Banco Popular de Puerto Rico

Receiving Wide Coverage ...Baleful in Basel: Banks around the world still need to repair their balance sheets by writing down dodgy assets, the Bank for International Settlements said in its annual report. In a speech, Jaime Caruana, general manager of the association of central banks, warned that excessive monetary stimulus could make things worse, by creating complacency about fiscal problems, encouraging risk-taking by the financial sector and/or unleashing inflation. Wall Street Journal, New York Times

Receiving Wide Coverage ...Housing Recovery? New home sales reached a two-year high in May, and while the S&P/Case-Shiller 20-City Home Price Index has been lingering in the valley (the latest report, released this morning, showed a decline, albeit at the slowest pace in more than a year), other indexes "show a nascent recovery," the Journal says. … Fidelity National Financial appears to be hedging its bets, though; the title insurance company has agreed to buy a restaurant chain. … A bill expected to pass the Senate this week would more than double flood insurance premiums over four years in high-risk areas. … Believe it or not, the mortgage-backed security market still discriminates between Fannie Mae and Freddie Mac — so much so that Freddie has been forced to pay rebates to lenders to compensate for the lower prices fetched by bonds with its guarantee, according to Businessweek. … The Post profiles Rep. Elijah Cummings, a Maryland Democrat who's become a "voice for distressed homeowners," and a vocal critic of the FHFA's resistance to principal reductions. … And though your Morning Scan rarely mentions stories from the arts section of the newspapers, Joe Nocera's Times piece on the documentary "The Queen of Versailles" is worth reading as a reminder of the housing boom's excesses. Yes, this is the same wealthy couple's Florida dream home (which they really did name after the French monarchial palace) the Journal wrote about in October, when construction was on hold. The husband, who is suing the director of the forthcoming documentary for defamation, tells Nocera that his timeshare business is as profitable as ever (despite losing possession of a resort) and that construction on Versailles has resumed. Well, that settles it: we're in a housing recovery.

Breaking News This Morning ...Barclays Settles Libor Probe: The British bank is the first to cut a deal with regulators in the international investigation of manipulation of the London Interbank Offered Rate, the papers report, citing anonymous sources. The Times puts the penalty in the "hundreds of millions." A formal announcement is expected today. New York Times, Financial Times, ZeroHedge

Receiving Wide Coverage ...Email Hijinks: Embarrassing trader emails are always our favorite part of regulatory settlements, and the missives uncovered by regulators investigating Barclays in the Libor-manipulation affair are pure gold. Some of our favorites:

Receiving Wide Coverage ...LIBOR Reform: The U.S. is better positioned to crack down on manipulation of the London Interbank Offered Rate than the U.K., the FT says. The fine extracted by American authorities from Barclays was nearly quadruple the penalty taken by the British government, the paper notes. The Justice Department and FBI have active criminal investigations of Liborgate, "while the various UK enforcers have essentially held fire." And despite ongoing complaints in this country of lax treatment of financial wrongdoing, compared to its counterparts across the pond "the DoJ has far more experience of bringing cases based on complex financial products and trading, their laws are more on point and prison sentences tend to be longer." Also, in case you were wondering if someone can really be prosecuted for giving a b.s. answer to a hypothetical survey question (and by "b.s." we mean "disingenuous and misleading" — you can't lie about an imaginary situation, can you?) the FT notes that our Commodity Exchange Act "makes it a crime to transmit a false report that would affect the price of a commodity." Sooner or later, we bet some lawyers will be racking up billable hours disputing the objective "falsity" of the what-if rates that banks quoted to the British Bankers Association survey. But the real-world impact of these machinations may be harder to dispute. According to the FT's Gillian Tett, who began reporting on LIBOR mischief five years ago and takes a victory lap in her column today, "an estimated $350tn of derivatives contracts have already been written using Libor as a reference point, and about 90 per cent of US commercial and mortgage loans are thought to be linked to the index, too." The index was susceptible to manipulation because "it was based on private reported quotes, not tangible deals," she writes, but LIBOR would be hard to replace with another benchmark since it's now "hard-wired into the system." Hence the focus is on reforming LIBOR, with even the BBA now asking for its process to be regulated. One more thing worth pointing out: there was no neither-confirm-nor-deny, we-are-pleased-to-resolve-this-distracting-litigation blarney from Barclays; as noted matter-of-factly at the bottom of a Journal story today, the bank admitted its traders "tried to increase their profits by rigging the bank's submissions" and that "it also submitted artificially low quotes to the U.S. dollar Libor panel during the financial crisis to try to protect the bank's reputation."

Receiving Wide Coverage ...Libor Mess: It turns out manipulating a key global interest rate for years on end can get you in some serious trouble. Stating that “the buck stops with me,” Barclays Chairman Marcus Agius has stepped down and the bank is launching an audit of its business practices, the Times says. The move is being read as an attempt to take pressure off of embattled chief executive officer Bob Diamond, the New York Times reports. The jury’s out as to whether that will be enough: the FT declares in a headline that “Decisive Week will Determine Diamond’s fate.”

