Receiving Wide Coverage ...
Not ‘Important’: MetLife, the country’s largest life insurer, has scored a significant victory in court, winning its battle with regulators over its designation as a systemically important financial institution (SIFI). U.S. District Judge Rosemary Collyer said in her decision that she sided fully with MetLife on two counts and partially on a third. MetLife argued federal regulators assigned the label in an “arbitrary and capricious” manner using a problematic process. In the immediate aftermath of the decision, MetLife will not face the more stringent capital requirements that come with its SIFI designation. The broader implications still remain unclear, though. The full decision was released under seal, and parties in the case have until April 6 to inform the court whether they want any portions of the ruling redacted if a version is made public. Consequently, it is not yet clear how broad of an effect the ruling will have – depending on the language Collyer used, the floodgates could open to challenges regarding regulators’ decisions including from other nonbanks, such as AIG and Prudential. The decision is already being labeled a defeat and a setback for the Obama administration, which has vigorously defended the process used to determine an institution’s importance, which was set up by Dodd-Frank. Others believe the case will be used as a magnifying glass to assess the usefulness of Dodd-Frank overall, with some arguing it could cause the law to crumble. The U.S. government still can appeal the ruling, but if it loses the appeal that could cause regulators to become more cautious in imposing new rules, which could have a significant effect on the financial services industry and the safety of the financial system.
The Fintech Threat: A report from Citigroup could change the way we look at financial technology. The 112-page report detailed how European and U.S. banks are expected to cut roughly 1.7 million jobs over the next decade as a result of progress in fintech, particularly in areas such as lending and payments. That figure amounts to roughly 30% of current employees of the banking industry. The report detailed that many of the jobs would be lost to nonbanks and start-ups acting as disruptors in these spaces, such as SoFi and PayPal. But the changes aren’t just coming from the outside. Citigroup’s analysts detailed how banks made a record $19 billion investment last year in technology, up from $1.8 billion in 2010. Citigroup also detailed how adoption of fintech varied by a geographu. For instance, in China nonbanks such as Tenpay and Alipay dominate the payments space, and Chinese consumers have adopted mobile payment technologies in droves, unlike their counterparts in the U.S. and Europe. The report contained it brashness – pointing to the example of Bill Gates calling banks “dinosaurs” in the 1990s, a prediction that did not quite come true. While technology can certainly replace many functions performed by employees, the banking industry still must rely on manpower to deal with certain regulatory requirements. Nevertheless, banks will continue to face pressure from digitally minded consumers who want online product options and investors who want more streamlined companies.
Wall Street Journal
The U.S. government’s anti-terrorism efforts have had the unintended effect of driving money underground for many individuals and groups kept out of the banking system, the paper says. Banks across the country have closed accounts for thousands of people and organizations because the institutions considered them to be potentially high-risk or difficult to monitor. Of course, many of these people and groups are innocent, but many are suspected criminals or terrorists that the government wants to monitor – a more difficult task when banks deny these customers, forcing them to take their financial business to underground, cash-based channels. In particular, banks have closed the accounts of nearly half of 82 money-transfer companies surveyed recently by the World Bank, forcing many of the companies out of business. Officials argue that banks should manage the risky accounts, not close or deny them altogether. But monitoring accounts for potential terrorism-related activity is a costly endeavor and difficult, since terrorists may not transfer money in amounts large enough or with enough frequency to flag attention.
Perceptions of banking and commercial real estate may be skewed, which could be leading investors toward riskier options. Ken Brown, who led the paper’s Asia finance and markets coverage for more than four years, detailed how attitudes among investors haven't changed since he left the states. Banks, he said, are still treated as distrustful, while real estate still garners much adoration, even though the two are deeply connected. This dichotomy, he argues, lends itself to the stalemate exemplified by market reactions to the Fed’s interest rate policy. He notes that while banks look similar today to the way they did before the crisis, the companies are working hard to cut costs and to make investment choices that avoid the risks of a housing bubble. And even when they trip up, as seen in many banks’ exposure to energy, it isn't in a manner that could cause it to crumble. Meanwhile, commercial real estate has attracted plenty of goodwill, with prices rocketing sky-high and foreign buyers flooding in. But this could be a mistake, as this real estate bubble could burst at any moment – and then it will be real estate alone that caused investors pain.
More information is coming to light regarding the challenges the Financial Crisis Inquiry Commission faced in advancing cases against Wall Street executives during its two-year existence. Congress created the bipartisan panel in 2009 to investigate what caused the crisis and to make recommendations regarding potential legal violations. Newly released documents have revealed some of the referrals the commission made before it was shut down by the Justice Department in 2011. The referrals related to executives at Citigroup, Merrill Lynch and AIG, and none turned into prosecutions. For Phil Angelides, who headed the commission, the Justice Department’s evident choice not to seek prosecution is a disappointing result. He told the paper it isn’t clear “what the department did in terms of fully investigating” the individuals mentioned in the referrals.
The story of Portugal’s Novo Banco is challenging long-held beliefs in the safety of certain investments. The Portuguese bank, known as the “bad bank,” was created from the remains of Banco Espirito Santo to house the failed bank’s toxic assets. At the end of last year, the Portuguese central bank decided to wipe out five of its bonds, enraging institutional investors, such as Pimco, despite vastly improving the bank’s capital position. The saga reflects changing perceptions among European financial authorities, which in recent years have held bondholders liable for banks’ troubles rather than burdening taxpayers by bailing out the banks. Consequently, bonds for European banks cannot be treated as the safe investments they once were, when bondholders took precedence over other investors. With bank debt riskier than before, new options of course have come to fruition in the form of so-called “coco bonds,” which convert to equity if a bank’s capital levels fall below a certain threshold. The real test of bonds new and old, of course, will come when a bank fails.
Philadelphia Inquirer: Villanova University basketball star turned once-successful Nova Bank chairman Barry Bekkedam is now standing trial for fraud. Bekkedam once lived the good life, traveling via private jet and collecting Ferraris and Aston Martins. But then, the financial crisis happened. He lost investors’ funds in a $1.2 billion Ponzi scheme, the paper reports. And ultimately the bank he co-founded, Berwyn, Pa.-based Nova Bank, failed, costing the Federal Deposit Insurance Corp. more than $91 million. Bekkedam and former Nova chief executive Brian Hartline are being tried in federal court on charges they defrauded the Troubled Asset Relief Program to cover up their misdeeds. To qualify for $13.5 million in Tarp funds, Nova had to raise $15 million from investors. Bekkedam and Hartline then allegedly issued loans to three individuals who immediately invested the money into the bank to make it look like the necessary capital was there. The two men then reportedly tried to hide the scheme from bank employees and auditors. Nova never received the Tarp funds, and Bekkedam and Hartline have argued that this make the government’s argument invalid. The men also claim that Tarp never asked where the money had come from and that the bank had taken similar actions in the past. And Bekkedam says that because he left his roles with the bank in 2007, he never dealt with Tarp directly. Pending the results of this trial, Bekkedam could still face charges of securities fraud that remain from a stayed case.