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PE Probe: The SEC has begun an informal inquiry into the private equity business, the papers report, citing anonymous sources. While Mitt Romney’s candidacy has sparked a national debate about whether PE firms are net creators or destroyers of jobs, the SEC is more concerned with in-the-weeds matters. “One focus of the inquiry is how private equity firms value their investments and report performance,” according to the Times. “The S.E.C.’s concern … is that some private equity funds might overstate the value of their portfolios to attract investors for future funds.” The papers also briefly mention the fee structures of PE firms as an area of interest for the Feds. Wall Street Journal, New York Times

More Settlement Reactions: The Sunday Times included a pair of editorials on the $25 billion pact announced last week between the mortgage megaservicers and federal and state regulators. The first piece calls the foreclosure robo-signing settlement “a wrist slap compared with the economic damage wrought by the banks in the housing bubble and bust.” While the banks did not get the blanket release from legal liability for “all manner of mortgage misconduct” they sought, the immunity they did get is still too broad for the Times’ liking: “Past sins in servicing and foreclosure are largely absolved.” The paper is also skeptical about how much the new national investigative task force led by New York Attorney General Eric Schneiderman can accomplish, noting that some potential violations are nearing statutes of limitations. (Al Lewis makes some of the same points in his Journal column). The other Times editorial urges President Obama to lean on Federal Housing Finance Agency chief Ed DeMarco to allow Fannie Mae and Freddie Mac to do more principal reductions (loans held or guaranteed by the two government-run companies aren’t covered by the big settlement). DeMarco isn’t mentioned by name, but the editorial calls him “stubborn” for his resistance to loan writedowns. In her Times column, Gretchen Morgenson questions whether the banks will do what the pact requires them to, detailing a spotty history of compliance in other post-crisis settlements. She also notes the theory, advanced by knowledgeable observers like “Naked Capitalism” blogger Yves Smith, that the servicing settlement’s principal reduction requirement is really a backdoor bailout of the banks. Morgenson sums up the logic succinctly: The pact “will improve the value of the second liens or home equity lines of credit they own. These vast holdings — roughly $400 billion — are worthless if the first mortgages preceding them are underwater. But if the banks don’t write down the second liens alongside the first mortgages, the seconds become more valuable. A lower principal balance on the first mortgage makes the second more likely to pay.”

Wall Street Journal

Today’s the deadline for public comments on the proposed implementation of the Volcker Rule, and Paul Volcker is expected to submit a letter defending the regulation named after him. While critics have said the ban on proprietary trading by banks will hurt market liquidity, “according to people familiar with Mr. Volcker's thinking, his comment letter will argue that too much liquidity in the market can cause investors to bid up asset prices with the expectation that there will always be a buyer.” The former Fed chairman will also argue that there’s an overlooked benefit to the megabanks from the rule: “U.S. bank-holding companies with investment-banking units will be able to tell clients that they are far less likely to face potential conflicts of interest, because they won't have proprietary-trading activities.”

Contingent capital securities — bank bonds that convert to equity when the issuer’s capital ratios fall below a certain threshold — are finding favor in southern Europe. Governments are planning to purchase these instruments as a way to shore up their banks without directly bailing them out. Accounting rules allow sovereigns to invest in “co-cos” without increasing their deficits.

The Journal editorial board supports SEC Chairman Mary Schapiro’s efforts to reform money market funds. Of the two proposals she offers, the writers prefer the one that would “clarify for money fund customers that they are investing in securities that can rise and fall, as opposed to insured bank accounts.” It would do this by ending the “government-sanctioned accounting fiction” of a stable net asset value of $1 per share. If NAV is allowed to float, reflecting the market prices of the underlying assets, investors will know exactly what they’re getting into when they park their cash at money market funds, the editorial argues. (For a discussion of an interesting counter-proposal to lay bare the risk inherent in money market funds without publishing fair-value NAVs, read our post on BankThink, especially David Merkel’s comment at the end of the thread.) The Journal’s pundits are less enthusiastic about Schapiro’s other proposal, which would require the funds to hold capital reserves and limit how much investors could withdraw at one time, since “it would still maintain the fiction of stable value.” In any event, expect Jerry Hawke to fire off a rebuttal to the Journal in 5, 4, 3, 2…

The city of St. Paul has withdrawn its petition for the Supreme Court to hear the case of Magner v. Gallagher. The court would have considered the legal question of whether “disparate impact analysis” can be used to prove racial discrimination under the Fair Housing Act, regardless of whether there is proof of discriminatory intent. Although the case concerned building codes — “slumlords,” according to a Journal editorial, accused the city of discrimination for enforcing its code — administration officials feared a victory for St. Paul would mean a defeat for fair-lending enforcement efforts. So they counseled the city to drop its appeal, which it did.

Washington Post

Washington area community banks and credit unions that depend on a secondary market to sell their mortgages are “bracing” for the end of Fannie Mae and Freddie Mac, according to this local-business story. You can exhale, guys — Treasury Secretary Tim Geithner said this month that the administration would provide more details on winding down the GSEs this spring, but also said he doesn't expect legislation to advance this year.


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