BankThink

In Barbara Rehm's column "It's Time for Money Funds to Fess Up About Fluctuating Values," she characterizes the $1 net asset value as "a fiction," which is defined at something feigned, invented or imagined.

The appeals court ruling is likely to perpetuate the perverse situation in which banks view SEC legal settlements as a cost of doing business rather than a deterrent for fraud.

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.

Some banks must know where the missing customer funds are. Otherwise why would they be confident enough to bid as much as 90% of face value for customer claims?

For years, Litton Loan Servicing was open to making a deal with delinquent borrowers. Then Goldman took over.

For young businesses to succeed, they first need business management tools, networks and coaching. Only after they have these things are they ready to take out loans.

Last year, for the first time in anyone's recollection, there were no new bank charters approved, with the exception of three specifically blessed to acquire failed banks.

Congress should repeal Sarbanes-Oxley to increase the flow of equity capital to micro- and small-cap public companies. Lawmakers also must increase the allotment for the SBA 7(a) program and guarantee it exists for the next three years.

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."

The Fed's assessment of the 19 bank-holding companies' vulnerability to an economic stress event underscores one of the major challenges in conducting "what-if" types of scenario analysis; namely that it seems to be fighting the last war.