B of A Tapped Retail Unit for Risky Trades; Disclosures 'Useless'

Wall Street Journal

Bank of America used federally insured retail deposits to finance risky trades by its European investment banking unit, the paper reports. The bank says it no longer engages in the practice, which is aimed at helping hedge funds and other clients avoid taxes. Regulators had previously questioned Bank of America about the reputational and legal risks associated with dividend arbitrage, and now a bank employee has made whistleblower submissions to the Securities and Exchange Commission, reviewed by the paper, regarding the involvement of U.S. retail deposits. As the paper reported last year, other banks engage in dividend arbitrage as well, although that report made no mention of banks tapping into their government-backed U.S. units to do so. Either way, the news about BofA will likely fire up those who want to bring back Glass-Steagall or at least impose stricter firewalls between insured depository institutions and banking units that engage in riskier activities. Former Federal Deposit Insurance Corp. chair Sheila Bair tells the paper, "I don't think it's an appropriate use" of retail deposits. "You have explicit government backing inside a bank. There is a taxpayer risk there."

Many banks have been backing out of commodities trades in the aftermath of the financial crisis, but Goldman Sachs is still at it. That strategy isn't necessarily paying off with investors, who value the bank at roughly the same price as Morgan Stanley even though Goldman is the higher-earning company.

Red flags are popping up left and right in the auto lending market, according to John Carney of "Heard on the Street." The latest problem is federal regulators and prosecutors have taken fresh interest in investigating the lending practices of auto financers including Santander Consumer, GM Financial and Ally Financial.

Financial Times

In what may not be the world's most controversial stance, the paper's John Gapper suggests private banks should avoid helping wealthy clients dodge taxes and launder money. Regulatory crackdowns on shell companies could weed out those who are trying to disguise criminal activity, he suggests, while the rich should reflect on whether "they want to resemble money launderers, carrying piles of notes out of private banks to sidestep taxes that other people pay."

New York Times

A lot of disclosures are useless to the people they're supposed to help, writes ProPublica's Jesse Eisinger. The problem is the more complex the transaction, the more complicated the disclosures — a theory that applies to everything from buying a car to securities trading. The solution is not simplified disclosures but "hard and fast rules," according to Eisinger. "If lawmakers want to end a bad practice, ban it. Having them admit it is not enough."