Receiving Wide Coverage ...

The Fitch-Slap: "Unless the Eurozone debt crisis is resolved in a timely and orderly manner, the broad credit outlook for the U.S. banking industry could worsen." This warning Wednesday from the credit rating agency Fitch sparked a sharp sell-off in financial stocks late in the trading session. Fitch left its ratings for banks unchanged but said the "risks of a negative shock are rising." Wall Street Journal, Business Insider, Bloomberg

Life in the Big Citi: Citigroup is planning to cut 3,000 jobs, or 1% of its global workforce, the Times reported Wednesday morning, citing an anonymous source. This appears to include the 900 layoffs at Citi's securities and banking unit previously reported in the Journal. Today the Journal profiles Michael O'Neill, the new chairman of Citibank and a renowned bank-turnaround artist. At the helm of Citigroup's flagship subsidiary, he faces a "daunting task," the story says. A former Marine, "O'Neill will work closely with Gene McQuade, Citibank's chief executive, as the bank refocuses on the basics of corporate and consumer banking and cash management for large companies." Meanwhile, on the Times' "Economix" blog, Simon Johnson, who's previously argued that big banks should be broken up, makes a case specifically for taking apart Citigroup. Johnson cites an interview Citi's Vikram Pandit gave to The Banker (that's a U.K. magazine, no relation) in which the CEO says his company will rely on "the global transactions services business" and "emerging markets" for growth. The former is all well and good, but such services "do not require a very large balance sheet; these can equally well be performed by a network of small, nimble financial firms," Johnson says. And playing in the emerging markets is asking for trouble, the former IMF economist suggests, noting that predecessor Citicorp got burned in that business in the 1980s. If Citi stumbled similarly again, Johnson maintains that there's still no good mechanism for resolving global systemically important firms, Dodd-Frank's "living wills" notwithstanding. "We cannot handle the collapse of a bank like Citigroup in 'orderly' fashion," Johnson writes.

It’s Complicated: The top story on the front page of today’s Journal looks at “liquidity swaps,” a mechanism to which European banks are increasingly resorting to fund themselves. In these deals, a bank will take an illiquid asset – say a loan to a junk-rated corporation – and transfer it to an investment bank or an insurance company. In return, the bank gets a more liquid asset, like a government bond, which it can then pledge as collateral to obtain a loan from the European Central Bank. (Hold off on the wisecracks about sovereign debt not being quite so riskless – we’ll get to that in a bit.) The insurer or investment bank gets a commission for the trade and a discount on the dicey stuff. Sounds like a win-win, right? Well, European regulators are worried. “Liquidity swaps could have the effect of increasing inter-connectedness between the insurance and banking sectors,” the U.K.’s Financial Services Authority warned in July, “and, in turn, create a transmission mechanism by which systemic risk across the financial system may be exacerbated.” Meanwhile the FT reports that Europe’s top insurance regulator is telling its charges to reconsider the notion that government bonds are risk-free, in light of, you know, the whole eurozone debt crisis thing. Though the story doesn’t mention liquidity swaps, we imagine that the guidance from the European Insurance and Occupational Pensions Authority (or Eiopa – how’s that for an extraterrestrial-sounding acronym?) could make it harder for insurers to accept government bonds in these transactions.

Wall Street Journal

The Journal’s editorial page chides lawmakers for moving to raise the FHA’s maximum loan limit to $729,750 from $625,500 through 2013. “As ever, the excuse is that this will lift housing prices, which will help the larger economy. But we have learned the hard way that artificially inflating home prices does not lead to durable growth. Government policies already steer too much capital into housing.” Naturally, the editorial notes that the taxpayer-backed FHA has recently disclosed deepening financial troubles.

Financial Times

The mortgage-backed securities market doesn’t think the revamped version of the Home Affordable Refinancing Program will do much good – or, from the investors’ perspective, much harm. Prices have risen for MBS with high-coupon collateral, reflecting bets that prepayments triggered by refis under the government program will be relatively scarce.

New York Times

ProPublica’s Jesse Eisinger takes a broad look at reforms of the derivatives market under Dodd-Frank. Regulators have had to make some tough calls. For example, how high should they set the bar for firms to trade on the new clearinghouses? The CFTC resisted lobbying from the big banks and decided to require clearinghouses to admit firms with as little as $50 million of equity. Eisinger notes that MF Global pressed for this decision, but to his credit resists the temptation of taint-by-association. Require too little capital for membership, he says, and you have a lot of fly-by-night firms and counterparty risk; but require too much and you get an oligopoly and reinforce “too big to fail.” The piece gives other examples of how it’s not obvious whether regulators are making all the right moves, so the jury’s out on whether Dodd-Frank has made the world safer from derivatives. Refreshingly inconclusive.

“Federal prosecutions for financial institution fraud have tumbled over the last decade, despite the recent troubles in the banking sector, according to a new analysis of Justice Department data.”


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