Receiving Wide Coverage ...
Twisting and Shouting: As expected, the Federal Reserve announced it would shift the composition of its bond portfolio by selling about $400 billion of short-term Treasuries and using the proceeds to buy longer-term ones, in an effort to drive down long-term yields and thereby mortgage rates. Unexpectedly, the Fed also said it would take an additional step to hold rates down: reinvesting any principal repayments from its portfolio of agency debt and mortgage-backed securities into new MBS. So instead of just Operation Twist, "we got a double twist," economist Diane Swonk told the Financial Times. According to the paper's lead story, "such a big move suggests that Ben Bernanke, Fed chairman, is alarmed by the slowdown, and has decided to override opposition on the rate-setting Federal Open Market Committee and provide as much stimulus as easily practical." On the FT's "Money Supply" blog, Robin Harding expresses disappointment that despite speculation, the Fed did not pursue a strategy that would have directly hit banks in the pocketbook: lowering the interest the central bank pays them for excess reserves. "I'm always surprised that there aren't more complaints about the $4bn-a-year subsidy to banks that it represents," Harding writes. In a separate FT article, he says that overall, the Twist was "the most bold and uncompromising action possible," and notes that the Fed acted in defiance of internal dissenters (the vote on the Open Market Committee was 7-3 in favor of twisting) and the rather loud Republicans in Congress and on the campaign trail. The Times' "Economix" blog considers the possibility that the political pressure may have only encouraged the Fed to make its move. The piece quotes Bruce Bartlett, a former Treasury official in the first Bush administration: "The Fed jealously guards its independence and cannot allow itself to be seen as caving to administration pressure. Therefore, administration pressure to ease would force the Fed to remain tight lest it appear that it was caving to pressure. For this reason, administrations quickly learned that the best way to influence the Fed is through back channels." We're going to take a brief pause to remind readers the two reasons this monetary maneuver is called "Operation Twist": 1) As this infographic the Journal published a few weeks ago so beautifully illustrates, the Fed is redistributing its investments along the yield curve like the air in a twisted balloon and 2) it was tried once before, with mixed results, in the 1960s, when young people were dancing like this. Got that? Good. Now where were we? Oh yes, yet another take from the FT: Gavyn Davies notes that while the Fed twisted, it didn't do a whole lot of shouting - that is, communicating to the markets that it expects to keep short-term rates (you know, the type the Fed used to muck with exclusively) as low as they are for longer than expected. The central bank simply reiterated what it said after the last policy meeting about keeping these rates near zero for two years. "The next debate at the Fed will probably be whether to do more on operation 'shout,'" Davies predicts. Stocks sold off after the Fed announcement, which the Journal's editorial writers attributed to the central bank's statement that it now sees "significant downside risks" to the economy, and, the editorial adds, "perhaps also as reality dawned that the reprise of 1961's Operation Twist is more gesture than salvation." The overall thrust of the editorial is that the answer lies in changing fiscal and regulatory policies, not monetary easing. "Heard on the Street" in the Journal says the news hurt financial stocks in particular because lower 10-year yields mean a flatter yield curve and hence tighter net interest margins, and because the committee's gloomy economic outlook bodes poorly for loan growth. The main Fed story in the Journal notes that as the central bank has been trying to lower rates by soaking up the supply of bonds, the Treasury Department has been diluting the impact of those purchases by, well, issuing more bonds. Yet another Journal piece says that the mortgage-backed securities market had been worried in recent weeks about a glut of issuance as many homeowners were refinancing at already-low rates while the Fed's MBS holdings paid off. The plan to redeploy returned principal back into this sector was thus reassuring.
Not Too Big to Downgrade: Moody's downgraded Bank of America's and Wells Fargo's long-term ratings and the short-term ratings of Citigroup, saying it believes the government is less likely to support the banks if needed. "Lex" in the FT argues that this was a bigger deal than anything the Fed announced, since aside from the lower probability of a bailout, Moody's also cited fundamentals in the banking business. "When lenders don't want to lend and borrowers don't want to borrow, the Fed can twist away all it likes," the column says. Wall Street Journal, New York Times, Financial Times
Wall Street Journal
The paper has gotten hold of the same draft of the Volcker rule that the FT obtained a few days ago, and come away with the same conclusion: the ban on risky investments with a bank's money is getting watered down. At least we're pretty sure it's the same draft because both newspapers count 174 pages. "The only hope now is Fed demands higher capital at trading entities," Tweets former Journal reporter Peter Eavis.
At a hearing on Bank of America's proposed $8.5 billion settlement with MBS holders, a judge questioned the lawyer for Bank of New York Mellon about its duty as trustee on the bonds. BNY, you may recall, has been criticized by some investors for backing the settlement.
John Thiel is restructuring the wealth-management business at B of A. Until recently, he reported to Sallie Krawcheck, who was ousted in the management shake-up two weeks ago.
"The SEC accused a former employee of Goldman Sachs and his father with insider trading in the agency's first enforcement action involving ETFs." That stands for exchange-traded funds — you know, the stuff that rogue trader at UBS specialized in.
Speaking of UBS, chief executive Oswald Grubel has ruled out a sale of its investment bank.
The latest in the mortgage servicing talks: A big meeting in Washington is scheduled Friday between the companies, the feds, and the state attorneys general. "The meeting is clouded by continued squabbling between the states as to the size and scope of penalties to be paid by the banks for their alleged failings in processing foreclosures," the FT says. So which is likelier to happen first: a robo-signing settlement, or a Middle East peace deal? Bets? Anyone?