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Europe Is Back on the Front Burner: Bailouts of Greece, Ireland and Portugal were something the world managed to digest. Now come harder-to-swallow fears that Spain may soon become the first big European Union nation to require financial life support.
"It is fair to say sovereign debt concerns are again front and centre as traders become worried about Spain's budget position in the light of a tough austerity programme and struggling economy," writes the Financial Times. "The health of the country's banks is also a concern after data showed bad loans at their highest level since 1994."
The rising worries come in the wake of a few months of relative calm for Continental finances during which the European Central Bank's roughly €1 trillion ($1.31 trillion) of emergency loans helped push down interest rates of troubled euro-zone countries and ease fears about Europe's debt crisis. But lately rates have again been marching higher, notes the Wall Street Journal.
At the center of the rising rates and concerns are Spanish banks. They have accumulated €323 billion of property assets of which €175 billion were labeled "problematic" by the Bank of Spain last year. That proportion has risen amid soaring unemployment and rising mortgage delinquencies, says the New York Times.
Another concern is that Spanish banks have nearly run through €200 billion previously borrowed from the ECB. That poses a problem not only for the banks but for the Spanish government as well, which is counting on its financial institutions to continue buying its bonds. All told, the banks have about €21 billion remaining in their coffers; meanwhile the Spanish government is hoping to unload another €47 billion worth of sovereign debt this year alone, according to the Journal. Italian banks are in a similar situation, having burned through most of what they borrowed from the ECB, according to several analysts.
"Despite the new money sloshing around Europe, the fundamentals of the debt crisis are little changed: Spain and Italy both need sustained access to financing to cover their deficits," the Journal says.
"Perhaps the biggest downside of using Europe's bailout funds to prop up Spanish banks is the unsettling message it would send to markets," writes the Times. "And some officials caution that such a step may not be enough if Madrid fails to hold the line." Financial Times, Wall Street Journal, New York Times
Between a BlackRock and a Hard Place: BlackRock (BLK), the world's biggest money manager, is often characterized these days as "bigger than the Fed" with nearly $4 trillion (yes, trillion with a "T") in assets under management. So the news is received with considerable heft that its chief executive, Laurence D. Fink, is warning his firm will have no choice but to yank assets from at least some banks if they are downgraded by Moody's Investors Service (MCO).
According to Fink, BlackRock's hand would be forced by the fact that some of its trading agreements require it to maintain highly rated counterparties.
"That's not my wishes," Fink told the New York Times on Wednesday about the possible asset shuffle. "We have to respond to contracts we have."
For its part, Moody's has said it will decide in the next two months whether to lower its ratings on 17 global financial companies.
In the U.S., Morgan Stanley (MS) appears to be the most vulnerable as Moody's is threatening to cut its ratings by three notches to a level that would be well below the rating of some other rivals. Citigroup (NYSE:C) and Bank of America (BAC) will fall to the same levels, but both institutions are helped by having higher-rated subsidiaries where large chunks of their trading business is housed, the Times writes.
Behind Moody's review, it has said, are the "vulnerabilities" of capital markets businesses, including "the confidence-sensitivity of customers and funding counterparties, risk management/governance challenges, and a high degree of interconnectedness and opacity."
"Additionally, these institutions are exposed to large and rapidly-changing risk positions that expose these firms and their creditors to unexpected, sometimes outsized losses," Moody's has said in its reports.
Citi Pay News Not Sitting Well: The shock waves are continuing to spread through the banking world following Citigroup shareholders' thumbs-down vote earlier this week on the pay package for Chief Executive Officer Vikram Pandit.
Now a majority of shareholders of FirstMerit (FMER) have rejected a $6.4 million package for Chairman and CEO Paul Greig. That plan was designed to reward Greig for his work in 2011, even as the Akron, Ohio, regional bank's stock declined 20%.
"A sign of broader discontent among investors frustrated by years of lousy returns," is how the Wall Street Journal characterized the rejection.
Proxy-advisory firms Institutional Shareholder Services and Glass Lewis & Co. advised shareholders to vote against both the Citigroup and FirstMerit plans. They're also advising investors to vote down packages at Huntington Bancshares (HBAN) and elsewhere.
The pay pushback comes as a Dodd-Frank provision had made mandatory "say-on-pay" votes among shareholders of many publicly help companies. Directors are not required to follow along with the non-binding votes, but given the political climate they'll be hard-pressed to ignore them entirely. On that score, the response of Citi's directors may prove a critical test-case. Wall Street Journal, American Banker
New York Times
The Times has a whale of a story this morning about how JPMorgan Chase (JPM) is allegedly gaming the Volcker Rule—the Dodd-Frank provision intended to prevent big banks from gambling with taxpayer-backed assets.
The story notes that many big banks responded to Volcker's passage by loudly trumpeting withdrawals from hedge funds, private equity investments and prop-trading.
Now come accusations that JPMorgan has since quietly re-established an in-house casino in London under a trader who goes by the nicknames "Voldemort" and "The London Whale." Mr. Whale (aka, Bruno Iksil) has reportedly amassed huge positions in indexes related to corporate defaults—so huge that the Times reports they're distorting those markets.
The controversy is part of a larger cat-and-mouse game being played between Congress, the author of Dodd-Frank, and big banks. At its center is the question of how to write a law that prevents banks from making big speculative bets while still being permitted to carry out their vital market-making functions.
If history is any guide, Wall Street is likely to prove more adept at circumventing Volcker than Congress is at making it air-tight.