Banco Popular de Puerto Rico

Receiving Wide Coverage ...The Vickers Report: We missed this yesterday, but it's still well worth bringing to your attention, if only to put the regulatory debate in this country into perspective: the U.K. Independent Commission on Banking, led by Sir John Vickers, issued a 358-page report recommending an overhaul of the country's banking system. Central to its blueprint is the "ring-fencing" of retail banking operations — isolating them from a corporate parent's wholesale and investment banking activities. The ring-fenced portion of a bank would have its own board separate from the rest of the institution, and a rather plush 20% capital cushion (including 10% equity, plus other loss-absorbing investments like unsecured "bail-in" bonds or contingent capital), among other protections. Capital could move from the ring-fenced bank to the investment bank — as long as the latter's capital ratio did not fall below the 10% minimum. This "structural separation should make it easier and less costly to resolve banks that get into trouble," the report says. Reuters' blogger Felix Salmon admiringly calls this plan "the Volcker rule on steroids … It's essentially a break-up, in all but name, of the big banks with both retail arms and investment-banking operations." (In light of this, Salmon finds JPMorgan Chase CEO Jamie Dimon's recent complaints about Basel III galling). Chris Skinner of the Financial Services Club blog is less impressed: "The proposal to leave banks as integrated universal operators — good for Barclays — by purely creating a delineation between their domestic commercial and retail banking operations versus their global links is a duck out. Why? Because it does not address the issue of why banks fail, but just what to do when they fail. … Sure, it's a good thing to know what to do when a bank fails ... but why not try to deal with the core of failure as, even if we know what to do, a bank failure in its investment arm will still destroy value in its overall operations?" The Journal's "Heard on the Street," while awed by the scope of the proposed reforms, calls the plan "a major gamble" on various unknowns, such as the market's willingness to float bail-in debt and shareholders' willingness to accept lower returns on equity from banks. Finally, the FT's editorial page declares the Vickers plan "a necessary reform of British banking" that would effectively tackle the problem of too-big-to-fail. The editorial writers do warn that regulatory arbitrage could, in the long run, undermine the reform: "the big European governments are … unlikely to abandon their universal banks. That means the Vickers plan does not have time on its side. For now, the single market in retail banking works better in theory than in practice but, sooner or later, European banks will try to poach UK retail business and weaken the effect of Vickers rules that apply only to UK banks." Still, "that is a case for implementing them while they do the most good" — i.e. tout suite. Wall Street Journal, New York Times, Financial Times, BBS News

Receiving Wide Coverage ...The Signs Are Bad …: The market volatility of the summer is beginning to take its toll on results at the large diversified banks (we have taken a vow to avoid as much as possible that apple-and-orange smoothie of a catchphrase, "Wall Street"). JPMorgan Chase executive Jes Staley warned investors at the Barclays conference in New York that trading revenue will probably slip 30% for the third quarter, the Financial Times reported. Banks that have investment-banking operations, including JPMorgan Chase, Bank of America and Citigroup, are expected to post poor results for the third quarter on lower trading volume and weaker income from providing advice for stock and debt offerings, according to the New York Times.

Receiving Wide Coverage ...Legacy Liabilities: Statutes of limitations are looming for investors with potential legal claims against firms that sold them dodgy mortgage-backed securities during the boom years, helping to explain a recent uptick in bondholder suits, the Journal reports. The Federal Housing Finance Agency's suits against various securitizers, filed just before the three-year anniversary of the agency's takeover of Fannie Mae and Freddie Mac, was only the most prominent example of such litigants racing to beat the clock. Meanwhile, another Journal story reports that the SEC is widening its probe into collateralized debt obligations, those mutant cousins of mortgage-backed securities. Among other actions, the agency is pushing Citigroup to settle a civil case for $200 million, the story says. The charges concern a $1 billion CDO that Citi created in 2007, right around the time cracks were beginning to show in the housing market façade; citing anonymous sources, the Journal says investigators are looking at whether Citi had short positions. In the Times, "Dealbook" takes a TARP tally and finds that nearly three years after the emergency program was created, 500 banks still owe the government a combined $19 billion of bailout money. (For perspective: that outstanding balance is just 8% of the total that the government invested through TARP.) The largest bank that still owes TARP: Regions Financial. Finally, Countrywide is the acquisition that just keeps on giving for Bank of America. The Department of Labor ordered the bank to rehire and pay $930,000 to a whistleblower it improperly fired. The employee, whose name has not been disclosed, had reported "pervasive wire, mail and bank fraud" at Countrywide, and illustrating the adage "no good deed goes unpunished," B of A "used illegal retaliatory tactics against this employee," a government official said. B of A insists the termination was solely related to the worker's "management style" and it plans to appeal. For now we'll just have to speculate on whether there's a "welcome back" card being passed around for everyone in the office to sign.

