BankThink

Alternative capital instruments would allow mutually held banks to become more vital providers of financial services.

Chairman Bernanke and Secretary Paulson wrongly said they lacked the legal power to save Lehman. Then, they almost immediately turned around and saved other major investment banks — by waving a magic wand and making them bank holding companies, eligible for federal support. But Shakespeare's line applies: "If it were done…, then 'twere well it were done quickly."

Receiving Wide Coverage ...Down Jones: Following news that the Chinese economy might be cooling off, the "Dow Jones Industrial Average fell 3.5 percent, capping its biggest two-day drop since the height of the financial crisis in 2008," the Post reported. But it wasn't just stocks markets that were showing the stress: commodities "plummeted after months of holding steady." The Journal concurred, noting a sell-off in "everything" in a flight to the safety of U.S. Treasuries, spooked by "fears of another recession and a Greek debt default." G-20 officials were busy trying to assure investors that European banks are healthy enough to endure another crisis.

When pressed by extreme stress, do you, as a leader, stay and fight or fly the coop?

Dodd-Frank will prove hugely expensive and still fail in its main mission of preventing the next financial crisis. Blame Washington and its flawed assumption that it can micro-manage the banking system.

Researchers claim to have created a hacking tool that can exploit the security used by PayPal and other companies.

Receiving Wide Coverage ...Twisting and Shouting: As expected, the Federal Reserve announced it would shift the composition of its bond portfolio by selling about $400 billion of short-term Treasuries and using the proceeds to buy longer-term ones, in an effort to drive down long-term yields and thereby mortgage rates. Unexpectedly, the Fed also said it would take an additional step to hold rates down: reinvesting any principal repayments from its portfolio of agency debt and mortgage-backed securities into new MBS. So instead of just Operation Twist, "we got a double twist," economist Diane Swonk told the Financial Times. According to the paper's lead story, "such a big move suggests that Ben Bernanke, Fed chairman, is alarmed by the slowdown, and has decided to override opposition on the rate-setting Federal Open Market Committee and provide as much stimulus as easily practical." On the FT's "Money Supply" blog, Robin Harding expresses disappointment that despite speculation, the Fed did not pursue a strategy that would have directly hit banks in the pocketbook: lowering the interest the central bank pays them for excess reserves. "I'm always surprised that there aren't more complaints about the $4bn-a-year subsidy to banks that it represents," Harding writes. In a separate FT article, he says that overall, the Twist was "the most bold and uncompromising action possible," and notes that the Fed acted in defiance of internal dissenters (the vote on the Open Market Committee was 7-3 in favor of twisting) and the rather loud Republicans in Congress and on the campaign trail. The Times' "Economix" blog considers the possibility that the political pressure may have only encouraged the Fed to make its move. The piece quotes Bruce Bartlett, a former Treasury official in the first Bush administration: "The Fed jealously guards its independence and cannot allow itself to be seen as caving to administration pressure. Therefore, administration pressure to ease would force the Fed to remain tight lest it appear that it was caving to pressure. For this reason, administrations quickly learned that the best way to influence the Fed is through back channels." We're going to take a brief pause to remind readers the two reasons this monetary maneuver is called "Operation Twist": 1) As this infographic the Journal published a few weeks ago so beautifully illustrates, the Fed is redistributing its investments along the yield curve like the air in a twisted balloon and 2) it was tried once before, with mixed results, in the 1960s, when young people were dancing like this. Got that? Good. Now where were we? Oh yes, yet another take from the FT: Gavyn Davies notes that while the Fed twisted, it didn't do a whole lot of shouting - that is, communicating to the markets that it expects to keep short-term rates (you know, the type the Fed used to muck with exclusively) as low as they are for longer than expected. The central bank simply reiterated what it said after the last policy meeting about keeping these rates near zero for two years. "The next debate at the Fed will probably be whether to do more on operation 'shout,'" Davies predicts. Stocks sold off after the Fed announcement, which the Journal's editorial writers attributed to the central bank's statement that it now sees "significant downside risks" to the economy, and, the editorial adds, "perhaps also as reality dawned that the reprise of 1961's Operation Twist is more gesture than salvation." The overall thrust of the editorial is that the answer lies in changing fiscal and regulatory policies, not monetary easing. "Heard on the Street" in the Journal says the news hurt financial stocks in particular because lower 10-year yields mean a flatter yield curve and hence tighter net interest margins, and because the committee's gloomy economic outlook bodes poorly for loan growth. The main Fed story in the Journal notes that as the central bank has been trying to lower rates by soaking up the supply of bonds, the Treasury Department has been diluting the impact of those purchases by, well, issuing more bonds. Yet another Journal piece says that the mortgage-backed securities market had been worried in recent weeks about a glut of issuance as many homeowners were refinancing at already-low rates while the Fed's MBS holdings paid off. The plan to redeploy returned principal back into this sector was thus reassuring.

Traditionally demand deposit account origination has followed a fairly standard process. Enter the application, check OFAC and "closed-for-cause" databases, open the account. Lather, rinse, repeat. However, with banks looking to shore up deposit account profitability in the wake of the Durbin Amendment by cutting costs and reducing fraud losses, the standard origination process just won’t do it anymore.

At year end 2010 Bank of America had $2.3 trillion in assets, $230 billion of capital, 57 million customers, ranked among the top firms in nearly every major growth market in the U.S., employed 288,000 people, made $150 billion of community development loans a year, donated $200 million to charity annually, and was one of the largest home lenders in the nation.

Receiving Wide Coverage ...The Capital One Hearings: The Fed held the first in a series of public hearings on Capital One's application to buy ING Direct. The Journal leads with the fact that along with the usual CRA activist types, community bankers (represented by the ICBA) voiced loud objections. Not only to this deal, but to any that would result in an institution with $100 billion or more in assets. "It is unlikely regulators will embrace the moratorium idea outright," the paper says, "but the criticism highlights the divide between big and small banks over the appropriate response to the 2008 financial crisis. Community banks, which fought to differentiate themselves from unpopular Wall Street banks in the crisis' aftermath, continue to wield clout on Capitol Hill and could increase pressure on regulators to slow big bank mergers." Capital One, meanwhile, rebutted the claim that by creating the fifth-largest bank the deal would result in another too-big-to-fail entity. The lender's general counsel, John G. Finneran, Jr., asserted that if anything, the combination would have the opposite effect. Unfortunately the press stories we see merely report that assertion without explaining the argument behind it; for that, we had to go to Finneran's testimony. His main points are that both Capital One and ING Direct do traditional banking (CDs, but no CDOs or CDS); neither dominates its markets or provides a service critical for the financial system to function (your frequent flier card doesn't count); and placing a foreign-owned entity under domestic ownership means less interconnectedness. Now you can judge for yourself. Wall Street Journal, New York Times