Receiving Wide Coverage ...
QE3 Surprise: In a departure from recent statements, Federal Open Market Committee indicated a willingness to step up bond purchases. Previously the Fed had hinted only that it might reduce monthly purchases. Now the official line is they could go up or down, depending on inflation and job growth. The upshot of all this Kremlinology: The shift to a neutral stance means the economy is still pretty weak. Wall Street Journal, Financial Times
Mel Watt: Obama's pick of the North Carolina congressman to head the FHFA signals "the administration's desire to preserve a substantial role for the government in the future of the housing market," according to the Post. However, Watt tells the Times, "I am committed to finding a new model, and that model includes winding down Fannie and Freddie." He even says that as FHFA director, he'd be obliged to look at principal reduction "from the homeowner's perspective and the taxpayer's perspective," not just the former. "There are a lot of things I might have to approach differently as a director of this agency." (He's been a big advocate of principal writedowns, which acting FHFA director Ed DeMarco staunchly opposes.) In any event, Watt faces a tough confirmation battle in the Senate, with Bob Corker, a Republican member of the Senate Banking Committee, saying flatly, "I could not be more disappointed in this nomination." The Times also notes, "While Mr. Watt is known for promoting lending to low-income and minority borrowers, he is not considered unfriendly to banks. Financial firms … are among his biggest donors, in no small part because Charlotte, part of which is in Mr. Watt's district, is a banking center." New York Times, Washington Post
Wall Street Journal
Another day, another trial balloon about regulatory capital. "The Fed and Federal Deposit Insurance Corp. are considering requiring certain large, complex banks to maintain a minimum level of unsecured long-term debt, according to people familiar with the discussions." The idea is to "place a greater burden on creditors, rather than taxpayers, in the event of a bank's demise," and also help stabilize funding costs. Makes sense (Former FDIC Chairman Sheila Bair and others have made similar arguments). The article says these deliberations are part of a broader effort by regulators "to force banks to shrink voluntarily by making it expensive and onerous to be big and complex." (Force voluntarily?) This follows the FT's report yesterday that the Fed was thinking about setting a higher leverage ratio for U.S. banks than required under Basel III. Actually, a Google search just reminded us the FT reported in December that the long-term debt thing was being considered, and quoted an actual human being, Fed Gov. Daniel Tarullo.
"Clubby London Trading Scene Fostered Libor Rate-Fixing Scandal": We had to read through lots of salacious anecdotes about interbank brokers entertaining traders with meals, ski trips, and "more legally questionable activities" (use your imagination) before we found the mechanics of how this relates to Libor. "Acting at the behest of bank traders who stood to profit from movements in Libor," these brokers allegedly "encouraged other banks to provide inaccurate Libor data and spread false market information intended to move Libor." One former UBS trader "repeatedly asked brokers to tweak certain data that they provided to other banks, which those banks used to determine their Libor submissions, the regulators say." The brokers obliged these requests for the same reason they took the traders to establishments like "Lady Marmalade Adult Parties": to win more of the traders' business. Conversely, traders would reward brokers by engaging in "wash trades" that cancel each other out but generate brokerage commissions, authorities claim. A "gotcha" graphic accompanying the story, detailing an instant-message exchange between a broker and a trader, shows that however any legal case turns out, these pinstriped boors should be sentenced to remedial training in punctuation and capitalization.
"Foreign banks trying to escape a Federal Reserve proposal to increase their capital levels have found an unlikely champion in the New York regulator that threatened to put Standard Chartered out of business in the US." That would be Benjamin Lawsky.
New York Times
"In Brown-Vitter Bill, a Banking Overhaul With Possible Teeth" — A sympathetic but critical appraisal.
"Banks Ease Capital Cost of Loans to Brokers" — That is, loans made to individual financial advisers to get them to join the firm, forgivable over time if the adviser hits performance targets and sticks around. The capital cost is eased by holding the loans outside the broker-dealer unit, thus evading SEC requirements. "This is classic regulatory arbitrage," says a finance professor.