Receiving Wide Coverage ...
Capital Punishment: The Fed is expected to support the Basel Committee's plan to impose a capital surcharge on the biggest, most globally interconnected financial institutions, the Journal reports. A draft proposal could come before Christmas; JPMorgan CEO Jamie Dimon, whose bank would have to hold another 2.5% of extra capital as a percentage of risk-weighted assets (on top of the 7% required of all institutions) would probably prefer a stocking full of coal. Big banks have lobbied hard against the "G-SIFI surcharge," protesting it would dampen lending and hurt the economy. In another blow to the industry on this front, the European Union said Britain is free under EU law to impose extra capital requirements on her banks above and beyond what Basel calls for, the FT says. The U.K. government plans Monday to adopt that and most of the other proposals by Sir John Vickers' commission, including the "ringfencing" of retail banking from trading. Finally, Bank of America completed its previously announced debt exchange offer, generating $3.9 billion of capital that will count toward Basel III guidelines. The opportunity for banks to raise capital this way — by extinguishing debt at a discount to par — is an advantageous byproduct of bond investors' loss of confidence in the banks' credit. In an environment like this, you have to count your blessings wherever they come from.
CSI — Mortgage Fraud Edition: The FHFA has formed a partnership with New York Attorney General Eric Schneiderman to investigate banks' private-label mortgage securitizations, the FT reports. "Investigators will be able to share documents and findings, and pool resources, according to people familiar with the co-operation agreement." Schneiderman has been probing roughly a dozen banks and mortgage insurers, the story notes, and the FHFA has sued institutions that sold this dicey paper to Fannie and Freddie. We'd like to point out that these two enforcement bodies have come a long way since the FHFA's predecessor resisted the efforts of Schneiderman's predecessor to investigate appraisal fraud a few years back, just as the bubble was bursting. Meanwhile, the Journal reports that the same law firm that represented investors in Bank of America's $8.5 billion mortgage bond settlement has turned its sights on JPMorgan Chase. Acting on behalf of investors holding $95 billion of MBS that JPMorgan minted from 2005 to 2007 (the era of stuff like this), the attorneys have asked trustees to look for dud loans that shouldn't have been included in securitizations. The Journal story notes that unlike B of A, JPMorgan "is widely viewed as facing fewer mortgage problems than competitors."
Law & Order — Mortgage Fraud Edition: Speaking of Fannie, Freddie and the insane mortgage practices of yesteryear that seemingly everyone in the industry made excuses for at the time, the SEC on Friday sued the former CEOs Daniel Mudd of Fannie and Richard Syron of Freddie, claiming they misled investors about the GSEs' exposure to dodgy loans. According to "DealBook" in the Times, the board of Fortress, Mudd's current employer, now has to make a decision about whether to keep him as CEO, even though the civil charges against him are unrelated to his work at the private equity firm. The main Times story on the suits against Mudd and Syron reminds us that the SEC has "has come under fire for not pursuing top Wall Street and mortgage industry executives who contributed to the financial crisis" and "for citing only midlevel bankers while settling with the Wall Street firms themselves." On that score, the House Financial Services Committee is going to hold a hearing on the SEC's "neither admit nor deny" boilerplate settlements (the ones that Judge Jed Rakoff hates). Finally, could the OCC, as successor to the OTS, go after Washington Mutual's former executives, who paid the "small potatoes" amount of $65 million in their settlement with the FDIC last week? Senator Carl Levin suggests this is possible to columnist Gretchen Morgenson, but she doubts it given the OCC's history.
CSI — MF Global Edition: Following last week's story in the Times about how MF Global had put its chief risk officer in the doghouse, lawyer Michael Peregrine laments in a "DealBook" opinion piece that such a situation "is not unique to MF Global or to the financial services sector. … One of the lasting legacies of the Sarbanes-Oxley era is not to mess with the risk officer or compliance officer. … Board and/or management efforts to marginalize its influence are typically made at organizational and personal peril." Directors and executives are certainly entitled to challenge risk officers' judgment, he writes, but they must show respect to the role. Peregrine gives some concrete examples of what "respect" entails, among them: have the risk chief report straight to the COO, the CEO or even the board; scrutinize any decisions to fire or strip duties from this person; and give him or her "regular, substantive access to executive leadership." We've bookmarked Peregrine's piece on our web browser, because it could inform a future list of Tough Questions to Ask Banks About Risk Management ("whom does your chief risk officer report to?"). In the Washington Post, columnist Barry Ritholtz lists "six elements that I found astonishing" about the MF Global collapse. Our favorite: "None of MF Global's Canadian clients lost any money thanks to tighter regulations there." Good defense playing, eh?
Pawn Takes Castle? An article in the Journal looks at online pawnbroker sites as a way for entrepreneurs to raise cash. These websites charge much lower fees than traditional shops, the story says. Meanwhile "many holiday shoppers are flocking to pawnshops" of the brick-and-mortar kind to buy gifts, the Times reports. Until recently, despite booming demand for pawn loans, sales of collateral had been weak and "owners of pawnshops melted down much of the jewelry in stock because there were so few buyers." But this is changing as continued economic weakness prompts bargain-hunting and the old stereotypes about pawnshops (neon signs, bulletproof glass) are challenged by "sleek chains that resemble mainstream, big-box retailers." It's the most wonderful time of the year!
Wall Street Journal
The FASB and its international counterpart, the IASB, have agreed in principle on a new accounting standard that would require banks to book loan losses as soon as they expect to lose money on the loan. Up until now they've been forced to wait until a loss is actually incurred to record it. Bankers generally support the proposed change, with the standard caveats about wanting more clarity in the final standard. The two standard-setting boards also agreed to require more disclosure about "gross" derivatives positions, so investors have more to go on than just the net figures after hedging. Because that hedge is only as good as the counterparty behind it, and if you don't know who that is … you just don't know.
Senate Republicans are trying various maneuvers to stop President Obama from making recess appointments for Richard Cordray at the Consumer Financial Protection Bureau and for other administration posts. This Beltway-insider-y piece details the various legal and political strategies available to both sides in this fight.
Four current members of the House received loans through Countrywide's "Friends of Angelo" VIP program, ethics committee chairman Darrell Issa announced. He learned this by subpoenaing Bank of America, which took over Countrywide in 2008. Issa didn't identify the four lawmakers, but Rep. Edolphus Towns of New York is already known to have been an "F.O.A."
The two leading contenders for the Republican presidential nomination are trading barbs over their past affiliations with financial services firms. "After GOP rival Mitt Romney suggested that [Newt] Gingrich return the money he was paid to advise government-sponsored mortgage monster Freddie Mac … Gingrich questioned if Mr. Romney 'would like to give back all the money he's earned from bankrupting companies and laying off employees over his years at [private equity firm] Bain.'" If you're wondering, this article comes from the opinion section of the Journal, hence the use of "monster" above in lieu of "financier" or "company."