Receiving Wide Coverage ...
Something to Stress About: Unlike the last round of stress tests, which left it up to banks to release the results, the Federal Reserve plans to open the kimono on the current assessments of banks’ ability to withstand a severe downturn. The six biggest banks will have to project how they’d fare in an imaginary scenario where the European crisis metastasizes into a Lehman-like market catastrophe. And all of the top 19 banks will have to model their performance in a world where unemployment soars past 13% (well above the hypothetical-but-not-so-far-from-reality joblessness rates in the last two sets of stress tests). The assessments are due in January; after reviewing this information the Fed will make it all public in March. “The tough guidelines are a sign the Fed hopes to convince investors that its scrutiny will be tougher than recent tests in Europe,” the main story in the Journal says, though the “Heard on the Street” column laments that it took the panic across the pond for the Fed to see the merits of transparency. The FT, on the other hand, describes disclosure as a double-edged sword: “The pledge of more published data has the potential to reassure or frighten investors.” In a video on the British paper’s website, its U.S. banking editor, Tom Braithwaite, notes that the 2009 stress tests, which were considerably more transparent than last year’s, were “a good confidence boost to the market.” But as the details of the latest tests were announced after the market close Tuesday, the futures market sold off on fears that banks would be forced to do more dilutive equity raises. “Never mind not increas[ing] their payout to investors,” Braithwaite says, “could we be back to a situation where banks were raising capital?” Like the doctor says, you’ll have to wait until the results get back from the lab, please schedule a follow-up with our receptionist. Wall Street Journal, Financial Times, New York Times
Not Better, Just Less Bad: The FDIC’s quarterly banking profile showed the U.S. banking sector’s profits rising to their highest level since before the crisis. But the gains were mostly driven by lower loan-loss provisions. “That can't go on indefinitely,” acting FDIC chairman Martin Gruenberg is quoted as saying in the Journal. “At some point, in order to generate income and revenues, lending is going to have to expand.” Wall Street Journal, Financial Times, New York Times
“Intellectually Dishonest”: That is how Robert Jenkins, a member of the Bank of England’s financial policy committee, described the lobbying tactics of bankers who say Basel III’s capital and liquidity standards will force them to cut lending and raise rates. The claim, he said in a speech, “is dishonest because it is untrue. Politicians could abandon Basel altogether and it would not change the market view of many banks. What you would achieve is further erosion of confidence in the banking system. And it is potentially damaging because it promotes fear for an economy which the banks are there to serve and from which they draw their livelihood. For the truth is that banks can strengthen their balance sheets without harming the economy. They can do so by cutting bonuses, by curtailing intra-financial risk-taking and by raising term debt and equity.” Them’s fightin’ words. Jenkins, a former fund manager, “is clearly attempting to set himself out [as] a champion for banking reform,” says The Guardian. We’ll want to keep an eye on him from this side of the Atlantic. Financial Times, The Guardian (U.K.), Wall Street Journal
Wall Street Journal
It’s trial balloon time! The ubiquitous “people familiar with the negotiations” tell the Journal that the multistate attorney general talks with mortgage servicers are carrying on without the participation of California AG Kamala Harris. You’ll recall that she pulled out of the negotiations last month, calling the proposed robo-signing settlement “inadequate” for borrowers, and that to persuade her to come back to the table someone leaked to the Journal a proposal to include mass refinancings in the eventual settlement. Now the leakers are trying sticks rather than carrots. Stick No. 1: “Officials have discussed limiting the amount of loans that could be written down or refinanced in states that don't join the settlement,” and such states “wouldn't receive any of the funds that will go directly to the states, nor will borrowers in those states receive cash payments for which they might otherwise be eligible. … If California doesn't sign on, the state would lose billions of dollars in potential benefits, the people said.” Morning Scan translation: “You need us to help get re-elected.” Stick No. 2: “The refinancing plan will remain in the deal even if California doesn’t because it is attractive to other states that have seen large home-price declines, the people said.” Morning Scan translation: “We don’t need you to get ourselves re-elected.” Stick No. 3: Due to a statute of limitations and the fact that California is a nonjudicial foreclosure state, “Ms. Harris has a limited ability to bring legal claims related to originations and servicing practices if she decides not to agree to the foreclosure deal, people familiar with the negotiations said.” Morning Scan translation: “You really need us if you want to score any political points on this issue.”
This story, though, is a fine bit of muckraking: “A group of investors and analysts have access to top Fed officials who give them a chance at early clues to the central bank's next policy moves, according to interviews and documents” obtained through FOIA. We expect Congressional hearings on this will be announced shortly. …Then again, maybe potential insider trading isn’t something lawmakers are keen to probe right now.
You can’t please anyone, ever. Not when it comes to interchange. “The National Retail Federation and other trade groups filed a lawsuit Tuesday against the Federal Reserve, arguing that the agency went too easy on banks when it set limits on the debit-card fees banks charge retailers.”
MF Global was a case study in how not to manage risk. The infographic embedded in this story demonstrates this succinctly.
New York Times
We missed this story yesterday about the plight of young finance professionals, who have been beset by layoffs and the vilification of their chosen line of work by the Occupy Wall Street crowd. You can guess how a lot of Times readers reacted. No? Well here’s a hint: a subsequent roundup of those comments carries the headline, “For Distressed Young Bankers, a Symphony of Small Violins.”
Vox: These Bank of England guys don’t mince words, do they? “If risk-making were a value-adding activity, Russian roulette players would contribute disproportionately to global welfare,” write two of the U.K. central bank’s financial stability experts, in an essay on our favorite new wonky website. Their point is not to belittle the financial sector but to say that it adds value by managing risk (such as by screening borrowers), not by simply taking it. In this view, loan growth on banks’ balance sheets isn’t necessarily a positive economic indicator, “especially when the risk itself may be mis-priced or mis-managed.”
And, Lastly …
CNBC: Dreading that post-Thanksgiving shopping trip? Having a hard time convincing the spouse it’s not worth dealing with the crowds? We present the perfect excuse to keep the family away from the mall – Occupy Black Friday, a.k.a Stop Black Friday. “Some demonstrators are planning to occupy retailers on Black Friday to protest ‘the business that are in the pockets of Wall Street,’” CNBC reports. “The goal of the movement is to impact the profits of major corporations this holiday season.” And you thought big banks were the movement’s only punching bags. (Lest you think these demonstrators are 100% anti-capitalist, there’s also Support Small Business Saturday.) But we have some friendly advice for the protestors, too: bring earplugs. That treacly holiday music the chain stores start blaring this time of year is almost as painful as pepper spray.
American Banker’s Morning Scan will publish next on Monday, Nov. 28. Happy Thanksgiving!