Receiving Wide Coverage ...
The (Slow) Death of Cash: Canada is getting rid of its penny, which now costs 1.6 times more to produce than it’s worth. Here in the U.S., meanwhile, Christian Science Monitor guest blogger Joseph Salerno declares that Washington has been waging a “war on cash” by refusing to print bills in denominations larger than $100 since 1945. And a Benjamin today sure doesn’t buy as much as it did back then. “This has made large cash transactions extremely inconvenient and has forced the American public to make much greater use than is optimal of electronic-payment methods,” Salerno writes, bemoaning the loss of privacy that comes with transacting on the grid. Even if you find Salerno’s interpretation of events a touch conspiratorial, keep reading. In the second half of his post he reports a truly amazing phenomenon: the emergence of Tide detergent as a black-market currency for the drug trade. Not any laundry detergent, mind you, just Tide. It fits the bill, as it were, for a currency, Salerno writes. “Tide is the most popular brand of laundry detergent and is widely used by all socioeconomic groups. Tide also is easily recognized because of its Day-Glo orange logo. Laundry detergent can also be stored for long periods without loss of potency or quality. … Enough can be carried by hand or shopping cart for smaller transactions while large quantities can easily be transported and transferred using automobiles.” We hesitate to call Procter & Gamble for comment. For a more optimistic perspective on the digitization of money, MIT’s Technology Review interviews former Treasury Secretary and White House economic advisor Larry Summers about his work with Square (he’s on the board of Jack Dorsey’s disruptive payments company) and the tech VC firm Andreesen Horowitz (where he’s a “special advisor,” which means contributing as “a thinker, not just as a door opener”). “Today, money can get transferred from any part of the planet to any other part of the planet, essentially instantaneously,” says Summers, who also teaches at that other university in Cambridge, we forget what it’s called. “I think for the most part that's a positive thing. People can see prices more easily, they can act on their desires more efficiently; friction is rarely a good thing.” And if you haven’t already, check out American Banker’s video interview with David Wolman, author of the book “The End of Money,” in which he talks about the moral and public-health arguments for doing away with cash, the adoption hurdles for mobile payments, and the privacy issues that quite understandably bother people like Salerno (and us as well, we should emphasize). (While we’re shamelessly self-promoting, watch the clips from our recent analyst roundtable on a meat-and-potatoes banking topic: the future of superregional banks. The latest video focuses on the risks facing this category of institutions; another video has our panel of experts explaining why they nevertheless consider the mid-tier banks the best-positioned group in the new environment.)
Wall Street Journal
The junk bond market is going gangbusters. Issuance has surged this quarter as low-rated companies rush to take advantage of “some of the lowest borrowing costs in history” while they last and yield-hungry investors snap up the paper.
In his fourth and final lecture in a series of talks at George Washington University, Fed chairman Ben Bernanke defended the central bank’s post-crisis purchases of Treasury and mortgage-backed securities. The resulting "lower long-term rates have, in my view and in terms of the analysis we do at the Fed, promoted growth and recovery," he said.
“Sales of investment and vacation homes surged last year, the latest evidence that investors and higher-income households are taking advantage of low home prices to scoop up bargains.”
A court rejected a hedge fund’s challenge to Bank of America’s $8.5 billion settlement with bondholders over mortgage securities issued by that well-tanned sheep of the B of A family, Countrywide. The hedge fund, which the FT reveals goes by the gothic-sounding name Baupost (it filed its objection last year under the mysterious handle 28 Walnut Place LLC), had accused the trustee on the MBS pools, Bank of New York, of failing to stand up for all investors when it agreed to the settlement with B of A and a handful of large bondholders. B of A still needs a judge to approve the pact itself.
The U.S. Treasury auctioned off its TARP preferred shares in six small banks, fetching 88 cents on the dollar, for a $50 million principal loss. Though the government turned a small net profit on those half-dozen institutions when you factor in interest and dividend payments, we’ve got 350 more banks to go, worth $11 billion, and “the healthiest have probably already exited” TARP. Gulp.
New York Times
What if Moody’s makes good on its threat to downgrade 17 multinational financial companies, including Morgan Stanley, Citi and B of A? At a minimum, all three will have to post more collateral in derivatives trades. But they could also lose trading relationships with mutual funds and asset managers, or at least need to rewrite contracts with these clients. Already Morgan Stanley “has spoken to trading partners about rewriting contracts to allow for more leeway on credit quality and has had internal discussions about moving some trading activities to a bank subsidiary that has a slightly better rating than the company,” anonymous sources tell the Times. Since Citi and B of A do their trading through higher-rated subsidiaries, their worries may be less acute than Morgan Stanley’s, the paper says.
Ed Clark, the CEO who put Toronto-Dominion Bank on the U.S. map, will gradually move out of the job beginning next year.
The recent wild ride in exchange-traded notes is only one reason to be worried about these synthetic instruments. Law professor and “DealBook” columnist Stephen J. Lubben points out that in addition to their oft-noted counterparty risk (which is troublesome enough: where would the investors stand in the line to be repaid if the financial institution that sold the note went bankrupt?), ETNs lack such protections as margin collateral or central clearing. And they’re being sold to moms and pops. Gulp.
And, Lastly …
The New Yorker: The “Talk of the Town” column in this week’s issue takes the reader inside a convention of bank risk managers, where (spoiler alert!) the cocktail reception ends early.