Receiving Wide Coverage ...

The TBTF Quarantine: The Journal leads its story about that package of Dodd-Frank rules proposed by the Fed yesterday with one that came as a surprise to the industry: limits on the top six banks’ exposures to each other. Goldman Sachs’s net credit exposure to JPMorgan, for example, would be capped at 10% of the former’s regulatory capital, and vice versa. The story quotes an analyst as suggesting this may be “a back-door way” to shrink the banks’ capital-markets businesses. A shadow Volcker rule, if you will. (Or a stealth Glass-Steagall, perhaps. Maybe a veiled Vickers. How about a Trojan Tobin?) Restricting interbank credit among those with $500 billion or more in assets could, of course, hurt market liquidity, but this is a price the Fed’s willing to pay to reduce interconnectedness among the megabanks, and thus keep any one of them from threatening to “punch a hole in the fabric of the universe” (in Matt Taibbi’s memorable phrase) a la AIG. The FT’s story, however, notes two surprise concessions to the banking industry from the Fed, both in the area of liquidity. First, the Fed said it would rely on banks’ internal modeling, rather than its own, to gauge the banks’ liquidity needs. And the central bank proposed to allow Fannie Mae and Freddie Mac mortgage-backed bonds to count as “highly liquid securities,” alongside cash and Treasuries. This was notable, the FT says, since “global regulators sought to limit the amount of Fannie and Freddie securities that could be used to meet liquidity rules.” (Those bureaucrats must be anti-American! And anti-homeownership to boot. Figures, these fancy Europeans, renting cold water flats and living their entire lives inside the same square mile, running down the block once in a while for a bottle of wine and a baguette and parking their puny SmartCars perpendicular to the curb...) Where were we? Oh, right … As expected, the Fed’s 173-page proposal includes a capital surcharge for the top eight banks, consistent with Basel III. There’s a lot more in here, including ongoing stress tests and remediation requirements for banks that show lapses. Wall Street Journal, Financial Times, New York Times, Washington Post

The MF Global Money Trail: The Journal and Times both have stories quoting anonymous sources as saying that investigators hunting for the missing client money are looking closely at a $200 million transfer made to JPMorgan shortly before MF Global went bankrupt. Wall Street Journal, New York Times

Wall Street Journal

Despite the FHFA’s recent cooperation with New York’s attorney general on mortgage fraud investigations, the federal agency’s not getting along so well with California’s. Kamala D. Harris sued Fannie and Freddie, “seeking to force the firms to answer a detailed list of questions after the firms’ federal regulator [the FHFA] sought to block an open-ended inquiry by the state.” Her office had previously subpoenaed the GSEs for “a record of every vacant home owned by the companies in the state and asked the firms whether they were aware of drug dealing, prostitution or the presence of explosives and radioactive material in those homes.” Ah, but will she ask Wal-Mart the same questions about its stores in California, given recent events?

The PCAOB’s inspectors “found deficiencies in 26 audits conducted by Deloitte & Touche in its annual inspection of the Big Four accounting firm.” That’s out of 58 complete and partial audits review by the audit-firm regulator, so a 45% deficiency rate, which compares unfavorably to 37% for PricewaterhouseCoopers and 22% for KPMG. But Ernst & Young’s inspection report still hasn’t come out, so Deloitte still has a shot at third place among the Big Four!

In a clear riposte to Joe Nocera's Times column Tuesday, Peter Wallison in the Journal details how Fannie Mae and Freddie Mac's need to meet HUD affordable housing requirements and their use of sub-prime mortgages made them "important factors in the financial crisis." Wallison, a member of the Financial Crisis Inquiry Commission, who dissented on its report, said the failure to disclose subprime holdings caused the risk of owning, buying or distributing MBS to be underestimated. Of course, Wallison isn't the only one taking Nocera to task.

New York Times

Even in Switzerland, capital is contentious. Last year, “the president of the Swiss central bank … was called ‘arrogant’ and ‘egotistical’ by bankers quoted anonymously in the pages of Swiss newspapers. His supposed sin: Wanting banks to hold extra capital,” above and beyond what Basel III calls for. One anonymouse, a Swiss banker, was quoted as saying, “He’ll never find another job in Switzerland.” In other words, try to add a Swiss finish and you’ll be finished, monsieur. But as Swiss legislators were debating the proposed rules this year, UBS’s alleged rogue trading scandal broke, and it became politically untenable for banks to continue to protest the plan. It passed, and this story is one that bank supervisors the world round can pin to their cubicle walls, and look at whenever they need a booster shot of courage to face the charter-shopping, palm-greasing, laptop-stealing bullies who give bankers a bad name.


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