Receiving Wide Coverage ...

Wells Fargo: The FT has a pair of admiring stories on the bank. One depicts Wells as a stalwart that shunned the exotic-mortgage boom of the previous decade and is now being rewarded for its conservatism with an unprecedented 30.1% share of mortgage originations (a position that fallen archrival Countrywide’s Angelo Mozilo once dreamt of). It might be a bit of an overstatement to say Wells “stayed out of the game” of pushing the underwriting envelope (remember those first-lien home equity lines the bank was flogging in 2006?), but clearly it’s suffered less from that period’s excesses than its peers. In the other FT story, chief executive John Stumpf lays out Wells Fargo’s expansion plans, which include growth via acquisitions in wealth management and insurance and purchasing assets from European institutions that are downsizing.

Financial Innovation: The latest issue of The Economist features a 14-page special report on this timely subject. (Just to be clear: although there are passing mentions of “whizzy payment technologies,” the focus is on innovations in wholesale rather than retail finance, so don’t expect to learn much about digital wallets or PayPal in here.) Anticipating that some will reflexively ask “isn’t ‘innovation’ what got us into the current mess?” the magazine argues that even much-maligned derivatives can produce benefits to society, if perhaps inadvertently. Credit default swaps on sovereign debt, for example, perform “a useful signalling function in an area tilted heavily in favour of governments (which do not generally have to post collateral and can bully domestic buyers into investing).” More than once The Economist notes that despite all the blunders associated with the product, India’s conservative financial regulators recently permitted the country’s first CDS deals to attract investors and build a local bond market. Instruments like CDS and securitizations aren’t inherently toxic, the magazine suggests; it’s the way they were used during the mortgage boom that was the problem. “Rather than asking whether innovations are born bad, the more useful question is whether there is something that makes them likely to sour over time.” That thing is “rampant growth and mutation” once an innovation takes hold. Hence, in addition to covering hot topics like social-impact bonds, exchange-traded funds, high-frequency trading and “retail structured products” (gulp) such as life settlement investments (a.k.a “death bonds”) sold to individual investors, the report includes articles on back-office operations and collateral management — unsexy areas whose importance became clear during the crisis.

Wall Street Journal

In a concise summary of the issues facing the biggest banks, “Heard on the Street” says the biggest headwind is the Fed’s zero interest rate policy, which depresses net interest margins. The problem is particularly acute for the large banks, since they tend to park their cash in shorter-dated assets. Fourth-quarter net interest margins were below 3% for JPMorgan, Citi and B of A — a good percentage point lower than the average for banks with less than $10 billion in assets. Since the Fed has said it intends to keep rates at these super-low levels through 2014, big banks need more robust loan growth than they’ve generated so far for net interest margins, or stock valuations, to improve.

An article by Alex Edmans of the Wharton School on “How to Fix Executive Compensation” includes an idea we hadn’t seen before: pay executives with company debt as well as equity. This would discourage excessive risk-taking by aligning executives’ interests with those of creditors rather than just shareholders, Edmans argues; they’d worry about the downside as much as the upside.

New York Times

An article on the front page of the Sunday Business section considers the debate over moral hazard in the context of the mortgage mess. “Homeowners who keep paying their mortgages, even if their homes have lost value, reasonably wonder why neighbors who weren’t as responsible are getting help. On the other hand, the problems in the housing market are a problem for all of us. Many economists and housing experts agree that the debt that now looms over homeowners is holding back a broad recovery.”

Elsewhere ...

TechCrunch: This tech news website reports that PayPal has ordered Smashwords, a distributor of electronic books (like Amazon, but without the hardcover or paperback options), to remove certain adult content if it wants to continue using the payments company’s services. “Regardless of whether you are a reader of such material or not, the move by PayPal raises questions of whether a middleman payments company should be calling these kinds of shots over content.” Inevitably, this was the first reader comment posted: “Answer: BITCOIN.”


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