Receiving Wide Coverage ...Diamond in the Rough: It has been a bad run for bank bosses with homophones for names, but especially for former Barclays CEO Bob Diamond, who resigned early today over the Libor scandal. Diamond said: "The external pressure placed on Barclays has reached a level that risks damaging the franchise. I cannot let that happen." The Journal said Diamond's exit could portend a turn away from his focus on expanding the company's capital markets business, which absorbed the North American operations of Lehman Brothers after that firm collapsed in 2008. The question of who to name as a successor will hinge in part on "whether the bank's board wants to continue with Mr. Diamond's drive to build out Barclays's investment banking arm. His departure could herald the splitting off or winding down of the unit as the bank looks to cut costs and adapt to tougher regulations, analysts say. The U.K. is set to pass laws in 2015 forcing banks to ring-fence their retail banking divisions from investment banking activities—a move that could drive up funding costs." Wall Street Journal, New York Times, Financial Times

Receiving Wide Coverage ...Regulators Made Us Do It: While we were grilling hot dogs and cracking open cold ones yesterday, our cousins across the Atlantic watched a committee of the U.K. Parliament grill former Barclays CEO Bob Diamond. He made an allegation the Journal calls “explosive” — that during the 2008 crisis the bank’s regulator had (perhaps inadvertently) encouraged it to submit lower quotes to the survey that produces the London Interbank Offered Rate. About a month after Lehman Brothers failed, Diamond told lawmakers, Paul Tucker, a top official at the Bank of England (and a leading candidate to become the central bank’s next governor), phoned him to express concern about the high numbers Barclays was reporting to the survey, which asks banks to estimate what it would cost them to borrow money from other banks. Diamond said he didn’t interpret the call as an order to lower Barclays’ hypothetical Libor rate, but that the subordinates to whom he relayed the information misconstrued it as such. Rolling Stone’s Matt Taibbi, true to form, calls the claim “an awesome piece of political jungle defense by Diamond, tossing a hand-grenade into the seat of Her Majesty's government minutes before he's supposed to be grilled by parliament.” But the FT says the testimony could have been worse for Tucker, since “people close to Mr. Diamond had suggested before his resignation that he would suggest the call was an implicit sanction for the bank to pretend it could fund itself at cheaper rates than reality.” The former CEO also told the skeptical panel he was unaware of Libor manipulation until last month, and he pointed the finger at other banks which, according to the Post, Diamond claimed “were routinely underreporting the rates at which they were borrowing, afraid that revealing how high their costs had soared would spark an investor panic or government nationalizations. He seemed to suggest that regulators were content to see misreporting of interbank lending during times of crisis.” Overall it was a testy hearing, with exchanges like this one recounted in the Journal:

Receiving Wide Coverage ...Sick of Liborgate Yet? We know some readers are, and we’re starting to feel some fatigue too. But the scandal continues to dominate headlines, and if you cut through the salacious trader emails (admittedly a good bit of fun) and the sometimes sanctimonious commentary, it is undeniably an important story that touches on so many of the big issues in financial services today: regulators’ proper role, reputational risk, client trust, etc. The most original angle we saw on our rounds this morning comes from the FT: There’s an unusual provision in Barclays’ settlement with the U.S. Commodities Futures Trading Commission, under which the U.K. bank, in addition to the usual monetary penalty and promise to revamp compliance, also agreed to “take on a role as an advocate for increased oversight for the industry.” Barclays will “encourage” the British Bankers Association and other publishers of interest rate benchmarks to reform the processes for Libor and other indexes. The FT frames this as “the latest example of the controversial practice of using enforcement pacts as a road map to change compliance,” of which the 2003 Wall Street research settlement may be the most famous example. The comment thread on this article is rich, too, e.g. this suggestion for making Libor more accurate: “A revised method could be adopted whereby the rate of borrowing polled is combined with a rate at which a willingness to lend is derived from a separate group and the ZOPA is used to establish the Libor.” (We are pretty sure that by “ZOPA” the commenter is referring to the negotiation concept “zone of possible agreement” and not recommending that the British peer-to-peer lending pioneer Zopa should get involved.)

Receiving Wide Coverage ...Missing Bank Director: Aubrey Lee Price, an investment adviser and a director of Montgomery Bank & Trust in Ailey, Ga. (which the FDIC seized Friday), has been missing for several weeks. On Tuesday the government accused him of wire fraud related to the embezzlement of $17 million from the bank. He has also been accused of defrauding investors in the funds he managed. Right before his disappearance, Price sent business associates a letter that read like a suicide note. Authorities consider him a fugitive. Wall Street Journal, Atlanta Journal-Constitution