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Deal or No Deal? There was brief speculation Monday that President Obama would announce a settlement of government probes into foreclosure abuses in his State of the Union address tonight. Those hopes (or fears, for some consumer advocates) were dashed when Iowa Attorney General Tom Miller, the leader of the multistate task force negotiating with the top five mortgage servicers, went out of his way to say there would be no deal reached this week. For the skeptical consumer advocates, that’s just as well; they “fear the pending settlement would allow banks to pay only a fraction of what is warranted and escape legal culpability for a wide range of abuses that have yet to be fully investigated,” according to the Post. An additional objection is that the banks reportedly would be allowed to earn “credits” toward the $25 billion settlement amount by writing down first mortgages they service for investors, but would not have to swallow losses on the second mortgages the banks themselves own. “This reverses the contractual hierarchy that junior lienholders take losses before senior lenders. So this deal amounts to a transfer from pension funds and other fixed income investors to the banks, at the Administration’s instigation,” writes “Naked Capitalism” blogger Yves Smith, who rarely makes a point she doesn’t feel the need to italicize. And yes, those “credits” mean the industry isn’t necessarily going to pay the whole $25 billion out of pocket; the cash portion might be as small as a fifth of the total. On Monday administration officials pitched the tentative terms reached with the servicers to all the states’ attorneys general. A handful of AGs, including California’s Kamala Harris, remain wary of potentially giving away the store. Anonymice tell the Journal that the timetable for a deal is now early February. Wall Street Journal, Washington Post, Naked Capitalism, Financial Times
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Wall Street Journal
Bank of America CEO Brian Moynihan is expected to be deposed in coming months in several civil lawsuits over the bank’s handling of the Merrill Lynch acquisition, the Journal reports, citing anonymous sources. Questions are likely to center on B of A’s disclosure of Merrill’s losses and awarding of bonuses to the brokerage’s employees. Moynihan’s predecessor as CEO, Ken Lewis, made the deal to buy Merrill; Moynihan was B of A’s head of investment banking at the time.
In his “Current Account” column, Francesco Guerrera surveys the range of ongoing and potential mortgage-related litigation against banks. “The wheels of justice are turning far too slowly, and it is important to recognize that the time spent on this isn’t without cost,” he writes. “The sheer size and scope of the issues have the potential to freeze, or at least depress, swaths of productive activity for years to come.” All those lawsuit provisions sitting on banks’ balance sheets, for example, represent money that can’t be loaned out. Alluding to the “five stages of grief,” Guerrera writes that “investors and homeowners should know that, judging by the mountain of lawsuits piling up, acceptance that we need to pay up and move on seems a long way away.” The Morning Scan did the same double-take as a Journal reader who asks in the comment thread, “Who is ‘we’?”
The OECD recommends that governments end tax breaks for mortgage interest payments. These and other forms of tax relief “largely benefit the wealthy,” and ending them “could be used to cut income tax rates and thereby boost growth” while narrowing inequality. Well reasoned as this proposal may be, somehow we imagine it might not go over too well in Washington right now. If ever.
Financial Times
An editorial criticizes the French and German governments for trying to soften the Basel III international capital rules. For instance, “Merkozy” (as one wag calls the two countries’ leaders in the comment thread) want “to lift limits on the double counting of capital in banks’ insurance subsidiaries, which are particularly common in France.” The FT says this goes against the spirit of the Basel III agreement, in which each signatory country agreed that the new capital regime “should punish its own particular sins, notably when counting as capital certain instruments that do not absorb losses well in a crisis.” If so, Jamie Dimon can relax; Basel’s not “anti-American” any more than it’s anti-French or anti-German.
Tom Braithwaite, the FT’s U.S. banking editor, considers the difficulty the big investment banks are expected to have retaining talent given tightened regulation, clipped paychecks and competition from “shadow” banks. The hedge fund Citadel, for example, has received 150,000 resumes. To escape some restrictions, it’s conceivable that Goldman Sachs or Morgan Stanley might give up the bank holding company status they eagerly obtained during the crisis.
Credit Suisse is paying bonuses this year with a “structured note derivative” whose value is linked to the credit performance of “names” in the bank’s portfolio. This moves risk off the balance sheet, while reducing cash compensation. This is similar to a move the Swiss bank made a few years ago when employees received a piece of the bank’s CDO exposure.
