Wednesday, February 22

Receiving Wide Coverage ...

Like A Marine: Let's begin today with a treatise on morals involving two of the business media's favorite topics: Greece and the U.S. housing market. As the New York Times notes, contract issues are at the forefront of both.

For banks and other financial-industry players involved with Greek debt, it's all about credit default swaps, and the international community's utter fear (perhaps misplaced) that the latest attempt at bailing out the nation will trigger those complicated instruments and cause a financial tsunami. Great lengths are being taken to avoid such an outcome. One such manipulation centers on the definition of voluntary participation by lenders. Take your 50%-plus haircut like a Marine, Europe says. You can always bow out with a dishonorable discharge, therefore, your participation is voluntary — and the CDS are not triggered.

That's fine, but one wonders whether we're losing sight of the moral implications behind the boulder of the financial ones. Philosophical purists would contend that it's immaterial whether invoking the CDS causes havoc, or not. A contract is a contract, n'est-ce pas? When the semantics of what constitutes a voluntary haircut on the part of lending banks is manipulated beyond the intention of their creators, to which both the parties and the law were originally in concurrence, even for what is perceived at the time to be the greater good, does it not rip apart the most fundamental underpinning of our global society? That your word is your bond? "In God we trust" is printed on the dollar, but there's a reason we study contracts in law school. The moral issues involved in dishonoring contracts (upon which our legal system is based) will be with us a lot longer than even the ramifications of a fresh financial crisis, however severe they may be.

And perhaps they may not be what the fearmongers would have us believe; quietly, the practice of posting margin may act as a force shield protecting counterparties. As Darrell Duffie, a Stanford professor who believes the swaps will be triggered, told the Times: "The fears about the market are small potatoes."

Move the discussion 5,137 miles to the West, and the issue of contracts rears its ugly head again in Washington, where populist fever is again picking up over Fannie Mae and Freddie Mac, in this case surrounding the issue of taxpayer-advanced legal fees for some troubled GSE executives. A regulatory analysis has found that you, me and the folks next door have advanced nearly $50 million in legal payments to defend former GSE executives. Most of the money involves allegations of securities fraud. Total legal outlays since 2004? $99.4 million. Outrageous amount of money, no one will disagree with that, but as the Times points out, the analysis, by the inspector general of the GSE's conservator, states that the legal contracts to financially support the executives' defense could have been discarded when the government took over the companies in 2008. Painful as it might be, taking the high road was the right road, setting an example that those involved in the Greek bailout would be wise to follow.

In other housing-related news, the Washington Post also examines the tensions between top Federal Reserve officials and Congress over how to solve the housing crisis. Congress, naturally, is advising the Fed to stick to its monetary-policy knitting. In its corner, the Fed's ability to lever the economy (and the all-important housing market) via monetary policy has, of course, been severely compromised by things out of its control. You know the Fed has to be utterly frustrated to be poking its nose into fiscal-policy matters, thus. Washington Post

Wall Street Journal

How many decades will it take Citigroup to get out from under the adverse effects of the financial crisis? One? Two? The bank is now looking at a multibillion-dollar write-down as it begins to divest its minority share in the Morgan Stanley Smith Barney brokerage. As the Journal notes, Morgan Stanley can soon start buying Citigroup out of the joint venture, formed under systemwide duress in 2009. Price — isn't it always? — will probably be a point of contention when the talks get going.

Then there's that housing thing again. The Journal says that, judging from the rebound of luxury-home builder Toll Brothers, it's clear the McMansion's demise has been greatly exaggerated. Wonder if bank loan officers are thinking twice about their role in the comeback…

Financial Times

The FT brings us the story of a drop in the bucket. Wells Fargo has agreed to buy BNP Paribas's North American energy business. It's "one of the biggest transactions to date in the wave of European banks selling assets to strengthen their balance sheets," the paper notes. The emphasis should be on the word "wave." This is only the beginning of a fundamental shift in who owns what where. Desperate to meet stricter capital ratios, expect European banks to conduct tons more sales like this.

Wells, meantime, may just be getting started. They were recently rumored to be the prime candidate to pick up Ally Financial's North American auto-loan business, should Ally feel like selling it. Price tag on that baby? North of $60 billion. Stay tuned. The San Francisco bank may emerge from the crisis in better shape to go forward than anyone.

New York Times

The DealBook column today takes a look at how the Volcker Rule may have the unintended effect of leading Goldman Sachs, Morgan Stanley and maybe Merrill Lynch to disavow their (conveniently obtained) bank holding company status. If they were to do so, they would be much more off the regulatory grid, re-opening old revenue avenues, but the PR hit would probably fasten a clamp to the notion. Still, the article contends, a vacuum will open for smaller, newer investment banks to compete. Either way, the investment-banking giants may never see their halcyon days again.