Wall Street Journal
The Dodd-Frank restriction on the Federal Reserve's authority to be a lender of last resort poses a threat to financial stability, Glenn Hubbard, former chair of the Council of Economic Advisers under President George W. Bush, and Hal Scott, a Harvard Law School professor, write in an op-ed for the Wall Street Journal. Restrictions on federal guarantees for bank deposits and money market funds also contribute to the threat. The Fed's lender-of-last-resort authority can be labeled a bailout, but it's a necessary feature of the financial system, the authors write.
Santander is expected to name the former head of JPMorgan Chase's consumer bank as the chief executive of its U.S. holding company, the paper reports, citing unnamed sources. Scott Powell will be named CEO of Santander Holdings USA, holding company for Santander Bank and 61% owner of Santander Consumer USA. Banco Santander, the Spanish parent company, is also expected to move its Puerto Rican bank and its private bank under Santander Holdings USA; those units had been direct holdings of the Spanish parent company. The Journal points out Santander Bank is expected to fail the Federal Reserve's stress test this month, because of how the bank measures and predicts potential losses and risks.
A year after it failed the Federal Reserve's stress tests, Citigroup is under pressure to perform better this time around. In fact, another failure may result in investors clamoring for CEO Michael Corbat to be shown the door, along with Chief Financial Officer John Gerspach and Brian Leach, head of risk, anonymice tell the Financial Times. Citi's board might also back that idea, in the event of another stress test failure. The FT does note that most analysts expect Citi to pass this year, pointing out the work Corbat and other Citi execs have done over the past year on getting ready for stress testing.
New York Times
Wells Fargo has decided to limit the dollar volume of its subprime auto originations to 10% of overall auto originations, the New York Times reported, citing interviews with unnamed executives at Wells Fargo and other auto lenders. Other banks may follow Wells Fargo's lead, the article suggests (presumably based on its interviews with anonymous sources). Wells Fargo's move comes amid signs that the subprime auto loan segment is overheating. Wells Fargo had recently said the bank will take a pass on subprime loans to certain borrowers, if another bank "will accept a lower risk-adjusted return." Regulators are also keenly aware of the potential for problems in the subprime-auto sector. Some lenders have extended the repayment periods on subprime borrowers to 84 months and making loans that are larger than the value of the car, an OCC regulator told a panel last week at the annual conference of the Global Association of Risk Professionals.
Eric Holder has given staff members 90 days to come up with new civil or criminal prosecutions involving mortgage-backed securities, before he closes the door for good on such cases. Columnist William D. Cohan slams Holder for not prosecuting a single executive for his or her role in the crisis. Cohan offers his suggestion for two bankers whom he thinks could be valuable whistleblowers in helping Holder bring cases: former Citigroup exec Richard M. Bowen III and former JPMorgan exec Alayne Fleischman. Both Bowen and Fleischman have already given lots of dirt to the Justice Department and the Securities and Exchange Commission and "both remain willing to help make a case against their former employers," Cohan writes.
A collection of arguments against the concept of giant banks is offered by Gretchen Morgenson, presented in the context of JPMorgan Chase last week fighting back against those who want to break it up. One, a recent study published by the Bank for International Settlements shows high-growth financial sectors actually impede economic growth and curb productivity. It's a very complicated argument, but the essential point is industries that produce ideas, instead of tangible things that can be seized as collateral, get less financing in boom economies. Another academic study mentioned by Morgenson points out the financial industry accounted for as much as a quarter of the increase in wage inequality between 1988 and 2006.
How about this niche industry as a new area of growth for banks: loans to fund divorce settlements. Companies like BBL Churchill Divorce Finance, Balance Point Divorce Funding and Novitas pursue a strategy of making loans to a spouse who has little money and wants to file for divorce and seek a big financial settlement from their former loved one who has lots of dough. These firms lend up to 25% of the value of a projected divorce settlement, with rates between 12% and 18%.