Receiving Wide Coverage ...
Downgrades: As had been widely expected for some time, Moody’s lowered its ratings on more than a dozen global financial companies, including five of the six largest institutions in the U.S. Although they remain investment-grade credits, the three diversified megabanks (Bank of America, Citi and JPMorgan) and two pure-play investment banks (Goldman, Morgan Stanley) will have to post more collateral and stand to lose trading revenue because of counterparties’ credit requirements. The downgrades will have spillover effects on money market funds (which generally can only buy top-rated commercial paper, and thus can no longer lend to the now-“Prime-2” Citi and B of A) and municipalities (which have relied on banks’ guarantees to lower their own borrowing costs). Moody’s rationale for the cuts is that the business of being a large, trading-oriented bank has permanently changed for the worse, including “the removal of the ‘too big to fail’ maxim,” according to the FT. Even if you doubt that this maxim has truly been removed, you gotta love the British paper’s “sell on the rumor, buy on the news” headline (“Moody’s downgrades end uncertainty”) as well as this on-the-record quote from a stout-hearted analyst at one of the downgraded banks: “We think some of the changes by rating agencies are not motivated from credit considerations, but rather are meant to protect them legally in the future.” Wall Street Journal, Financial Times, New York Times.
Speaking of Money Market Funds…: As previewed in the Times, SEC chairman Mary Schapiro stumped for further reform of these investment vehicles at a Senate hearing. The Journal’s editorial page weighs in, supporting her proposal to make money market funds allow net asset values (and hence share prices) to float. The Senators at the hearing were skeptical, though, as some of Schapiro’s fellow SEC commissioners have been.
Reg Reform Reconsidered: Several letters to the editor in the Journal this morning beg to differ with an op-ed the paper ran a few days ago by Frank Keating, head of the American Bankers Association. He argued that Glass-Steagall, had it still been in effect, would have worsened the 2008 crisis, since commercial banks like JPMorgan and B of A wouldn’t have been allowed to acquire ailing brokerages like Bear and Merrill. Scoffs one Journal reader: “Do any of us really believe that a policy of massive federal government bailouts and emergency lending, accompanied by forced, highly rushed and (as the Bank of America shareholders are now finding) costly acquisitions by the industry's remaining healthy banks, is the right answer?” Also in the Journal today, there’s an op-ed by the lawyer C. Boyden Grey and his client, Jim R. Purcell, the CEO of State National Bank of Big Spring, which has sued the government to challenge the constitutionality of the Dodd-Frank provisions that created the CFPB and the Financial Stability Oversight Council. The article lays out the plaintiff’s case that the law has eliminated checks and balances, for example by giving the CFPB a budget immune to Congressional oversight and prohibiting courts from reviewing the council’s designations of institutions as “systemically important.” Judging from some of the comments posted on American Banker’s story about this suit, Big Spring has become a folk hero for many people in the industry. We at the Morning Scan do wonder, though, why this little Texas bank decided to take up the cudgel. With $293 million in assets, it’s unlikely to be stamped as too-big-to-fail by anyone, and also exempt from much of the CFPB’s oversight. The curmudgeon who writes the Bank Lawyer’s Blog is delighted to see a broad legal challenge to the CFPB (and borrows Matt Taibbi’s “vampire squid” metaphor to describe the agency). But even this passionate advocate for regulatory relief writes that the hiring of Grey, a former White House counsel, “appears to demonstrate that the people behind this lawsuit are not paupers. It also demonstrates that this isn't a lone Texas community bank drawing a line in the sand. Still, there's something appealing about the front man for this group being a Gus McCrae-type Texan.” Read the Bank Lawyer’s post for more rugged western imagery.
Wall Street Journal
“Efforts by U.S. banks to avoid violating antiterrorism financing laws are crimping the ability of Somalis in the U.S. to send money home, prompting calls for Congress to revisit bank regulations on money transfers.” See earlier stories on this unintended consequence of regulation in American Banker here and here, and a previous Morning Scan roundup of articles on this issue from local media in Minnesota (which has a large Somali community).