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AIG's Restructuring Examined: American Insurance Group released its plans Tuesday for a corporate restructuring aimed at appeasing restless investors, but already critics have begun to poke holes in the plan. The insurer plans to separate its company into nine units that can be spun off at any time. It plans an initial public offering for its mortgage insurance unit and decided to create a legacy portfolio for non-strategic assets in a manner similar to banks. Observers have noted this plan could come back to haunt AIG's executives. Dividing the company into nine units will allow investors to critique the value of each of AIG's businesses better. That means AIG will ultimately have to live up to its promise to shed unsuccessful units, and in the meantime, it'll need to boost the quality of financial disclosure to improve transparency. Ultimately, the choice not to break up outright is all but guaranteed to set the stage for a proxy battle with investors, such as Carl Icahn, who remain unhappy about the insurer's designation as systemically important by regulators.
RBS, Santander Take Hits on Settlements: The Royal Bank of Scotland is singing the blues – or more appropriately, the reds. The Scottish bank said Wednesday it will once again report an annual loss, even as it has pursued a companywide restructuring. The bank has not posted a profit since 2007. This year, RBS' earnings woes come courtesy of a series of charges that hit the bank. RBS is to pay £4.1 billion ($5.88 billion) to settle mortgage-backed securities litigation in the U.S. and issues stemming from missold insurance accounts in the U.K. RBS had not set aside provisions for the resolution of those matters, leading it to its current predicament. As a result of the poor quarter, it is less likely the British government will sell more of its shares in the company – it still holds a 73% stake in RBS, but has been attempting to reduce that. Meanwhile, at Banco Santander in Spain, profits were almost entirely gobbled up by a one-time charge of roughly $1.8 billion. The charge also settles issues related to the sale of an insurance product, and it includes provisions to compensate affected consumers. Altogether, the bank reports a €25 million ($27 million) profit for the quarter, versus €1.46 billion ($1.59 billion) a year ago.
Wall Street Journal
The Federal Reserve just can't seem to catch a break since it hiked interest rates in December. The central bank is expected to hold interest rates at this month's FOMC meeting – and that's likely for the best, considering the effects of the rising dollar. The strength in the dollar complicates "efforts to slowly move rates higher while having little negative effect on the economy." It has thrown into sharp focus major issues with the global economy, such as falling commodities and economic weakness among developing economies. Consequently, U.S. exports have taken a hit, which is set to weigh on earnings. Observers may want to brace themselves as analysts predict continued increases in the dollar's value, though not as sharp as in 2015.
The Securities and Exchange Commission is planning its agenda, and diversity is on the table. As SEC chairman Mary Jo White enters what is likely to be her last year as head of the commission, boardroom diversity and executive compensation appear to be the hot topics she'll deal with. White said the commission may consider requiring companies to report on the diversity of their directors, citing concerns that current disclosures don't provide enough information on the subject. Future disclosures may require information on the race and gender of board nominees. Additionally, White said she wants to complete the executive compensation rules that were proposed last year, including provisions related to clawbacks.
Since Lending Club's debut on the New York Stock Exchange at the end of 2014, it's not quite been smooth sailing for peer-to-peer lender despite its promising results. The company has doubled its revenue in the year since and issued billions of dollars' worth of loans. But the company's stock has fallen, and it appears that Lending Club's success is partly to blame. Investors have become wary of the competition – both from brick-and-mortar traditional banks and other online lenders. Regional banks, including Citizens and SunTrust, have begun to invest more efforts in personal lending. Big banks have also gotten in on the action – Goldman Sachs is planning a consumer-oriented online division. And other nonbanks, such as LoanDepot.com, have been encroaching on Lending Club's turf more directly. At the same time, Lending Club and other P-to-P lenders have come to face the scrutiny of regulators, including more stringent oversight from the Consumer Financial Protection Bureau and an investigation into pricing and credit quality by the California Department of Business Oversight. The company's chief executive and co-found Renauld Laplanche told the publication that Lending Club is exploring other ways to improve profits and investors' interest. These could include new product areas, such as car loans or partnerships with traditional banks in the vein of the recent deal between JPMorgan Chase and OnDeck Capital.
New York Times
With stocks in a downward spiral thanks to a multitude of issues, the fate of activist investors has come into question. Disrupting a company, as activist hedge funds do, used to be a lucrative proposition. Solidifying a corporate change such as a spinoff or a sale could produce excellent returns for the investor when the market was still in its bull run. Plus, anytime the activist made a mistake, it was close to a guarantee that the market's gains would help cover it up. But with today's market volatility, activist investors cannot count on the same assurances, and as a result takeover activity has slowed. Turnarounds are understandably harder to accomplish when times are tough for everyone – and already 2016 appears to be shaping up as a repeat of 2008 in that sense. The question that remains is whether these hedge funds will survive the year ahead, or fold under the weight of the downturn, according to the paper.
It's time to challenge the conventional wisdom surrounding the cause of the financial crisis, according to an op-ed by Mercatus Center visiting scholar David Beckworth and American Enterprise Institute visiting fellow Ramesh Ponnuru. They argue it's become accepted as a fact that the bursting of the housing bubble caused the Great Recession and its fallout. But presidential candidate Sen. Ted Cruz offers an alternative take on the cause of the crisis, which they suggest should be considered. Cruz argues the Federal Reserve steered the country into the crisis when it chose to tighten monetary policy. While the downturn in housing caused concerns about subprime mortgage bonds as early as 2006 and was pushing us toward a recession, it's the tightening of monetary policy in 2008 that threw us into the fray full-throttle, the authors say. As further evidence, they point to Australia where a housing boom led to a bubble, but looser monetary policy kept the fallout closer to a correction than the Great Recession.