Receiving Wide Coverage ...

Bank Stock Bulls: A story in the Journal says bank stocks could fare well in 2012 - regional and community banks' stocks, that is, not the too-big-to-fail crowd. Financials in general have been trading for less than book value, implying some upside. But the new regulatory capital demands on the largest institutions will crimp their returns and their ability to reward investors with dividends or share repurchases. Also, the big banks have been taking in more deposits than they could profitably redeploy through lending, making those more-ubiquitous-than-Starbucks branches they assembled over the last decade or so seem superfluous and costly. An analyst is paraphrased as saying something that we've kind of known for at least a year now but are pleased to see it articulated: "The idea that big banks enjoy economies of scale is largely a myth." Banks with less than $10 billion in assets are now, therefore, "in a position to outgrow and outperform the giants." Yet the FT quotes other analysts making a bullish case for the big banks' shares. Aside from the aforementioned discounts to book values, things are looking up for the U.S. economy (relatively speaking) and lending has picked up a bit recently. One forecaster expects U.S. banks to "cherry pick assets from de-leveraging European banks at a discount." The story also suggests banks' borrowing costs in the fixed-income market could improve in 2012, having widened considerably. Wall Street Journal, Financial Times

Wall Street Journal

Only 92 banks failed in the U.S. last year, the least since 2008. But a Journal analysis says one reason the number dropped, from more than 100 in each of the previous two years, is "because troubled banks aren't failing as quickly. Weak banks are staying alive for longer periods in undercapitalized condition and they are in weaker shape when they fail than in the past." Regulators say this doesn't mean they've been cutting banks some slack; rather, the economy is allowing struggling banks to hold on a little longer in hopes of finding an investor, their supervisors say. Well, sort of. "If we believe there's a realistic chance...we're more willing to let them get that capital raise," an OCC official tells the Journal. "This is a judgment that we have to make" (emphasis ours). So really, the economy is allowing regulators to allow sick banks to hold on a little longer. Not that there's anything wrong with that, necessarily; near the end of the story a finance professor points out that regulators try to minimize losses to the FDIC deposit insurance fund (i.e., taxpayers, i.e., the person you see in the mirror), and surely that old saying "haste makes waste" applies, at least some of the time, to the matter of whether to seize a bank.

Following last week's incendiary piece about Capital One's embarrassing habit of illegally badgering consumers for debts that were previously discharged in bankruptcy, the Journal reports on an also-controversial, but arguably less objectionable, practice of other financial firms: offering new credit cards to subprime consumers who would otherwise be unable to obtain them, on the condition they agree to repay old debts that had expired under statutes of limitations. At least the offer would be hard to object to, provided the issuer makes it clear to the customer that the aged debt would otherwise be unenforceable; apparently, though, this doesn't always happen. These "balance transfer" programs are typically provided by a bank working with a debt-collection agency that buys the moldy-oldie receivables for pennies on the dollar. "The credit-card agreements essentially create assets out of thin air." (Banks are necessary partners in this arrangement because of their access to the MasterCard network - Visa's pulled out of this market, the story says - and because banks can export interest rates across state lines.)

The Journal's editorial page criticizes Massachusetts Attorney General Martha Coakley's suit against several big mortgage servicers and MERS over foreclosure practices, mostly related to documentation. She offers no evidence of people who were current on their mortgages being foreclosed on, the editorial writers complain, and "America's housing market can't recover until banks are allowed to foreclose on delinquent homeowners and resell those homes to people who can afford them. Ms. Coakley's lawsuit will delay that process." The editorial notes that Ally Financial's GMAC Mortgage has stopped buying mortgages in the state in response to Coakley's action. After reading the Journal writers' claim that "processing errors don't necessarily rise to the level of deception and fraud," we were a little disappointed that no one in the comment thread had brought up the possibility that so-called technicalities, like whether a corporation has the papers to prove its standing to kick someone out of her house, might be, um, a part of due process? On the other hand, Martha Coakley is hardly an ideal champion for the cause of due process.

Financial Times

A study by the consulting firm Oliver Wyman, commissioned by the Securities Industry and Financial Markets Association, claims to quantify the potential costs of the proposed Volcker rule: as much as $315 billion to corporate bond investors, as a result of reduced market liquidity; $43 billion to issuers, in the form of higher borrowing costs; and another $4 billion to the bond buyers in the form of higher transaction costs. While giving ample space to this analysis, the FT notes a few of its flaws at the end of the story. For example, the SIFMA study assumes no one will try to fill the trading void left by banks, but many expect nonbanks will step in to do just that. Also, the newspaper notes, "losses suffered by one group are likely to be another's gain. For example, investors benefit when corporations pay more to issue debt. Much of the losses described in Oliver Wyman's study are merely a transfer of wealth." We might add: how would all those scary multibillion-dollar costs in the study stack up against the potential bill to taxpayers from bailing out a bank whose trading desk blundered with a Corzine/Adoboli-style wager?

Keeping commercial customers' data secure is one of the few areas where big banks still look like heroes. According to a lengthy FT feature story, the large institutions "generally do a better job of security," and they eat a bigger share of cybertheft-related losses for their business customers than do the smaller banks. The story is hardly flattering for the banking industry overall, though. "Regulatory authorities and law enforcement agencies increasingly see financial institutions as part of the problem in the failure to rein in internet fraud. Though security overall is improving and the banks' own systems are rarely penetrated, many have opted not to scan for even obvious fraud being perpetrated on their customers. …One reason for the protection shortfall is that US banks do not have to pay full restitution to commercial enterprises."

New York Times

A story in "DealBook" says investment bankers expect a resurgence of merger and acquisition activity this year. That's M&A in general, mind you; the piece doesn't really address the prognosis for consolidation in the banking sector following 2010's disappointing deal flow.

The signs point to tepid consumer spending this year, the Times says in a broad macro-type story. "Although retail sales have remained relatively strong, high levels of consumer debt make it unlikely that rapid growth will help power economic expansion."


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