Receiving Wide Coverage ...
Executive Pay: The Journal and the Times have somewhat different takes on the compensation disclosures from JPMorgan, Morgan Stanley and Citi that came out late last week. "Bonuses Pinched for Bank CEOs," the Journal's headline declared, though the first paragraph elaborated that some bonuses were pinched more than others. The stock bonus for JPMorgan's Jamie Dimon was flat, Morgan Stanley chief James Gorman's stock award was cut in half, and Citi's Vikram Pandit got his first stock award since the financial crisis. The Times' headline telegraphed a more critical take: "Bad Year for Wall St. Not Reflected in Chiefs' Pay." The article suggests that lower-level employees took bigger pay cuts than the top brass at the banking and securities conglomerates, and that any hit being taken by these CEOs to their compensation packages is modest compared to the suffering of shareholders as the companies' stocks tanked in 2011. Meanwhile, "Heard on the Street" in the Journal notes that there's a hitch to the much-celebrated trend of deferring bankers' bonus pay: "firms may be locking in compensation expense that isn't matched by future performance." If revenues fail to rebound, "firms could actually be handcuffed on pay. In the face of further revenue declines, a firm could find itself saddled with large accruals for deferred compensation."
Transparency: Elizabeth Rosenthal writes in the Times' Sunday Review that laws requiring disclosure can lead actors in a variety of fields, including financial services, to "dump" information without improving transparency or informing consumers so they'll make wiser choices. For example, "every holder of a subprime mortgage that is now underwater once signed an elaborate disclosure statement required by the Truth in Lending Act describing precisely the risky terms of their loan." Later Rosenthal adds, "At real estate closings, in less than an hour, buyers sign reams of paper they are seeing for the first time." Like the speaker in this riveting TED video who admonished her audience of professionals to "write for grandma," a Harvard professor quoted by Rosenthal suggests that making disclosures understandable is more important than putting out reams of legalese disclaimers. (The article's punch line, which speaks to the more-versus-simpler question, involves the Consumer Financial Protection Bureau.) However, a Times reader warns in the comment thread that "even meaningful disclosure can often fail to deter bad choices." This commenter, a long-time real estate lawyer who represented homebuyers, says he would read every word of every document and discuss them with clients before closings. "Despite my warnings about such onerous terms as pre-payment penalties, teaser interest rates and balloon payments, as well as potentially dangerous adjustable rate mortgages, in almost every case, my clients had been sufficiently caffeinated by the blandishments of their real estate agents, mortgage brokers and bank representatives (not to mention the threat of losing the opportunity of buying this perfect piece of real estate) that they were impervious to any of my caveats." While we're talking big-picture transparency issues, Steve Randy Waldman, who writes the blog "Interfluidity," has published a follow-up to his much talked-about post from last month that argued opacity is "absolutely essential" to modern finance and can sometimes even be good for society. Pooling individuals' money into black-box vehicles that give them a false sense of security, be they banks or money market funds or pension funds, is what allows the financing of productive but risky endeavors that those individuals would never in a million years wager on directly, Waldman maintains. "You can have opacity and an industrial economy, or you can have transparency and herd goats," he wrote in December. His new post clarifies that this was an unwelcome conclusion to him, that he hates the way finance ties "kleptocracy and effectiveness into a bundle that's both impossible to refuse and debilitating to accept" since it entails crises and bailouts and Great Recession/Depression periods. A truly transparent financial system is a worthwhile pursuit, Waldman writes, but creating it would mean a much more radical project than Dodd-Frank or Basel III or any of the other "fixes" governments have made.
Wall Street Journal
An article looks at the ramifications of the small-bank exemption from the Durbin amendment capping debit card interchange fees. The story duly notes that community banks and credit unions "aren't crowing" about being able to charge merchants more for processing debit card transactions than their megabank rivals. The smaller institutions "say their new advantage will evaporate as merchants steer customers away from debit cards by dangling discounts for cash and other incentives." At the same time, small-town merchants whose customers are primarily served by community banks are also unhappy with the situation. An Iowa drugstore owner says half the debit purchases in her store are on cards issued by local banks; "merchants in rural, remote states like Montana, where the No. 1 bank by deposits is First Interstate Bank, of Billings, … are likely to get hit with bigger debit-card fees than merchants in Washington, D.C.," a market dominated by Wells Fargo, Bank of America and PNC.
Some mortgage holders may soon be swallowing bigger mortgage losses than they thought. "Old Republic International said its mortgage-insurance subsidiary will pay just 50% of every claim under orders from its main regulator in North Carolina."
An article surveys proposals from economists for helping the housing market. Securitization pioneer Lew Ranieri is quoted suggesting that Fannie and Freddie loosen the financing spigot for property investors who want to buy foreclosed homes, so the inventory can be cleared; the New York Fed's William Dudley says the GSEs' aggressive repurchase tactics are discouraging banks from extending mortgages to anyone but the most creditworthy customers. President Obama is expected to talk about the housing situation in his State of the Union address Tuesday night, the article says.
"US money market funds have begun moving back into European bank paper, a sign that central bank efforts to backstop key institutions are improving risk appetite."
New York Times
Columnist Gretchen Morgenson recaps the reasons why mortgage servicers' force-placed insurance practices are being investigated by New York State's financial services regulator - the high cost (up to 10 times the price of regular hazard coverage), the conflicts of interest (ties between the servicers and the underwriters create an incentive to place expensive and sometimes unnecessary policies), and the results (struggling homeowners are pushed into foreclosure when the premiums are tacked onto their monthly payments; investors' losses from foreclosures are compounded). American Banker's readers knew most of this more than a year ago. But Morgenson reports some very interesting details near the end of her column. First, as a condition for approving Ocwen Financial's purchase of Litton Loan Servicing from Goldman Sachs, New York state made the servicer agree to "impose only competitively priced policies" on homeowners, and to not place the coverage with affiliates. Also, it turns out the loss ratios on force-placed insurance are way lower than on regular homeowners policies, making the pricing differential seem even harder to justify.
"BreakingViews" says the rally since mid-December in the stocks of the top six U.S. banks could be fragile. The fundamentals may well justify current valuations, the column suggests, but "any more jitters about U.S. or European economies… could drive bank stocks right back down again."
Columnist Michelle Singletary says the CFPB should put a high priority on addressing mandatory arbitration clauses. The Dodd-Frank Act, she notes, requires the new agency to study these clauses, which are common in credit card agreements and were upheld in a recent Supreme Court decision. Depending on what it finds, the bureau has the power to place conditions or limitations on these clauses, which consumer advocates have long called unfair.
And, Lastly …
The Daily Mash: This British satirical website reports that Standard & Poor's has upgraded its own credit rating, to "Triple-A Plus Super Fantastic." It gets funnier as it goes on. As with The Onion, reader discretion is advised.