Receiving Wide Coverage ...
Beijing to D.C.: This Isn't Funny: America's political dysfunction has reached such heights that even foreigners are feeling compelled to speak up. China and Japan, which have stocked up on trillions of dollars of Uncle Sam's IOUs, began publicly expressing concerns that the interest payments on them could be in peril. "The clock is ticking," Beijing warned in its first official comments on the stalemate, while urging Washington pols to "ensure the safety of the Chinese investments." China directly held $1.3 trillion in U.S. government bonds as of July, Treasury data indicates. In Japan, which itself is a world leader in political gridlock, finance minister Taro Aso on Tuesday called on "the United States to resolve its debt ceiling stand-off without delay," the Financial Times reports. Japan's Ministry of Finance is worried that a U.S. default could cause investors to dump the U.S. dollar and push up the yen, hurting the nation's international competitiveness, the FT said. Back home, Senate Democrats are planning a vote this week to extend U.S. borrowing authority through 2014 in the latest sign that the political class's attention is shifting from the budget impasse to preventing a government debt default, the Wall Street Journal reports. The Treasury says the debt ceiling must be raised this month or it will be unable to pay all the country's bills. Treasury Secretary Jacob Lew is scheduled to answer questions about the debt ceiling on Thursday in front of the Senate Finance Committee, giving Republicans a chance to press him for potential areas of compromise, the Journal added. Back on Wall Street, traders remain largely of the view that Washington is engaged in political theater rather than mass suicide. The fiscal stalemate continued to weigh on stock prices Monday, but the market's volatility index, known as the "fear gauge," has merely hit a four-month high and remains far below its level during past crises. "We all tell ourselves, 'This is something that is not going to happen,'" David Coard, the head of fixed-income trading at the Williams Capital Group, told the New York Times. "This would be like a black swan event. It's not something that you would have thought that the U.S. could do in a million years." Financial Times, Wall St. Journal, New York Times
The Falcone Has Crashed: It seems like those wily Wall Streeters had good reason all these years to fiercely resist admitting that their wrongdoing was, in fact, wrong. Exhibit One is Philip A. Falcone, the hedge fund high-flier whom the Securities and Exchange Commission knocked off his perch in August when Falcone admitted wrongdoing, agreed to pay $18 million and consented to a ban on acting as investment adviser for five years. The deal resolved two SEC civil lawsuits against the money manager and his company, Harbinger Capital Partners. The charges involved a failure to disclose to investors a $113 million personal loan Falcone took out from a Harbinger fund to pay his taxes, even as other investors were prevented from pulling their money. The billionaire's admission of "multiple acts of misconduct" as part of an SEC settlement are now having knock-off effects. On Monday, New York's top financial regulator, Benjamin Lawsky, used the admission to punish Falcone in an unrelated case, banning him for seven years from controlling insurance companies licensed in the state or serving as an officer or director of Fidelity and Guaranty Life Insurance, which is owned by NYSE-listed Harbinger Group (HRG), his publicly traded company. Ironically, the waves the SEC created with its insistence that Falcone admit wrongdoing are likely to complicate future agency efforts to exact similar admissions, the New York Times reports. "With the prospect that such admissions could come back to haunt defendants in other cases, legal experts say, there could be a chilling effect on the banks and hedge funds that regulators seek to punish. Investors might also use the admissions to bolster civil lawsuits. 'This is the event that is going to stick in the craw of every defense lawyer,'" Thomas A. Sporkin, a former SEC attorney now at Buckley Sandler, told the Times. Instead of settling, defendants might be more inclined to take a case to trial, straining SEC's resources at a time when its boss, Mary Jo White, is stressing the importance of holding individuals accountable for financial misdeeds. New York Times, Wall Street Journal
Wall Street Journal
The Federal Reserve's decision to boost growth by continuing to buy $85 billion-a-month in bonds followed six months of tense negotiations inside the central bank and a stumbling effort to let the public know what was going on, the Journal reports. A small group of Fed officials has been privately pushing Chairman Ben Bernanke to plan an exit from his signature program, several people familiar with the closed-door deliberations told the paper. But glimmers of a weakening economy prompted the Fed in September to surprise markets and keep the program going. The saga shows how hard it is for a central bank to communicate about plans that are complicated, evolving and conditional on the economy, it added.
The Treasury Department's Office of Financial Research has published a report outlining the ways in which it believes money management giants like Blackrock Inc. (BLK), Pacific Investment Management Co. and Fidelity Investments could potentially pose a risk to the financial system, notes Francesco Guerrera, who edits the paper's Money & Investing section. "The big boys of asset management display many of the characteristics of 'systemically important' institutions. They play key roles in most markets, and are huge and highly concentrated," he notes. The report, prepared for the Financial Stability Oversight Council, warns about two main dangers: "redemption risk," or the threat that investors will pile out of a fund at the same time and create a liquidity crisis; and that as links in the financial chain, these firms' troubles could be transmitted or magnified throughout the financial system. In response to the OFR report, money managers and the SEC argued that asset managers held up quite well during the financial crisis, even as their investors got clobbered, Guerrera reports. There is a root problem with the OFR's entire exercise of trying to determine which company is a "systemically important financial institution." It's that the Dodd-Frank Act tailored the definition to banks and it is a lousy fit for "shadow banks," including asset managers, Guerrera added.
The government shutdown is throwing a wrench into efforts by some small businesses to get government-backed loans from the Small Business Administration. Lenders said they continue to process and submit loans to the SBA. But, as American Banker previously noted, borrowers are having to wait for approvals.
The Association of Mortgage Investors warned Monday of member concerns that investors could shoulder a significant portion of the burden of penalties in any legal settlement over mortgage abuses. The letter, addressed to Attorney General Eric Holder, was prompted by recent reports indicating a settlement could be near between the U.S. government and JPMorgan Chase (JPM).
When JPMorgan Chase and Wells Fargo (WFC) launch the sector's third-quarter earnings season on Friday, they are expected to plump their bottom lines with further releases from bad debt reserves, the Financial Times writes. The releases contrast with another line on the income statement: loan growth, which is near zero four years into what supposedly is a recovery, according to Federal Reserve data. The FT characterizes the trend as "unsustainable" since banks will eventually exhaust their pot of reserve cash and need to make new loans if they, and the economy they support, are to maintain their long-term health.