PwC held accountable for bank failure; Fed gets friendly

Editor's note: Morning Scan will not publish on Wednesday, July 4, in observance of Independence Day. We’ll be back on Thursday, July 5.

Receiving Wide Coverage ...

Missed signals: A federal judge ordered PricewaterhouseCoopers to pay $625.3 million in damages for failing to detect a fraud that led to the 2009 failure of Alabama’s Colonial Bank, one of the largest bank failures during the financial crisis. U.S. District Judge Barbara Jacobs Rothstein ruled last December the accounting firm was negligent in failing to discover the fraud at Colonial, and on Monday she sided with the Federal Deposit Insurance Corp., the failed bank’s receiver, on the proper level of damages.

The judgment against PwC “is one of the largest judgments or settlements ever for malpractice by an accounting firm, and accentuates longstanding concerns over the quality of audits performed by the Big Four accounting firms,” the Wall Street Journal says. Wall Street Journal, Financial Times

Wall Street Journal

Let’s make a deal: The Federal Reserve showed mercy when it gave Goldman Sachs and Morgan Stanley the option of accepting failure on the second round of stress tests or agreeing to hold steady the amount of dividends and stock buybacks they will return to shareholders. The banks settled on the latter, rather than having to retake the tests if they wanted to return more to investors.

Luke Sharrett/Bloomberg

“The arrangement is the first of its kind in the eight years of the Fed’s annual tests, and one of the clearest signs to date of a significant shift in the regulatory environment for banks, which have been expecting a gentler approach from Washington ever since the election of President Donald Trump,” the paper comments.

On the hunt: Social Finance wants to build a $500 million war chest through an unsecured line of credit from banks “that could go toward potential buyouts of other financial-technology firms.” SoFi, which is now led by Anthony Noto, a former Goldman Sachs banker, “is looking to ramp up acquisitions as a way to make the online lender a more full-service financial institution.”

“We don’t have any near-term plans, but we’re building a strategy and a process to evaluate the different opportunities as they come our way,” Noto said.

Where are they now: Fabrice Tourre, the former Goldman Sachs subprime mortgage bond trader who was convicted in 2013 of federal charges of defrauding investors, is now conducting postdoctoral research in economics at Northwestern University.

Joseph Cassano, the former chief executive of AIG’s financial products unit in London, now devotes his time to philanthropy. “Few individuals played a more pivotal role in the financial crisis than” he, the paper says.

Financial Times

Moving toward legitimacy: Switzerland is expected to grant cryptocurrency companies full access to conventional banking services by the end of the year, “removing one of the restrictions to future growth.” The move would allow “crypto companies to operate with banks in the same way as other companies.”

Elsewhere

Growing shadow: The so-called shadow banking industry in the U.K. is now larger than the country’s GDP, according to the Office for National Statistics. The agency estimated the nonbank lending industry totals £2.2 trillion, although it could be much larger. By contrast, traditional British banks have combined balance sheets of £12 trillion.

Quotable

“We are pleased that the court recognized there are consequences when an auditor breaches its duty to the investing public.” — FDIC attorney Stephen Sorensen on a federal judge’s ruling against PricewaterhouseCoopers in the failure of Colonial Bank.