poor's Ratings Services downgraded 37 banks worldwide, including JPMorgan Chase, Bank of America, Citigroup and Wells Fargo here at home. The downgrades were the result of revised rating criteria. The Times noted that of the eight largest U.S. banks under review by S&P, only State Street escaped a downgrade.

"It would be hard to imagine a more thorough rebuke of how America's Securities and Exchange Commission … tries to discipline financial firms," The Economist’s Schumpeter blog says of New York District Judge Jed Rakoff's rejection of Citigroup's settlement with the SEC.

Receiving Wide Coverage ...‘Raked’ over the Coals: “The company neither admitted nor denied the SEC’s charges.” That stock disclaimer is nearly as common in the financial pages as “terms of the deal are fluid and the talks could still fall apart.” But a ruling Monday by U.S. District Court Judge Jed S. Rakoff could discourage boilerplate settlements in which the defendants pay a fine without addressing the substance of the case. Rakoff rejected the SEC’s proposed $285 million settlement with Citigroup over allegations the bank misled investors in the sale of a CDO that went kablooie. While he dismissed the settlement amount as “pocket change,” the judge’s main beef was what he described as “the SEC’s long-standing policy – hallowed by history, but not by reason – of allowing defendants to enter into consent judgments without admitting or denying the underlying allegations.” Such deals, he wrote, are “frequently viewed, particularly in the business community, as a cost of doing business imposed by having to maintain a working relationship with a regulatory agency, rather than as any indication of where the real truth lies.” The case may now head to trial; the parties could appeal, but doing so would risk “a ruling that would enshrine Judge Rakoff's tough stance for use by other courts,” the Journal says. The paper’s “Heard on the Street” column approves of the judge’s refusal to rubber-stamp seemingly weak settlements. To serve the interests of investors and the public, “some cases need to go to trial for the facts to be established, whether that means a win for the SEC or not,” the column says. But an analysis in the Times’ “DealBook” identifies some practical issues with this approach: “Requiring some acknowledgment of wrongdoing by defendants is likely to result in fewer settlements and more trials, which are costly for an agency already laboring under budgetary constraints.” A comment posted by a Times reader goes further: “The flaw in the judge’s reasoning is that he misunderstands the public interest as consisting solely of the resolution of this one case, rather than in the SEC's overall effectiveness in enforcing the law. … The time it will now spend either appealing this order and/or trying a case that could have been resolved by consent is time that [it] will not spend looking for and prosecuting other violations of the law.” Aside from saving face, a big reason companies like to settle without admitting or denying they broke the law is that admitting violations would prevent them from denying them in subsequent private litigation, the “DealBook” article notes. Wall Street Journal, New York Times, Financial Times, Washington Post

Receiving Wide Coverage ...Something to Stress About: Unlike the last round of stress tests, which left it up to banks to release the results, the Federal Reserve plans to open the kimono on the current assessments of banks’ ability to withstand a severe downturn. The six biggest banks will have to project how they’d fare in an imaginary scenario where the European crisis metastasizes into a Lehman-like market catastrophe. And all of the top 19 banks will have to model their performance in a world where unemployment soars past 13% (well above the hypothetical-but-not-so-far-from-reality joblessness rates in the last two sets of stress tests). The assessments are due in January; after reviewing this information the Fed will make it all public in March. “The tough guidelines are a sign the Fed hopes to convince investors that its scrutiny will be tougher than recent tests in Europe,” the main story in the Journal says, though the “Heard on the Street” column laments that it took the panic across the pond for the Fed to see the merits of transparency. The FT, on the other hand, describes disclosure as a double-edged sword: “The pledge of more published data has the potential to reassure or frighten investors.” In a video on the British paper’s website, its U.S. banking editor, Tom Braithwaite, notes that the 2009 stress tests, which were considerably more transparent than last year’s, were “a good confidence boost to the market.” But as the details of the latest tests were announced after the market close Tuesday, the futures market sold off on fears that banks would be forced to do more dilutive equity raises. “Never mind not increas[ing] their payout to investors,” Braithwaite says, “could we be back to a situation where banks were raising capital?” Like the doctor says, you’ll have to wait until the results get back from the lab, please schedule a follow-up with our receptionist. Wall Street Journal, Financial Times, New York Times

Receiving Wide Coverage ...More Bad News for B of A: "Bank of America's board has been told that the company could face a public enforcement action if regulators aren't satisfied with steps taken to strengthen the bank," the Journal reports, citing anonymous sources. Meanwhile, the FT notes that a federal judge's ruling will allow the attorneys general of New York and Delaware to intervene in Bank of America's controversial $8.5 billion mortgage bond settlement. "The action concerns far more than the financial interests of a few sophisticated investors" that agreed to the deal, the judge ruled.

Receiving Wide Coverage ...Occupying the Streets: Thousands of Occupy Wall Street protestors took to the streets of Manhattan, attempting to delay the opening of the New York Stock Exchange and making their presence felt among commuters on the subway trains and Brooklyn Bridge. The "National Day of Action" marked the movement's two-month anniversary and came several days after the demonstrators were evicted from Zuccotti Park. The atmosphere was tense and sometimes violent as some demonstrators clashed with police. A handful of people were injured, and several hundred were arrested. There were similar but smaller marches in other cities across the country, with similar dust-ups. New York Times, New York Post, Daily News (New York), Village Voice, Wall Street Journal, Financial Times

Receiving Wide Coverage ...The Fitch-Slap: "Unless the Eurozone debt crisis is resolved in a timely and orderly manner, the broad credit outlook for the U.S. banking industry could worsen." This warning Wednesday from the credit rating agency Fitch sparked a sharp sell-off in financial stocks late in the trading session. Fitch left its ratings for banks unchanged but said the "risks of a negative shock are rising." Wall Street Journal, Business Insider, Bloomberg

Risk management expert Clifford Rossi looks at two recently released documents on the FHA, which he says together "bear ominous warnings about a portfolio in excess of $1 trillion."

Receiving Wide Coverage ...Occupying Hearts and Minds: The papers took a stab at weighing the future of the Occupy Wall Street protests in the daylight of a "cleared and power washed" Zuccotti Park. The Times said "questions endure about whether…the movement might lose momentum or drift into irrelevancy" without its central piece of street theater. But some organizers "acknowledged that the crackdowns by the authorities in New York and other cities might ultimately benefit the movement, which may have become too fixated on retaining the territorial footholds." Wall Street Journal, New York Times