Breaking News This Morning ...
HSBC Earnings: The British bank said Monday it will cut up to 30,000 jobs and it reported a better-than-expected first-half profit. HSBC is selling 195 branches, mostly in upstate New York, to First Niagara (more on that below.) Wall Street Journal, New York Times
Receiving Wide Coverage ...
Debt Deal: Congressional leaders from both parties said Sunday night they'd agreed on a "framework" for a compromise plan to lift the debt ceiling. The Journal included in its package of related content a White House fact sheet on the preliminary deal. Times columnist Paul Krugman said the compromise amounted to "abject surrender" by President Obama to "blackmail on the part of right-wing extremists" and a "catastrophe on multiple levels" because the cuts will "depress the economy even further." An unsigned editorial in the Times sounded many of the same themes as the Krugman column, saying that the debt-ceiling deal "demonstrates the effectiveness of extortion" by "Republican extremists." On that point, the editorial page of Journal concurred, in a manner of speaking, proclaiming the agreement "a Tea Party Triumph." Wall Street Journal, New York Times, Washington Post
Waiting to Exhale: The caveats surrounding the agreement can be summed up in this headline from the Journal: "Market Relief May Be Fleeting." A story in the Times drills down into the preparations for the worst the financial services industry had been making, and the tentative relief its members felt upon hearing the news following "an anxious weekend spent glued to their BlackBerrys and iPhones." At JPMorgan Chase, for example, CEO Jamie Dimon "huddled with his senior managers on Sunday afternoon at the bank's Park Avenue headquarters. Executives even set up a war room to react to the political developments, just as they did for natural catastrophes like Hurricane Katrina. With no deal in place by Sunday afternoon, Chase announced that it would temporarily waive overdraft fees and other account charges for Social Security recipients, military workers and other federal employees if their government-issued checks were not posted." Another Times story quoted PIMCO's Mohamed El-Erian as warning on television that thanks to the provisionally agreed-upon federal budget cuts, "Unemployment will be higher than it would have been otherwise. Growth will be lower than it would be otherwise. And inequality will be worse than it would be otherwise. … We have a very weak economy, so withdrawing more spending at this stage will make it even weaker." A third Times piece looks at the potential damage this episode may have done to the country's reputation among global creditors. The paper quotes the IMF's Christine Lagarde, again from a TV appearance, as saying that investors have long had "'a positive bias towards the United States of America, towards Treasury bills.' The events of the past few weeks, she said delicately, are 'probably chipping into that very positive bias.' " Speaking of T-bills, columnist Floyd Norris considers how the uncertainty has driven recent, uncharacteristic fluctuations in this market. The Times also looks at how the prospect of a U.S. default affected money market funds. "Breaking the buck," a phenomenon not seen since the nadir of the financial crisis, has become a fear for these funds again, the story says. Finally, the Times considers the contrarian view that a failure to raise the debt ceiling, and even a default, wouldn't necessarily have been all that bad. The crux of the argument is that "lawmakers need to focus on the nation's long-term financial health rather than its current bind."
Those Buffalo Branches: HSBC, retrenching in the U.S., agreed to sell them to emerging consolidator First Niagara for $1 billion, a 6.67% premium on the deposits. Thirteen HSBC branches in Connecticut and New Jersey will be folded into neighboring ones, but the bank will keep its 116 branches in New York. HSBC's U.S. credit card portfolio remains on the block. But the more interesting story here may be First Niagara. According to the FT, the buyer outbid larger rivals Keycorp and M&T for the HSBC branches. The paper quoted First Niagara CEO John Koelmel as saying it will eventually have to do a capital raise to support the larger balance sheet, although right now "the financial markets are in a bit of disarray." The FT also raises the possibility of antitrust hurdles for the deal, given how concentrated the Buffalo market is. Wall Street Journal, New York Times, Financial Times
Wall Street Journal
A feature story looks at how the recent crises in the U.S. and Europe, coupled with long-running shifts in investor thinking, have turned some of the global credit markets' fundamental assumptions on their heads. "Emerging countries, which have typically been charged higher interest rates because of their perceived risk, are now paying as little to borrow as developed nations, if not less. Bond investors now appear to see Mexico and Brazil as less risky than the European countries that were once their colonial rulers, Spain and Portugal. The ongoing debt-ceiling debate has pushed the cost of credit-default swap insurance on U.S. Treasurys—long the ultimate 'risk free' investment—above that of Brazil."
First Niagara's ambitions notwithstanding, "there is no foreseeable end to the slump in financial sector mergers and acquisitions, according to a report by KPMG, as uncertainty over new regulation continues to dampen banks' appetites for big deals."
The moral for executives of this story about a recently fired Allstate manager is pretty simple: should you find yourself at a bar with members of the sales force, don't use obscenities to describe your CEO.
New York Times
Columnist Gretchen Morgenson is incredulous that the mortgage industry is balking at the definition of QRM proposed by regulators (particularly the 20% down payment requirement). She notes that on this issue, the lenders have the rare support of consumer advocates, and then quips: "One wonders how people who have lost their homes because of abusive lending practices feel about their 'advocates' forming an alliance with mortgage lenders on this issue."
The most interesting parts of this book review of Jeff Madrick's "Age of Greed" are the anecdotes involving the late Citicorp chief Walter Wriston. First, in the 1960s, Wriston led the effort to circumvent Regulation Q, which restricted the payment of interest on demand deposits. Despite Madrick's black-and-white view of financial deregulation as purely the work of gung-ho free-marketeers, reviewer Sebastian Mallaby sees a more nuanced picture: "Regulators fully understood that the demise of Reg Q would drive up the banks' borrowing costs, which would in turn lead them to chase higher-yielding loans to riskier customers," but "if Q was enforced, depositors would lend directly to companies by buying their debt in the securities markets. The choice was between deregulating the banks, which would be risky, or seeing financial activity move into hard-to-monitor markets, which might be even more risky." Then in the 1970s, as Citi faced losses on the Penn Central Railroad default, Wriston went hat in hand to the Fed. "Four decades ago, in other words," Mallaby writes, "the 'too big to fail' doctrine was already operative."