Banco Popular de Puerto Rico

Receiving Wide Coverage ...Fed Leaves Rates Unchanged: Recent data "suggests that the economy has been expanding moderately," the central bank said after the last policy meeting of the year, though it left its policy options open for 2012. A return to purchases of mortgage-backed securities remains a possibility, but for now the Fed will simply continue to reinvest principal repayments in new MBS. Wall Street Journal, Financial Times, New York Times, Washington Post

Receiving Wide Coverage ...Flight from Europe, to Safety: The stats in this morning's papers speak volumes: Three-month LIBOR hit its highest level since July 2009. (And if history is any guide, we gather some banks' actual borrowing costs could be worse than the index suggests.) The exchange rate for the euro fell below $1.30 for the first time since January. And cash on deposit at foreign-owned banks in the U.S. has fallen for six straight months, the first time this has happened in nearly a decade. The upshot of all this: confidence in Europe and in the global banking sector remains fragile, last week's accord among the continent's leaders notwithstanding.

Breaking News This Morning ...Hudson City Warning: The New Jersey bank expects to post a fourth-quarter loss after extinguishing costly debt.

Receiving Wide Coverage ...Capital Punishment: The Fed is expected to support the Basel Committee's plan to impose a capital surcharge on the biggest, most globally interconnected financial institutions, the Journal reports. A draft proposal could come before Christmas; JPMorgan CEO Jamie Dimon, whose bank would have to hold another 2.5% of extra capital as a percentage of risk-weighted assets (on top of the 7% required of all institutions) would probably prefer a stocking full of coal. Big banks have lobbied hard against the "G-SIFI surcharge," protesting it would dampen lending and hurt the economy. In another blow to the industry on this front, the European Union said Britain is free under EU law to impose extra capital requirements on her banks above and beyond what Basel calls for, the FT says. The U.K. government plans Monday to adopt that and most of the other proposals by Sir John Vickers' commission, including the "ringfencing" of retail banking from trading. Finally, Bank of America completed its previously announced debt exchange offer, generating $3.9 billion of capital that will count toward Basel III guidelines. The opportunity for banks to raise capital this way — by extinguishing debt at a discount to par — is an advantageous byproduct of bond investors' loss of confidence in the banks' credit. In an environment like this, you have to count your blessings wherever they come from.

Receiving Wide Coverage ...Less than a Lincoln: Bank of America’s share price fell below $5, as part of a broader selloff in financial stocks sparked by a warning from the European Central Bank about dangers for the Eurozone economy. The Charlotte, N.C., megabank’s shares closed at $4.99, the lowest level since March 2009. Mortgage-related litigation risk remains a dark cloud over the company, and $5 was a “bad psychological barrier” to break, an analyst tells the FT. Another analyst is paraphrased as saying that “some funds could become forced sellers of BofA shares due to pressure from clients and fund consultants, leading to further declines.” In a Bloomberg story picked up by the Washington Post, a money manager explains that the threshold is more than psychological: “We have screens that usually prohibit us from buying stocks under $5. If we own it, we would not kick it out automatically, but generally we tend to avoid stocks like that.” The trading-focused blog iBankCoin suggests those holding the stock may have an incentive to buy: “There have been reports that the $5 level in Bank of America’s stock must be defended by institutions in order for them to continue to hold the stock, else face forced selling.” And a finance professor quoted in the Bloomberg/Post story appears to damn Bank of America with faint praise. After saying the “real danger” for a public company is falling below $1 a share, which typically means delisting, he adds that in such cases “it is usually some fundamental problem with the business model and it may go to zero, but I think Bank of America is very different from your typical small failing company.” Quips the blog DealBreaker: “That’s Your Big Pump Up Speech?” Financial Times, iBankCoin, Washington Post/Bloomberg, DealBreaker

