Goldman to take $5B tax hit; PwC called negligent in bank failure

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Short-term pain: Goldman Sachs said it will take a one-time $5 billion earnings charge because of the tax reform law, likely forcing it to post its first quarterly loss in six years and wiping out much of its 2016 profits. “But the firm, like its brethren on Wall Street and across much of corporate America, will be a winner in the long run,” the Wall Street Journal notes. “They will make this back and then some,” said Devin Ryan, an analyst at JMP Securities. “Tax reform is a positive for Goldman Sachs.” Wall Street Journal, Financial Times, New York Times

Indeed, banks, which tend to pay relatively high tax rates, “are expected to benefit from the planned cut in the corporate rate” to 21% from 35%, the Journal says in a separate article. “Bank executives said they expect additional benefits from the plan,” including greater economic growth and a lighter regulatory regime.

Who's responsible?: A federal judge ruled that PricewaterhouseCoopers was negligent in connection with the 2009 failure of Alabama’s Colonial Bank, one of the biggest bank failures of the financial crisis. U.S. District Judge Barbara Jacobs Rothstein said the firm violated auditing rules by failing to take measures that would have detected a $2 billion mortgage fraud scheme — perpetrated by one of the bank’s clients, Taylor Bean & Whitaker — that led to the bank’s demise. The suit was brought by the Federal Deposit Insurance Corp. The judge will now consider whether, and how much, damages should be imposed on PwC. The Journal says the firm could face “hundreds of millions of dollars in damages.” Wall Street Journal, Financial Times

Wall Street Journal
The year that was: Bitcoin “became one of the market’s greatest speculative crazes” in 2017, the paper notes. The cryptocurrency began the year at about $970 and nearly hit $20,000 by December, a gain of about 2,000%. On the way there it went through five selloffs of at least 30%. Nevertheless, the paper says, “it remains to be seen whether it can live up to the hype.”

Passing it on: Banks are set to pass along 34% of higher interest rates to their depositors this year, more than double the 15% they paid out last year, which “could be bad news for certain banks,” the Heard on the Street column says. “How much banks need to pay for deposits will determine banks’ profitability and growth rates.”

Deadline madness: Mortgage lenders worked overtime last week to help customers in high-tax states prepay property taxes before yearend, ahead of the tax law, which restricts the deductibility of state and local taxes. “The phone has definitely been ringing off the hook in a big way,” said the president of a Syracuse, N.Y.-based bank.

Financial Times
David versus Goliath: The Federal Housing Finance Agency wants Fannie Mae and Freddie Mac to look into potentially using alternative credit scores that may allow more people to get approved for mortgage loans. The review could create “a new fight for a share of the lucrative U.S. credit scoring market” between FICO, which dominates the market, and VantageScore, its main rival.

Back to normal: Deutsche Bank will pay “normal” bonuses and pay increases for the first time in the 2½ years since CEO John Cryan took over, the bank’s boss told a German newspaper over the weekend. “The happy new year for Deutsche’s bankers is in stark contrast with 2017, which began with Mr. Cryan abolishing 2016 performance-related bonuses for many senior staff,” the paper says. “The result was an unprecedented 80% cut in bonuses for performance in the previous year.”

Peter Frommenwiler/Bloomberg

Merge ahead?: European bankers and their regulators “are now talking openly about the need for consolidation in the sector,” the paper reports. “If this happens it would break a barren spell for banking deals stretching back almost a decade to the financial crisis.”

Quotable
“The world has never seen a more perfect speculative asset than bitcoin.” — Tom Dyson, founder of Palm Beach Research Group, which focuses on cryptocurrencies.