Receiving Wide Coverage ...The UBS Delta Blues: Kweku Adoboli, arrested in London Thursday on suspicion of fraud after allegedly blowing $2 billion of his employer UBS' money on unauthorized trades, worked at the Swiss bank's Delta One trading desk — the same line of business as Jerome Kerviel, who was convicted last year for losing Societe Generale a bundle back in 2008. What the heck is this Delta One, you ask? The FT has a very helpful explainer which we could not possibly hope to improve upon. The Times' "Dealbook" says Delta One desks are big moneymakers, and "Heard on the Street" in the Journal finds it "baffling" that this line of business should be the source of two high-profile debacles, since, according to the column, it's a low-risk activity. "For UBS to have lost so much suggests it had an unusually large position in an underlying asset or currency. That, in turn, could suggest a massive failure of oversight at the bank." An analytical story in the Journal says the Adoboli affair raises questions about risk management in the broader financial sector. "Unauthorized trading is hard to fully protect against given that traders typically hide their losses using fraudulent methods," the story says, and "management oversight hasn't always kept pace with the complexity of trades." You may now be wondering, where were the regulators in all this? The more apt question may be "who": Another Journal article reports that UBS' London investment bank operations were supervised by both U.K. and Swiss regulators, and it isn't clear which one had jurisdiction over the trades gone bad. "Dealbook" used the UBS mess as an excuse to dust off a list of famous rogue traders, originally published around the time Kerviel was convicted. Other journalists are taking issue with the use of the term "rogue trader." "They're not 'rogue' for the simple reason that making insanely irresponsible decisions with other peoples' money is exactly the job description of a lot of people on Wall Street," writes Rolling Stone's Matt Taibbi. "Hell, they don't call these guys 'rogue traders' when they make a billion dollars gambling." The Journal's David Weidner makes the same point succinctly in a Borscht-belt headline: "What Do You Call A 'Rogue' Trader Who Makes $2 Billion? A Managing Director." Another analytical story in the Journal points out that this was only the latest in a series of crises for UBS in recent years. (Another "Heard on the Street" piece also focuses on the bank's long-running reputational issues, and in case anyone misses those two stories, this "Deal Journal" entry describes UBS' trust problems as well. The Times also chronicled UBS' rocky recent history in the form of a timeline.) Finally, one more "Dealbook" entry gives us Adoboli's backstory, which is full of sentences like this: "In his spare time, Mr. Adoboli liked photography, cycling and wine." Sometimes, the human interest angle just isn't that interesting.

Receiving Wide Coverage ...Rogue Trader Redux: UBS raised its estimate of its losses from allegedly unauthorized trades by a London employee to $2.3 billion from the initial figure of $2 billion. The U.K. authorities formally charged Kweku Adoboli with fraud on Friday and said his shenanigans had gone on undetected for three years. Meanwhile, according to the Journal, the scandal has caused some Swiss politicians to call for UBS' CEO, Oswald Grubel, to step down, and intensified pressure on the company to shrink or spin off its investment bank. Grubel refuses to step down, though. Another Journal story says Societe Generale is still haunted by a similar scheme perpetrated by the now-infamous Jerome Kerviel that was uncovered three years ago. The Financial Times delves into the similarities between the two — both traders allegedly disguised losses with fictitious countertrades. Both Kerviel and Adoboli worked on "Delta One" trading desks, which traffic in, among other things, exchange-traded funds. ETFs had already been a source of worry for regulators this year — see this report from the Financial Stability Board, and this one from the U.K. Financial Services Authority. The Adoboli affair has moved the issue higher on their agenda, the Journal's "Heard on the Street" column notes approvingly. The FT columnist Tony Jackson says the UBS debacle has been used as an argument to support the U.K. Vickers report's plan for reforming banks — which he says is all well and good, but there are plenty of other reasons to do so, as that report said, which he then goes on to enumerate. (Interestingly, Jackson, though wholeheartedly in favor of the Vickers recommendations, argues the proposed ring-fencing of investment banks won't work — a point of disagreement with his colleague Martin Wolf. The problem, according to Jackson: "The underlying premise is that the board can set the culture. But that is not how big corporations work" — see BP. But we digress….) British and Swiss regulators have hired Deloitte to investigate the events at UBS, which will pay for the audit firm's gig, the FT says. David Sidwell, a former chief financial officer at JPMorgan and the senior independent director on UBS' board, will head an internal probe. Finally, an article the Times' "Dealbook" provides a concise summary of this multifaceted drama so far, and in the process answers a question that's been on our minds since we saw that photo of a handcuffed Adoboli surrounded by British police: why is he smiling?

