Wells may keep Parker; New role for mortgage modifications

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Cash crunch continues

The Federal Reserve Bank of New York said Wednesday that “it would increase the size of overnight cash loans offered Thursday through repurchase agreements to $100 billion from $75 billion, while doubling the size of a two-week offering Thursday to $60 billion. The decision to increase the size of the loans in the repo market follows recent operations where banks have bid for more cash than the Fed had offered. Demand to borrow cash in the repo market is expected to increase as the end of the quarter approaches.” Wall Street Journal, Financial Times

While the U.S. financial system “in many ways is much safer, with banks far less likely to fail or need a taxpayer bailout,” since the financial crisis, “in other ways it is also more brittle, as the channels that carry cash and securities between investors, banks and foreigners repeatedly clog in the face of stresses they once easily absorbed,” the Wall Street Journal notes. “The latest example is last week’s spike in interest rates on so-called repo loans, which are critical to the functioning of Wall Street.”

Karen Petrou, head of Federal Financial Analytics, said the episode illustrates the fallacy that “safer banks means safer markets.” “If banks become safer by retreating from a market, less-regulated players will move in and the market becomes more dangerous,” she said.

The dominance of big Wall Street firms in the overnight market for cash loans “is hampering Federal Reserve efforts to calm short-term funding markets. When those banks hoard reserves, it can drive borrowing costs higher for smaller firms. The five largest banks hold more than 90% of the supply of total reserves and a more even distribution would help cushion against such shocks.”

Challenging times

Banco Santander said it will take a €1.5 billion ($1.7 billion) charge for its U.K. business due to Brexit and changes in banking regulation. The Spanish bank said the charge “was mostly due to a challenging regulatory environment, mentioning the negative impact of ‘ringfencing’ rules, under which U.K. lenders must separate retail banking from riskier investment-banking operations. By separating the businesses, many costs have been duplicated.”

“The impairment charge comes during a challenging period for Europe’s banks as ultralow interest rates make lending less profitable,” the Wall Street Journal notes. “Political turmoil surrounding the U.K.’s exit from the European Union is adding to the uncertainty, particularly for lenders like Santander with large U.K. operations.”

“The move highlights the challenges facing the U.K.’s fifth-largest bank, which is grappling with sluggish growth and rising competition while its Spanish owner looks to cut costs and increase investment in other parts of its empire,” the Financial Times says.

On board

Barclays is adding two prominent people to its board as non-executive directors; Mohamed El-Erian, the former CEO of bond fund giant Pimco, and Dawn Fitzpatrick, the chief investment officer of Soros Fund Management. She previously worked at UBS.

“The two new names join Barclays board at a challenging time for the U.K. lender,” the Wall Street Journal reports. “It cut 3,000 jobs in the second quarter and is planning to clamp down further on costs. Chief Executive Jes Staley has been trying to convince investors that the bank’s mix of a big retail bank in the U.K., combined with a U.S.-and European-focused investment bank, can produce stable returns and provide resilience in a downturn. A drop in U.K. business investment caused by uncertainty over the U.K.’s withdrawal from the European Union has hung over the bank.” Wall Street Journal, Financial Times

Wall Street Journal

The new mod

Some lenders are quietly offering mortgage modifications to their best customers, not those in distress. “The new approach to loan mods in this latest wave of refinancing is to use them as a way to retain customers who have no problem repaying.”

“It creates loyalty with our members, provides a valuable service and reduces churn in the portfolio,” said Joe Fagenstrom, vice president of marketing at Star One Credit Union in California.

Financial Times

Deutsche probe

German criminal prosecutors “have launched an investigation into Deutsche Bank’s role in the money-laundering scandal at Danske Bank. Law enforcement officers on Tuesday and Wednesday visited Deutsche's Frankfurt headquarters and seized documents linked to suspicious transactions. Deutsche was a correspondent bank for Danske’s Estonian branch, which is alleged to have moved about €200bn of money from former Soviet states between 2007 and 2015.” Deutsche Bank “cleared more than €160 billion of potentially suspicious transactions” for Danske.

Separately, ABN Amro said it is being investigated by the Dutch public prosecutor “into potential money laundering and financing of terrorism.” The bank “has been warning investors that it could face a fine for lapses in its client due diligence that may have allowed breaches of money laundering and terrorism financing laws.”

Why don't you stay?

Wells Fargo’s acting CEO C. Allen Parker “is increasingly likely to be given the role permanently. Industry insiders and analysts said the prospect of regulatory pressure, a below-market pay check, and even geography are all making it difficult to fill the high-profile post” six months after Tim Sloan was forced out.

New York Times

Blame on you

WeWork’s botched initial public offering and the ouster of its CEO “is not simply the failure of a young and capricious founder. Adam Neumann, who helped start the company in his early 30s, was a magnetic leader with a brash style that constantly invited controversy. The problem is that the adults in the room didn’t act like adults. One of those adults was perhaps Mr. Neumann’s most critical enabler: JPMorgan Chase.”

“JPMorgan has been one of its most ardent backers for years, working multiple sides,” the paper writes. “It lent Mr. Neumann money personally (with his inflated shares as collateral), provided equity and debt for the company, served as a corporate adviser for the I.P.O. and secured nearly $6 billion in financing as part of the now scotched offering. If there was one institution best placed to fully understand the various conflicts of Mr. Neumann, it was JPMorgan.”

Elsewhere

Cases dismissed

A federal judge Wednesday dismissed three lawsuits against Credit Suisse accusing the bank of misleading investors “about a complex product for betting on stock market swings, and causing huge losses when it lost 96% of its value in one harrowing day. U.S. District Judge Analisa Torres in Manhattan said Credit Suisse had warned investors about risks in its VelocityShares Daily Inverse VIX Short-Term Exchange-Traded Notes, and the investors did not show that the Swiss bank intended to defraud them. Torres adopted U.S. Magistrate Judge Sarah Netburn’s recommendation on August 16 that the lawsuits be dismissed.”

Quotable

“Fortress banks mean all the fun is outside the walls.” — Karen Petrou, co-founder and managing partner of Federal Financial Analytics, commenting on the recent spike in money market volatility despite the strengthening of large commercial banks

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