Fed Officials Leaning Toward Further Easing; No, They’re Not

Receiving Wide Coverage ...

J.P. Mea Culpa: At yesterday’s Senate Banking Committee grilling, er, hearing, Comptroller Thomas Curry confessed “it does not appear” his office’s examiners at JPMorgan Chase “met the heightened expectation” for supervising large banks. Fed Governor Daniel Tarullo told lawmakers that the Volcker Rule, had it been in effect, would have required JPMorgan to document for regulators how its ill-fated trades qualified as hedges. As usual, Matt Levine of the blog “Dealbreaker” wrote our favorite headline on the matter: “Volcker Rule Would Have Required JPMorgan Whale to Look Himself in the Mirror and Ask ‘Is This Really What I Want to Do with My Life?’” Levine reads Curry’s testimony as “a reminder that, even without the Volcker Rule, the OCC, Fed and others had pretty complete access to data on JPMorgan’s whale-sized positions, and basically signed off on them as a hedge until Bloomberg [News] suggested there might be a problem,” which was about a month before JPM disclosed the big trading loss. Democratic Senator Robert Menendez admonished the panel of regulators (who all look really uncomfortable in the hearing photos, even by Congressional witness standards) that “if huge trading losses happen at banks after Volcker, the blood will be on all of your hands.” If you think that sounds hyperbolic (money being recoupable, unlike a life), remember he’s from New Jersey. Even Republicans on the committee walked away from the hearing talking about the need for higher capital requirements. Wall Street Journal, Financial Times, New York Times

About Those Capital Requirements: The Fed’s Board of Governors is scheduled to hold a public meeting today to vote on proposed capital and liquidity rules implementing Basel III in the U.S. The FT says the Fed is expected to remove an exemption that spared banks from having to deduct from capital the unrealized losses on available-for-sale securities. This would force U.S. banks to hold more capital than their European counterparts, anonymous bankers tell the FT, since the latter don’t have to use mark-to-market accounting for such assets. Because paper losses would threaten capital levels, these bankers warn, U.S. banks would have to unload or avoid buying long-term debt — including (gulp) U.S. Treasury and municipal securities. “If you do this, good luck floating bonds to pay for those bridges and hospitals” seems to be the subtext. The FT article notes, however, that there are ways to potentially mitigate the impact on capital from AFS portfolio losses, such as hedging interest rate risk (maybe the only risk for Treasuries, unless you have doubts about the full faith and credit of the United States) or moving the securities into a different accounting category. And an FT reader in the comment thread suggests that liquid, generic assets like Treasuries and munis should be the least of a bank’s capital worries: “Perhaps if there were less overly structured assets that have a market value only under certain conditions, which if absent will not attract any buyers, there will not be the AFS/MTM problem.” Other commenters in the thread suggest banks might be better off marking to market and reflecting losses in the capital, because the transparency would make investors more confident and willing to put money in these institutions: “Marking to market, and so replenishing capital when losses are suffered, would enable banks to hold smaller capital buffers, for any given level of safety, than a system in which assets are not re-marked and creditors cannot expect capital to be raised to compensate for losses.” For a bigger-picture assessment of the coming Basel III standards’ implications for U.S. banks and economic cycles, read the latest installment of Clifford Rossi’s “Risk Doctor” column in BankThink.

And Speaking of the Fed: In separate appearances, three top officials of the central bank — Atlanta Fed president Dennis Lockhart, his San Francisco counterpart John Williams, and Governor Janet Yellen — expressed heightened concern about the economy and suggested the Fed may have to consider additional interventions. Well, at least that’s how the Journal, the FT and the Post played the officials’ remarks. The Times emphasized the speeches’ “we’re not there yet” caveats and stands out from the other papers with the headline “A Little Optimism at the Federal Reserve.” (Notice how the one-letter article “a” profoundly affects the meaning — usage matters, folks.) Aren’t you glad you don’t have to parse Fed speeches for a living? Chairman Bernanke is expected to testify before the Senate Banking Committee on the macro outlook today, and the FT says bond investors will be listening keenly for hints of a change in his policy bias. Wall Street Journal, Financial Times, New York Times, Washington Post

New York Times

Kleiner Perkins is investing $15 million in Lending Club, and Mary Meeker, the former Morgan Stanley star Internet analyst, who’s now a partner at the VC firm, is joining the peer-to-peer lending start-up’s board. She’ll be reunited with her one-time boss, former Morgan Stanley CEO John Mack, who joined the board in April.

 

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