Receiving Wide Coverage ...The Mess at UBS: More details are emerging on how alleged rogue trader Kweku Adoboli may have run up more than $2 billion in losses for UBS without the Swiss bank's knowing. Press reports suggest he took advantage of a loophole in European reporting requirements for exchange-traded fund trading. Adoboli, the speculation goes, could have made up bogus hedges purportedly offsetting the unauthorized positions he took, because the fictitious trades wouldn't have required confirmations. As a former back-office employee, he was well qualified to perpetrate such a ruse. "Some banks do not confirm trades until settlement and Mr Adoboli is likely to have known which ones those were," the FT says, citing an anonymous insider. The paper points out that this is yet another part of the story echoing that of Jerome Kerviel, who worked in Societe Generale's middle office (PDF) before he made rogue trading history. We might add that Nick Leeson got his start as a clerk, too. (If you're wondering how we even remember that piece of trivia, click here and scroll to about 2:45.) And speaking of the bloke who brought down Barings Bank in 1995, Leeson was recently interviewed by The Sun (one British paper we don't expect to cite very often in the Morning Scan) about the Adoboli affair. He told the tabloid he blames the bank and that Adoboli could become a "fall guy." Banks, Leeson says, have "preposterously" failed to learn any lessons about "their dogged pursuit of money": "Putting controls in place, and employing people to ensure the controls are working, costs money so they won't do it. It's last on their list of priorities." This may well be a correct assessment, but as they say, consider the source. OK, let's zoom back out to the bigger picture: several articles observe that the UBS mess has strengthened the hand of those seeking to tighten regulation of financial institutions worldwide. "In the U.S., those on Wall Street and in Congress who wanted to repeal or roll back the Dodd-Frank law will have a hard time making inroads now," Franceso Guerrera asserts in the Journal's "Current Account" column. "The fact that UBS lost more than $2 billion on unauthorized trades leaves the impression that, once again, a member of the global banking elite has been unable to police itself.… Proponents of stricter regulation could hardly have asked for a better assist." A story in the Times' Dealbook makes a similar argument, and suggests that Adoboli's alleged speculative trades — apparently made with UBS' own money — could bolster the case for a stronger version of the Volcker rule in Dodd-Frank.

Receiving Wide Coverage ...The Capital One Hearings: The Fed held the first in a series of public hearings on Capital One's application to buy ING Direct. The Journal leads with the fact that along with the usual CRA activist types, community bankers (represented by the ICBA) voiced loud objections. Not only to this deal, but to any that would result in an institution with $100 billion or more in assets. "It is unlikely regulators will embrace the moratorium idea outright," the paper says, "but the criticism highlights the divide between big and small banks over the appropriate response to the 2008 financial crisis. Community banks, which fought to differentiate themselves from unpopular Wall Street banks in the crisis' aftermath, continue to wield clout on Capitol Hill and could increase pressure on regulators to slow big bank mergers." Capital One, meanwhile, rebutted the claim that by creating the fifth-largest bank the deal would result in another too-big-to-fail entity. The lender's general counsel, John G. Finneran, Jr., asserted that if anything, the combination would have the opposite effect. Unfortunately the press stories we see merely report that assertion without explaining the argument behind it; for that, we had to go to Finneran's testimony. His main points are that both Capital One and ING Direct do traditional banking (CDs, but no CDOs or CDS); neither dominates its markets or provides a service critical for the financial system to function (your frequent flier card doesn't count); and placing a foreign-owned entity under domestic ownership means less interconnectedness. Now you can judge for yourself. Wall Street Journal, New York Times

