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Corzine Out at MF Global: And he won't seek severance.
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Bank Transfer Day: It's tomorrow, hence the curtain-raising coverage in the papers. The Journal reports that despite the opportunity to pick up accounts, "executives of credit unions and community banks are … hesitant about the effort." For one thing, switching banks isn't as easy as deciding to buy a different brand of soda pop. "You can't do it in one day. It's misleading" to suggest you can, a credit union executive tells the Journal. Also credit unions aren't well staffed on Saturdays, if they're open at all. Given this unusual opportunity, we wondered, why not make an exception? Another credit union exec in the story answers: "We didn't want to open for just one Saturday. It would set a tone." (Set a tone? What, is he afraid he might have to start going to work when it's convenient for customers? Where's Vernon Hill when you need him? Oh right, he's in England.) Perhaps a more insurmountable issue noted in the article is that money can't be transferred between banks on Saturdays because the Fed's closed (though we imagine patient customers could just write a check from their old accounts to get the ball rolling). And here's one point not mentioned in the article: what about those who can't go to the bank on Saturday because it's against their religion? (Yes, we realize that's also a fair rejoinder to our crack about setting a tone.) The Times' "DealBook" reports that small banks and credit unions have already been picking up business from consumers miffed about new fees at the big banks. The article's evidence is both anecdotal - "Our business has tripled," says a community banker in San Francisco - and at least quasi-empirical: "More than 650,000 people have joined credit unions since Sept. 29 - the day Bank of America announced its debit card fee - and have brought in an estimated $4.5 billion in new deposits, according to a survey conducted by the Credit Union National Association." (Consider the source; hence the "quasi.")
B of A Capital Raise: The company disclosed a plan to issue close to $3 billion of shares. (It’s on page 10 here.) The FT says the move will dilute shareholders, though B of A insists it’s not reneging on Brian Moynihan’s pledge to not do that, since the new shares will be exchanged for outstanding preferred stock and debt. The rationale for the move is that “debt and preferred shares … carry guaranteed dividend and interest payments and are therefore more expensive for the bank than common equity, whose holders do not have a guaranteed pay-out,” the FT says. The Times notes that the exchange “will add to the bank’s Tier 1 capital base,” though B of A seems to be emphasizing the cost savings in its public statements. Financial Times, New York Times
Freddie’s Fix: “Freddie Mac tapped the U.S. government for another $6 billion in aid after the mortgage-finance giant's loss widened to $4.4 billion in the third quarter,” the Journal says. Taxpayers' total tab for bailing out Freddie is now $72 billion, of which $14.9 billion has come back in dividends. Fannie Mae's third-quarter results are expected to come out in the next few days. Wall Street Journal, Financial Times
Jefferies Jolted: Shares of Jefferies Group tanked on fears about the brokerage’s exposure to European sovereign debt (the stuff that felled MF Global). Feeding those fears was a report by Egan Jones, the independent rating agency, which calculated Jefferies’ sovereign debt holdings to equal more than three-quarters of its equity. Jefferies took great exception to this analysis, arguing that the $2.7 billion figure cited in the report was only its gross exposure, which did not take into account its offsetting short positions. The net exposure was but a sliver of its equity, the firm argued. Pish-tosh, says CNBC’s John Carney. “‘Offsetting short positions’ are only as good as your counterparties. So without explaining who your counterparties are, you cannot really reassure people with this kind of talk,” Carney writes. “‘Net exposure’ just tells us that you are relying on the financial stability of your counterparties. Gross exposure shows us how bad things can get if your counterparties fail.” The market apparently shared his skepticism, and trading in Jefferies shares had to be halted twice. Wall Street Journal, Financial Times
MF Global: There’s a lot out there today on this subject, but two stories in the Times seem to us to be particularly important for the banking industry. One notes that months before MF Global unraveled, “federal regulators were seeking to rein in the types of risky trades that contributed to the firm’s collapse.” But Corzine, who “carried significant weight in the worlds of Washington and Wall Street,” pushed back and prevailed. The other Times story notes that “at MF Global, there were at least six different agencies and industry groups minding separate parts of the store.” The result is that the company answered to “everybody and nobody.” Taken together, these stories are a poignant reminder of one of the biggest structural problems with the financial system (and the political one for that matter), one that Dodd-Frank scarcely addressed: regulatory capture. We’re reminded of the Reuters blogger Felix Salmon’s post the other day responding to Sheila Bair’s maiden column in Fortune. The former FDIC chairman criticized European regulators for giving “their banks much more leeway in making [risk-based capital] determinations than banks have in the U.S. … The problem has been exacerbated by Europe's adoption of a complex Basel II methodology, which essentially lets bank managers use their own judgment in determining the riskiness of their assets.” The result, Bair wrote, is that risk assessment in Europe has become “an insider's game where the bankers are calling the shots.” But Salmon argues that the FDIC was able to prevent this kind of chicanery in the U.S. only because the small banks, which are a powerful lobbying force, opposed Basel II, fearing it would put them at a disadvantage to the more sophisticated megabanks. “All regulators are captured by banks. Or, to be a little more precise, all legislatures are captured by banks, and all regulators do what the government tells them to do,” Salmon writes. “Bair is hopelessly naive if she thinks that European regulators — or even American regulators — can really ever force banks collectively to do something they don’t want to do.” A sobering thought. Have a good weekend everyone!
