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Quicken reduces size of IPO; Democrats call for a new Fed mandate

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Lowered expectations

Quicken Loans parent Rocket Companies was “expected to price its IPO below expectations at $18 a share” and was “also likely to sell about 100 million shares in its offering, fewer than the 150 million the company had originally planned,” the Wall Street Journal reported. “The smaller-than-expected offering, at a lower price, illustrates how even as the IPO market has warmed in recent months, investors are still sensitive to price when the coronavirus has destabilized the economy.”

“At that price and with that number of shares sold, the initial public offering would raise about $1.8 billion. The debut had been expected to raise as much as $3.3 billion in what would have been the year’s largest IPO. Rocket had expected shares to price between $20 and $22. The stock is expected to start trading Thursday.”

“Quicken had hoped for a strong reception after becoming one of the big financial beneficiaries from the fall in interest rates this year, which led to a jump in mortgage refinancing and increased the profits mortgage lenders can make,” the Financial Times said. “In the first quarter, Quicken refinanced $52 billion in loans, double the amount for the same period a year earlier.”

“But the outlook is muddied by questions over the U.S. economy and in particular the housing market, where more than 8% of borrowers are not currently paying their mortgage thanks to forbearance plans instituted by the federal government and lenders.”

“Nonetheless, the return to the public markets” for Quicken Loans founder Dan Gilbert “is a milestone for a man who was among the first entrepreneurs to grasp the potential for selling home loans directly to consumers, first over the phone, then the internet,” the FT said. “This has made him very rich. Even after cutting the IPO price, Rocket Companies is valued at about $36 billion. Mr. Gilbert will remain majority owner.”

Writing off Wirecard

Commerzbank said it “wrote off €175 million ($207 million) in the second quarter related to a large single case. While it didn’t name the case, a person familiar with the situation said it was Wirecard,” the Journal reported. “The charge came on top of €131 million it took from the effects of the coronavirus pandemic.”

“Commerzbank was among 15 banks that had together lent Wirecard €1.75 billion under a revolving credit facility. Some of the banks have tried to sell the exposure in recent weeks, but finding buyers hasn’t been easy. The firesale of the Wirecard loans, and in Commerzbank’s case the big writedown, suggests banks don’t expect to recoup much of the money from insolvency proceedings.”

“Renowned short seller” David Einhorn said Wirecard was a fraud “hiding in plain sight,” with “many voices yelling ‘Fraud!’ at the top of their lungs.”

“Rather than investigate the fraud allegations, the auditors continued signing the annual financial statements,” the head of hedge fund Greenlight Capital wrote in his quarterly letter to investors. In addition to regulators and auditors, Einhorn “also took aim at the sell-side analysts who ‘refused to engage in any real analysis of the controversy’ despite concerns over [Wirecard’s] accounting methods.”

Despite the big Wirecard write-off, Commerzbank still has its biggest shareholder — the German government — on its side. “On Monday, the government backed a new chairman over the vehement objections of Cerberus, which said the nominee, Hans-Jörg Vetter, was not ‘the right person for this job.’ ”

“A few weeks ago Cerberus seemed to be on the cusp of provoking a major shake-up in German banking after it pressured the two top executives of the country’s second-largest lender to quit,” the New York Times reports. “The firm has been lobbying hard for drastic cost cuts and other painful changes to reverse the bank’s chronically mediocre profits. But the interloper’s victory didn’t last long. Now the German establishment is pushing back in a battle for control that may determine whether the country’s banks can arrest their slide into irrelevance.”

Separately, “a German businessman responsible for one of Wirecard’s biggest sources of stated profits has been reported dead a month after Philippine authorities announced he was under investigation over the payments company’s collapse,” the FT reported. “The death of Christopher Bauer, 44, was reported to a civil registry in Manila last week. In June, Philippine authorities said they were investigating him and his wife, Belinda Bauer, in a probe involving Wirecard’s partner businesses. The Bauers were the owners of PayEasy Solutions, a Manila-based payments processor that was a key business partner for Wirecard,” accounting for about 10% of its reported revenue in 2018 “and more than a fifth of its operating profit.”

Washington Post

New mandate

“Congressional Democrats introduced new legislation on Wednesday that would make reducing racial inequality in the U.S. economy an official part of the Federal Reserve’s mission. The Federal Reserve Racial and Economic Equity Act requires the central bank to take action ‘to minimize and eliminate racial disparities in employment, wages, wealth, and access to affordable credit.’ ”

“While the legislation is not expected to pass Congress while Republicans control the Senate, it signals a growing consensus among Democrats that the Fed has played a role in deepening inequality and needs to be part of the solution to close gaps in employment and pay. It would be the first major change to the Fed’s mandate since 1977 and would significantly alter the central bank’s focus. Presumptive Democratic presidential nominee Joe Biden recently released a similar proposal. This latest bill in Congress goes a step further by explicitly requiring the Fed to work to close the gaps.”

The legislation, introduced by House Financial Services Committee Chair Maxine Waters, D-Calif., and Sens. Elizabeth Warren, D-Mass., and Kirsten Gillibrand, D-N.Y., would also require the Fed to report to Congress on how it would address racial disparities, American Banker’s Hannah Lang reports.

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