Receiving Wide Coverage ...Twisting and Shouting: As expected, the Federal Reserve announced it would shift the composition of its bond portfolio by selling about $400 billion of short-term Treasuries and using the proceeds to buy longer-term ones, in an effort to drive down long-term yields and thereby mortgage rates. Unexpectedly, the Fed also said it would take an additional step to hold rates down: reinvesting any principal repayments from its portfolio of agency debt and mortgage-backed securities into new MBS. So instead of just Operation Twist, "we got a double twist," economist Diane Swonk told the Financial Times. According to the paper's lead story, "such a big move suggests that Ben Bernanke, Fed chairman, is alarmed by the slowdown, and has decided to override opposition on the rate-setting Federal Open Market Committee and provide as much stimulus as easily practical." On the FT's "Money Supply" blog, Robin Harding expresses disappointment that despite speculation, the Fed did not pursue a strategy that would have directly hit banks in the pocketbook: lowering the interest the central bank pays them for excess reserves. "I'm always surprised that there aren't more complaints about the $4bn-a-year subsidy to banks that it represents," Harding writes. In a separate FT article, he says that overall, the Twist was "the most bold and uncompromising action possible," and notes that the Fed acted in defiance of internal dissenters (the vote on the Open Market Committee was 7-3 in favor of twisting) and the rather loud Republicans in Congress and on the campaign trail. The Times' "Economix" blog considers the possibility that the political pressure may have only encouraged the Fed to make its move. The piece quotes Bruce Bartlett, a former Treasury official in the first Bush administration: "The Fed jealously guards its independence and cannot allow itself to be seen as caving to administration pressure. Therefore, administration pressure to ease would force the Fed to remain tight lest it appear that it was caving to pressure. For this reason, administrations quickly learned that the best way to influence the Fed is through back channels." We're going to take a brief pause to remind readers the two reasons this monetary maneuver is called "Operation Twist": 1) As this infographic the Journal published a few weeks ago so beautifully illustrates, the Fed is redistributing its investments along the yield curve like the air in a twisted balloon and 2) it was tried once before, with mixed results, in the 1960s, when young people were dancing like this. Got that? Good. Now where were we? Oh yes, yet another take from the FT: Gavyn Davies notes that while the Fed twisted, it didn't do a whole lot of shouting - that is, communicating to the markets that it expects to keep short-term rates (you know, the type the Fed used to muck with exclusively) as low as they are for longer than expected. The central bank simply reiterated what it said after the last policy meeting about keeping these rates near zero for two years. "The next debate at the Fed will probably be whether to do more on operation 'shout,'" Davies predicts. Stocks sold off after the Fed announcement, which the Journal's editorial writers attributed to the central bank's statement that it now sees "significant downside risks" to the economy, and, the editorial adds, "perhaps also as reality dawned that the reprise of 1961's Operation Twist is more gesture than salvation." The overall thrust of the editorial is that the answer lies in changing fiscal and regulatory policies, not monetary easing. "Heard on the Street" in the Journal says the news hurt financial stocks in particular because lower 10-year yields mean a flatter yield curve and hence tighter net interest margins, and because the committee's gloomy economic outlook bodes poorly for loan growth. The main Fed story in the Journal notes that as the central bank has been trying to lower rates by soaking up the supply of bonds, the Treasury Department has been diluting the impact of those purchases by, well, issuing more bonds. Yet another Journal piece says that the mortgage-backed securities market had been worried in recent weeks about a glut of issuance as many homeowners were refinancing at already-low rates while the Fed's MBS holdings paid off. The plan to redeploy returned principal back into this sector was thus reassuring.

Receiving Wide Coverage ...Down Jones: Following news that the Chinese economy might be cooling off, the "Dow Jones Industrial Average fell 3.5 percent, capping its biggest two-day drop since the height of the financial crisis in 2008," the Post reported. But it wasn't just stocks markets that were showing the stress: commodities "plummeted after months of holding steady." The Journal concurred, noting a sell-off in "everything" in a flight to the safety of U.S. Treasuries, spooked by "fears of another recession and a Greek debt default." G-20 officials were busy trying to assure investors that European banks are healthy enough to endure another crisis.

The feds are fighting five domestic banks over transactions Barclays arranged that allegedly exploited discrepancies in U.K. and U.S. tax laws to stiff Uncle Sam for billions, a joint investigation by the Financial Times and ProPublica found.