Receiving Wide Coverage ...
Bernanke in No-Man's Land: When the history of the financial crisis is written, Federal Reserve Chairman Ben Bernanke will no doubt take flak for many things but timidity about stimulating the economy is unlikely to be among them. A half decade after the crisis, and with the labor market on the mend, the Fed is still buying $85 billion of mortgage-backed securities and Treasuries each month. It's financing the expansion of its portfolio by creating bank reserves. That means banks will be at ground zero regardless of whether the Fed's eventual unwind of its record-setting $3 trillion balance sheet goes smoothly or sparks the next crisis. Fretting over how it will play out has gained renewed urgency in the past week amid new signs of economic strength and the Fed chairman's appearance before the House Financial Services Committee. Even Bernanke admitted he's in uncharted territory, telling lawmakers that no country has ever had a comparable increase in the size of its portfolio and unwound it "in the precisely analogous way." (Ah, to live in a world of Fed-speak!) Bernanke & Co. are now reconsidering bond sales in response to criticism that their third round of purchases is exacerbating the potential for the central bank to, "in a robotic fashion, dump assets" on the market, causing interest rates to climb rapidly, Ethan Harris, co-head of global economics research at Bank of America (BAC) in New York, told Bloomberg. There is growing chatter that the Fed might try to restrain inflation through the rates it pays on bank deposits or by hanging on to its bond holdings until maturity—prospects Bernanke discussed with a scholarly sense of confidence that left some observers unconvinced the Fed knows what it's doing. "Their [Federal Reserve officials'] models are one thing, but the real world is another," says Robert Eisenbeis, an economist at Cumberland Advisors and former research director at the Atlanta Fed. (Eisenbeis and others may be getting the heebie-jeebies recalling the confidence with which Bernanke assured the world shortly before the financial crisis that bad subprime mortgages posed no threat to the broader economy.) Money managers who play with their own and clients' money are voting with their wallets on the prospect that when all talk is over (or, more likely, as it blathers on) interest rates will start rising. "Figuring that the Federal Reserve won't be able to keep a lid on interest rates forever, large money managers such as BlackRock (BLK), TCW Group Inc. and Pacific Investment Management Co. are getting ready for the day when rates take their first turn higher," reports the Wall Street Journal. "It isn't coming anytime soon, these investors say. But when it does, they worry, the ascent will be swift and steep." The moves include: buying floating rate debt, interest-rate swaps and inflation-protected bonds that will increase in value; and shorting U.S. Treasuries. "We don't subscribe to the view that once the fire starts, we'll be able to outrun everybody through the door," Stephen Kane, managing director for U.S. fixed income at TCW in Los Angeles told the Journal. "Rates could be up 50 basis points before your traders can get all the sell orders through." Bloomberg, Wall Street Journal
Just Plain Too Big: One of the greatest absurdities of the post-crisis world is that, in an era when policymakers jawbone about eliminating "too big to fail" banks, those at the top of the financial food chain are bigger (70% of all banking assets are concentrated in a mere dozen institutions) and more unassailable than ever. That's the conclusion of Richard Fisher and Harvey Rosenblum, the president/CEO and executive vice president/director of research, respectively, at the Federal Reserve Bank of Dallas. Writing in this morning's Wall Street Journal, they declare the Dodd-Frank Act a "well-intentioned response" to the problem of ending TBTF that "rings hollow." The immunity of big banks is also the theme of Gretchen Morgenson's weekend New York Times column. In it, she makes the case that Securities and Exchange Commission chairman nominee Mary Jo White found it easier during her years as a federal prosecutor to bring mobsters than big U.S. banks to justice. The Dallas Fed duo's strategy for ending the cycle of welfare bankers includes: limiting their access to deposit insurance at the Federal Reserve's discount window; requiring borrowers to acknowledge in writing that there are never, ever any government guarantees; and restructuring the largest financial holding companies so every one of their corporate entities is subject to a speedy bankruptcy process. Journal Heard on the Street columnist David Reilly offers one other TBTF antidote: As banks grow in size, require them to and hold an increasing percentage of costly long-term debt as a percentage of total liabilities, countering the subsidy of their implied TBTF government guarantee. Wall Street Journal, New York Times
Stuff It: When it comes to the need to hide assets, intimacy is no obstacle to some financiers. Bradley Birkenfeld, the UBS money launderer turned tax whistleblower, was known to ship diamonds out of the U.S. in toothpaste tubes. Now comes the apprehension of Florian Homm, a flamboyant former hedge fund manager who spent the last five years on the lam after fleeing the Spanish island of Mallorca with $500,000 hidden in his underwear and luggage. Homm's days as a free man came to an end Friday when Italian police arrested the 53 year-old Harvard graduate at Florence's Uffizi Gallery. Homm, who was wanted for "portfolio pumping" of penny stocks at his firm Absolute Capital, faces U.S. charges of conspiracy to commit wire fraud, wire fraud, conspiracy to commit securities fraud, and securities fraud. New York Times, Bloomberg
Wall Street Journal
It's just not as easy to be a master of the universe as it once was. The Journal notes this morning the shrinkage the universe is suffering at the hands of a deflated commodities trading market. Behind the sucking sound are "tougher new rules and subdued markets," the Journal notes. A loud sucking sound it is, too. Revenue from trading oil, metals and soybeans dropped 16% last year at JPMorgan Chase (JPM) and 20% at Morgan Stanley (MS). At perennial commodities leader Goldman Sachs (GS)—whose boss Lloyd Blankfein originally hailed from commodities broker J. Aron & Co.—commodity revenue tumbled from $4.6 billion in 2009 to $575 million last year. All told, commodity revenue at the largest global investment banks fell 24% from a year earlier in 2012, to around $6 billion, according to a survey by research firm Coalition that is cited by the Journal.
If U.S. bankers think life is tough these days, they should take a gander across the pond. Banks on the Continent are scrambling to amend executive pay packages by month's end to adhere to new European Union bonus rules and secure shareholder approval at upcoming annual meetings, the Financial Times reports. Banks were thrown for a loop last week when the EU passed a plan to cap senior bankers' bonuses at the same level as their salaries, or double that amount with the express approval of investors. The rules are set to take effect in January 2014. "We've spent months structuring sophisticated schemes with our shareholders," one bank boss said. "Now we're going?.?.?. back to the drawing board."
Bloomberg: Is San Juan about to become the next offshore hedge fund tax heaven? It sounds like it's already well on its way in a story that discusses how native New York billionaire John Paulson has told at least four people who spilled the beans to Bloomberg that he's considering decamping to Puerto Rico to eliminate taxes on $9.5 billion in gains he's made investing in his own hedge funds. Paulson's claim to fame is making scazillions shorting subprime as the country flirted with financial collapse during the financial crisis. In total, ten wealthy Americans have already taken advantage of a year-old Puerto Rican law that lets new residents pay no local or U.S. federal taxes on capital gains, brags Alberto Baco Bague, Secretary of Economic Development and Commerce of Puerto Rico. Forty other wealthy mainlanders are currently talking to the Puerto Rican government about moving and have brought their families to look at housing and schools, he added. One hedge-fund manager, Pascal Forest, has taken the additional step of setting up his firm, Forest Investments LLC, in San Juan, according to Bloomberg.