Receiving Wide Coverage ...
Leeway on Liquidity: The Basel Committee rejected the banking industry’s pleas to delay the new global liquidity coverage ratio requirement, which will take effect in 2015, as scheduled. However, the group of international regulators said it would let banks temporarily dip into their emergency supplies of cash and liquid assets in times of stress. This came as “a relief to some bankers who feared the LCR would mimic the Basel capital standards; banks that fall below the minimum capital threshold are at immediate risk of shut down or government takeover,” the FT says. Financial Times, New York Times, Wall Street Journal
Earnings Previews: Bank earnings season will kick off Friday with JPMorgan Chase. In general, the big banks and securities houses are expected to report “dismal” fourth-quarter results (as the New York Times’ headline put it) reflecting a slowdown in trading revenues as investors steered clear of volatile markets. Wall Street Journal, New York Times, Financial Times.
Housing and the Fed: Two prominent officials from the central bank – New York Fed President William Dudley and Governor Sarah Bloom Raskin – suggested in separate speeches that mortgage principal reductions ought to be considered. Dudley’s comments were especially notable since he suggested, in his speech and in an interview with the FT, that taxpayers could foot some of the bill. Meanwhile, the Journal’s “Heard on the Street” column warns the Fed is “wading into risky political waters” with pronouncements like these and the ones in the white paper it published last week. The column also spotted a news-nugget in that white paper that we’d missed: the central bank said it’s “‘contemplating issuing guidance’ to banks and regulators that would possibly allow banks to turn some of these foreclosed homes into rental properties.” So the discussion of REO-to-rental conversions isn’t necessarily academic after all.
Wall Street Journal
The lead story in today’s Journal notes that the aforementioned slowdown in trading means bonuses on Wall Street are likely to take a big hit as well.
Call it the Mishkin Rule. The American Economic Association adopted a code of conduct requiring its members to disclose financial ties and other conflicts of interest in papers published in academic journals.
This op-ed by PIMCO chief Mohamed El-Erian is short on original observations, but it does a beautiful job of crystallizing the scarily unpredictable state of the global economy and financial markets. The money quote, for us, is this: “By driving interest rates to very low levels, central banks are pushing investors out on the risk spectrum. But … being pushed into an activity by the actions of others feels (and is) very different than being pulled in by the inherent attractiveness of the activity.” Don’t flatter yourself if you just floated a junk bond issue or syndicated a leveraged loan; investors are buying it with about as much enthusiasm and confidence as voters have when they cast ballots for the candidate they despise the least. The investment advice El-Erian dispenses at the end of the piece is irritatingly vague – we should pursue “strategies that are generally defensive yet agile enough to also be offensive as opportunities emerge.” (Sounds great! Was he channeling Bill Clinton when he wrote that bit?) But on the whole we agree with the Journal reader who wrote in the comment thread that “it was a pretty cogent argument for accepting the condition of ‘we don't even know what we don't know.’”
The Journal profiles John Williams, the president of the San Francisco Fed, who’s been advocating for years that the Federal Reserve Board disclose its interest rate forecasts, something the central bank is now about to start doing. Although he keeps a framed Zimbabwean 100 trillion dollar bill in his office as a reminder of the hazards of money-printing, Williams generally supports the Fed’s recent “unconventional” monetary stimulus policies.
AIG has hired a “chief science officer.” Murli Buluswar, whose resume includes a stint at Capital One, will lead a team that mines behavioral data to “improve loss forecasts, reduce costs and devise more accurate pricing. … This ‘technical pricing’ has become common in recent years for some financial-services firms.”
The SEC wants U.S. banks to give investors more details about their exposures to European debt. Disclosure to date has been “inconsistent in both substance and presentation,” the regulator says. Among other things, banks should “spell out the source of credit default protection,” suggesting that “investors should be given all the information so they can decide whether the hedges will be effective or not.” Like, if you’re hedging Portuguese sovereign debt with an insurance contract from a Portuguese bank, shareholders just might consider that material information.
New York Times
Columnist Gretchen Morgenson writes approvingly of the handful of state attorneys general who are “taking matters into their own hands” with mortgage servicers rather than leaving the issue to the multistate task force negotiating an industrywide settlement. She focuses on a recent suit brought by Catherine Cortez Masto of Nevada against Lender Processing Services. The AG’s complaint contains shocking allegations by former LPS employees, including a temp who “said she was paid $11 an hour … ‘to sign somebody else’s signature on documents.’ … She signed roughly 2,000 documents a day for months.” Morgenson’s overarching point is that details like these can only be turned up by investigations that a settlement would preclude. “Why strike a deal … without knowing what happened?” Very Rakoffian.
President Obama visited the Consumer Financial Protection Bureau’s headquarters Friday “in what amounted to a victory lap” a few days after his controversial recess appointment of Richard Cordray to run the agency. “Now that he’s here,” Obama said of Cordray, “irresponsible debt collectors and payday lenders and independent mortgage servicers and loan providers — they’re all bound by the same rules as everybody else.” At least until the inevitable legal challenges are filed.
McKinsey Quarterly: This article by the consulting giant is getting a lot of buzz. It warns that if banks don’t rethink and reinvent their business models, their average return on equity could drop to 7% by 2015 from 11% today, against a cost of equity McKinsey projects to top 9%. Basel III, Dodd-Frank and consumer deleveraging are the main reasons for the expected steep decline in profitability. The article doesn’t go into a whole lot of detail about how banks can set about transforming themselves, but it does suggest that technological advancements could dovetail with the need to transform retail banking: “In five years, branch banking will probably look fundamentally different as branch layouts, formats, and employee capabilities change. The use of the Internet and mobile devices will grow exponentially. Overall, the cost of serving each customer in a branch is likely to fall by one-third.”
Mashable: Two payments companies, Dwolla and LevelUp, made this technology site’s list of “startups to watch in 2012.”
And, Lastly ...
Fox News: “As president, I will break up the big banks [and] end future taxpayer bailouts,” declares John Huntsman in an op-ed. He would do this “by imposing a fee on banks whose size exceeds a certain percentage of GDP, proving them an incentive to slim down and localize.” This is gutsy stuff, well bolder than Dodd-Frank in its approach to Too-Big-to-Fail banks. But wait, who’s John Huntsman again?