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

Receiving Wide Coverage ...It's Not True, and If It Is, It's Not Our Fault: Bank of America agreed to pay $335 million to settle government charges that Countrywide overcharged minorities and steered them into subprime loans, in the largest residential fair-lending settlement in history. The bank denied the Department of Justice's allegations (we've seen the boilerplate "neither admitted nor denied" line in some news stories, but in the proposed consent order there's a flat-out denial right there on page 4). Yet at the same time B of A "took pains to distance itself from the accusations levelled at Countrywide," which it bought in 2008, the FT says. "Bank of America's practices are not at issue," a spokesman tells the paper. (The consent order includes an acknowledgment by the government that it's all about Countrywide.) This was the first steering case brought by the DOJ, but more are expected, the Journal says. The paper's "DealJournal" blog tallies all the various Countrywide-related settlements and other legal and credit costs B of A has incurred from the acquisition; they well exceed the $4 billion the bank paid for the mortgage company. And Fox Business/Dow Jones writer Al Lewis cites a separate, ongoing lawsuit against B of A from another arm of the government, the Federal Housing Finance Agency, which says that before the acquisition "the top executives of Countrywide...complained to each other...that BOA's appetite for risky products was greater than that of Countywide." Lewis is amazed: "Imagine that. Bank of America doing mortgage deals that even Mozilo found shocking. This would be like Frankenstein convincing Godzilla that he is the bigger monster." Wall Street Journal, Financial Times, New York Times, Washington Post, Los Angeles Times, Huffington Post, Fox Business,

Editor's Note ...Morning Scan is taking a break for the holidays next week. We'll publish next on Tuesday, Jan. 3.

Receiving Wide Coverage ...Bank Stock Bulls: A story in the Journal says bank stocks could fare well in 2012 - regional and community banks' stocks, that is, not the too-big-to-fail crowd. Financials in general have been trading for less than book value, implying some upside. But the new regulatory capital demands on the largest institutions will crimp their returns and their ability to reward investors with dividends or share repurchases. Also, the big banks have been taking in more deposits than they could profitably redeploy through lending, making those more-ubiquitous-than-Starbucks branches they assembled over the last decade or so seem superfluous and costly. An analyst is paraphrased as saying something that we've kind of known for at least a year now but are pleased to see it articulated: "The idea that big banks enjoy economies of scale is largely a myth." Banks with less than $10 billion in assets are now, therefore, "in a position to outgrow and outperform the giants." Yet the FT quotes other analysts making a bullish case for the big banks' shares. Aside from the aforementioned discounts to book values, things are looking up for the U.S. economy (relatively speaking) and lending has picked up a bit recently. One forecaster expects U.S. banks to "cherry pick assets from de-leveraging European banks at a discount." The story also suggests banks' borrowing costs in the fixed-income market could improve in 2012, having widened considerably. Wall Street Journal, Financial Times

Receiving Wide Coverage ...Bane of America: The Los Angeles Times reports that Bank of America is calling in the credit lines of struggling small-business customers. "If they can't pay in full, they are being offered new repayment plans for as long as five years, but with far higher interest rates than their original credit lines had." How many customers is this happening to? The Times interviewed "several" and quotes two by name; a spokesman for Bank of America tells the paper the total number is less than six figures. The bank claims these clients were notified a year in advance that their lines would be cut off, though some of the business owners say they didn't get the memo. Whatever the scope of the bank's tightening, it reflects an underlying tension that many bankers will probably find familiar: regulators are on B of A's case to reduce risk, but there's also a perceived moral imperative to support small enterprises in a weak economy. "If small businesses are going to lead the way out of the economic doldrums we now face in this country, they must have access to capital," the Times quotes a small-business advocate as saying. Are small businesses going to lead the way? It's debatable. But if so, it's fortunate that B of A is an outlier here; according to the Times article, "most other banks, having tightened lending standards in the aftermath of the financial crisis, had eased credit last year as competition for small-business customers heats up, bank analysts say." Indeed, a Journal story cites data showing that, overall, small-business lending is up. Hey, speaking of outliers, we know a way B of A can console its aggrieved clients: give them complimentary front-row seats at the next Malcolm Gladwell success seminar! … In other Bank of America news, the lender suffered a setback in its litigation with the bond insurer MBIA. A New York state judge ruled that to claim damages, plaintiff MBIA need only prove that Countrywide, now a part of B of A, misrepresented the mortgage-backed bonds the insurer provided a credit "wrap" for. It needn't show the misrepresentations caused its losses. The Journal's "Heard on the Street" column notes that MBIA didn't get everything it asked for (the judge denied the argument that B of A should have to repurchase loans that are still performing, for example), but concludes that the insurer has "new leverage" in settlement talks.