Receiving Wide Coverage ...
The Mess at UBS: More details are emerging on how alleged rogue trader Kweku Adoboli may have run up more than $2 billion in losses for UBS without the Swiss bank's knowing. Press reports suggest he took advantage of a loophole in European reporting requirements for exchange-traded fund trading. Adoboli, the speculation goes, could have made up bogus hedges purportedly offsetting the unauthorized positions he took, because the fictitious trades wouldn't have required confirmations. As a former back-office employee, he was well qualified to perpetrate such a ruse. "Some banks do not confirm trades until settlement and Mr Adoboli is likely to have known which ones those were," the FT says, citing an anonymous insider. The paper points out that this is yet another part of the story echoing that of Jerome Kerviel, who worked in Societe Generale's middle office (PDF) before he made rogue trading history. We might add that Nick Leeson got his start as a clerk, too. (If you're wondering how we even remember that piece of trivia, click here and scroll to about 2:45.) And speaking of the bloke who brought down Barings Bank in 1995, Leeson was recently interviewed by The Sun (one British paper we don't expect to cite very often in the Morning Scan) about the Adoboli affair. He told the tabloid he blames the bank and that Adoboli could become a "fall guy." Banks, Leeson says, have "preposterously" failed to learn any lessons about "their dogged pursuit of money": "Putting controls in place, and employing people to ensure the controls are working, costs money so they won't do it. It's last on their list of priorities." This may well be a correct assessment, but as they say, consider the source. OK, let's zoom back out to the bigger picture: several articles observe that the UBS mess has strengthened the hand of those seeking to tighten regulation of financial institutions worldwide. "In the U.S., those on Wall Street and in Congress who wanted to repeal or roll back the Dodd-Frank law will have a hard time making inroads now," Franceso Guerrera asserts in the Journal's "Current Account" column. "The fact that UBS lost more than $2 billion on unauthorized trades leaves the impression that, once again, a member of the global banking elite has been unable to police itself.… Proponents of stricter regulation could hardly have asked for a better assist." A story in the Times' Dealbook makes a similar argument, and suggests that Adoboli's alleged speculative trades — apparently made with UBS' own money — could bolster the case for a stronger version of the Volcker rule in Dodd-Frank.
Continental Breakdown: S&P downgraded the sovereign debt rating of Italy (one of the two "I's" in PIIGS, you'll recall), causing the euro to fall against the dollar. Meanwhile Greece, seeking another round of bailout aid, held talks with creditors, which it described as "productive," buoying the U.S. stock market. But economist Nouriel Roubini argues in an op-ed in the FT that Greece should just default and quit the euro. And, to use an irritating journalistic cliché, Roubini's not alone. Here's Desmond Lachman, a former IMF economist now at the American Enterprise Institute, quoted in a broad "what if?" story in the Times: "It is very much in Greece's interest to default now, as there is no prospect that it can repay its debt. If it is inevitable that an insolvent Greece is going to have to restructure, it would be better for Greece to do it now." Well, at least we can take comfort in the knowledge that those July stress tests found most EU banks to be well-capitalized … right? Actually, scratch that: The Journal has obtained a confidential document prepared by EU finance officials that says the tests "used out-of-date macroeconomic assumptions that didn't reflect the severe turmoil racking sovereign-debt markets." Finally, in Ireland (the other "I" in PIIGS), the National Asset Management Agency — a "bad bank" set up by the government to deal with banks' dicey property loans — is auctioning 14 works of art, including a Warhol, seized as collateral from a real estate developer.
Wall Street Journal
Fannie Mae and Freddie Mac plan to raise guarantee fees on the mortgages they buy, a step that could raise borrowing costs for homebuyers but also help reduce costs to the taxpayer.
Bank lending to businesses is growing, but the borrowers aren't using the money to expand. Rather, the proceeds are financing replacement of machinery, repairs and upgrades. These bank clients "have come to a point where they have to spend money to replace infrastructure... that they have put off for the last two or three years," says a Capital One commercial banking executive.
Citigroup is mounting an aggressive credit card mail solicitation campaign, in an attempt to regain ground in this market lost to rivals during the nadir of crisis in the U.S. It's hoping to capitalize on consumer frustration with new fees and disappearing rewards on debit cards that have resulted from the Durbin rule. Rival JPMorgan Chase is taking a similar tack with debit cardholders, and we just love the juxtaposition of these two sentences: "In a recent bank statement insert, Chase posed the question 'Debit or Credit?' and then made the case that credit cards are a 'great choice for making all your purchases big and small.' Chase said it isn't encouraging customers to switch from debit to credit."
New York Times
Call it the Magnetar rule. Or the Abacus rule. The SEC unveiled a proposal to prohibit financial institutions from sponsoring securitizations while making bets on the side that the deals will go kablooie, as several investment banks and hedge funds did with CDOs before the crash.
So how exactly would the "infrastructure bank" that Obama proposed a few weeks ago work? An article in the Post explains the concept.
John B. Taylor, a Stanford economist, is the most likely candidate to become Fed chairman if the Republicans win the presidency in 2012, columnist Ezra Klein writes. Taylor is "quietly campaigning for the job," Klein says, citing a Bloomberg op-ed Taylor wrote arguing that Congress should end the Fed's dual mandate and let the central bank focus on price stability.