Banco Popular de Puerto Rico

Receiving Wide Coverage ...All About the Dow: Despite "tepid economic growth" and "political gridlock" (most recently personified by the ongoing sequester), the Dow Jones Industrial Average hit a record high on Tuesday, climbing 125.95 points, or 0.89%, to 14253.77 and exceeding the previous record set in October 2007. But will the rally last? Maybe, posits the Journal. Or, alternately, should more investors pile in? Possibly, says the Times, due largely to the ongoing efforts of the Federal Reserve. More big picture coverage of the Dow rally: New York Times, Bloomberg, Reuters

Receiving Wide Coverage ...Stress Test Results Are Coming: Today is the day the Federal Reserve tells banks how they fared on their stress tests and whether they'll be able to return more capital to shareholders through dividends or buying back stock. Results won't be made public until March 14, but according to the Journal's Heard on the Street column, "analysts expect healthy capital returns overall." This doesn't mean investors should expect big payouts, as some banks, including Bank of America and Citigroup, which have previously seen return requests denied, and JPMorgan Chase have indicated their requests will be modest. "While chances are good that the 2013 capital-return announcements won't include nasty surprises, they also aren't likely to be game changers," the column concludes. "For that, investors still have to look to prospects for the economy, lending growth and interest rates." Meanwhile, this Dealbook article written by Jesse Eisinger of ProPublica takes issues with the fact that Bank of America is likely to get the Federal Reserve's green light on payouts, since the bank "has been underestimating its legal risks for years." The article cites a lawsuit over an $8.5 billion settlement with investors reached in 2011 concerning Countrywide's bad mortgages as the latest legal risk B of A may be downplaying on its legal reserves accounting books. "In keeping the reserves low, Bank of America has already won," Eisinger writes. "If it turns out that the bank loses its cases and has to pay much more money, it nevertheless has managed to make its books look that much better for years. That surely helped as it has tried to dig itself out of its financial crisis hole."

Receiving Wide Coverage ...Reaction Split on Stress Test Results: Seventeen of the 18 largest banks have enough capital on hand to weather a sharp economic downturn, according to the first set of results from the Federal Reserve's latest stress tests. Full explainer, plus graph, of the results are available in this American Banker article. You'll notice Ally Financial standing out as the only bank failing to meet the Fed's requirement of a minimum Tier 1 common capital ratio of 5% with two other firms — Goldman Sachs and Morgan Stanley — seeing their Tier 1 common ratio fall below 6%. (The Financial Times focuses on Goldman Sachs' performance in this round up of results, headlined "Goldman exposed to $20bn loss in a crisis.") Reaction to the overall results thus far appears mixed. "Banks Health on the Mend," declares this Journal headline, with one analyst noting "One way to address too big to fail is to keep capital levels too onerous in order to have the banks shrink. These results are pretty much in line with that." But others argue banks fared well because the Fed went too easy and that there are vulnerabilities the tests fail to account for. "The derivatives market is huge — $600 trillion — and a potential source of instability for the banks, though you are likely to see little indication of that in the Fed's stress tests," writes Fortune senior editor Stephen Gandel. Perhaps David Reilly sums it up best in his "Heard on the Street" column: "Overall, many aspects of the test should soothe investors still worried about bank strength. But they shouldn't engender complacency about the need to keep shoring up the financial system." Meanwhile, Citigroup has already publicized its request to buy back $1.2 billion of shares without seeking a dividend. The FT believes the Fed's stress test results may ultimately rein in U.S. bank payouts. The Federal Reserve is expected to respond to Citi and other requests next week.

Receiving Wide Coverage ...Bernanke in No-Man's Land: When the history of the financial crisis is written, Federal Reserve Chairman Ben Bernanke will no doubt take flak for many things but timidity about stimulating the economy is unlikely to be among them. A half decade after the crisis, and with the labor market on the mend, the Fed is still buying $85 billion of mortgage-backed securities and Treasuries each month. It's financing the expansion of its portfolio by creating bank reserves. That means banks will be at ground zero regardless of whether the Fed's eventual unwind of its record-setting $3 trillion balance sheet goes smoothly or sparks the next crisis. Fretting over how it will play out has gained renewed urgency in the past week amid new signs of economic strength and the Fed chairman's appearance before the House Financial Services Committee. Even Bernanke admitted he's in uncharted territory, telling lawmakers that no country has ever had a comparable increase in the size of its portfolio and unwound it "in the precisely analogous way." (Ah, to live in a world of Fed-speak!) Bernanke & Co. are now reconsidering bond sales in response to criticism that their third round of purchases is exacerbating the potential for the central bank to, "in a robotic fashion, dump assets" on the market, causing interest rates to climb rapidly, Ethan Harris, co-head of global economics research at Bank of America (BAC) in New York, told Bloomberg. There is growing chatter that the Fed might try to restrain inflation through the rates it pays on bank deposits or by hanging on to its bond holdings until maturity—prospects Bernanke discussed with a scholarly sense of confidence that left some observers unconvinced the Fed knows what it's doing. "Their [Federal Reserve officials'] models are one thing, but the real world is another," says Robert Eisenbeis, an economist at Cumberland Advisors and former research director at the Atlanta Fed. (Eisenbeis and others may be getting the heebie-jeebies recalling the confidence with which Bernanke assured the world shortly before the financial crisis that bad subprime mortgages posed no threat to the broader economy.) Money managers who play with their own and clients' money are voting with their wallets on the prospect that when all talk is over (or, more likely, as it blathers on) interest rates will start rising. "Figuring that the Federal Reserve won't be able to keep a lid on interest rates forever, large money managers such as BlackRock (BLK), TCW Group Inc. and Pacific Investment Management Co. are getting ready for the day when rates take their first turn higher," reports the Wall Street Journal. "It isn't coming anytime soon, these investors say. But when it does, they worry, the ascent will be swift and steep." The moves include: buying floating rate debt, interest-rate swaps and inflation-protected bonds that will increase in value; and shorting U.S. Treasuries. "We don't subscribe to the view that once the fire starts, we'll be able to outrun everybody through the door," Stephen Kane, managing director for U.S. fixed income at TCW in Los Angeles told the Journal. "Rates could be up 50 basis points before your traders can get all the sell orders through." Bloomberg, Wall Street Journal

Receiving Wide Coverage ...Failed-Bank Fallout: D&O insurance premiums are way up for small banks as the FDIC goes after former executives of failed institutions, the Journal reports. Meanwhile, the FDIC has kept quiet about "scores" of settlements in failed-bank cases the last few years, thanks to "no press release" clauses, a Los Angeles Times investigative piece revealed. Though these clauses can seal a deal with a defendant who wants to avoid embarrassment, they represent "a major policy shift from previous crises, when the FDIC trumpeted punitive actions against banks as a deterrent to others." Wall Street Journal, Los Angeles Times

Receiving Wide Coverage ...The Mary Jo White Hearing: "Not a single senator voiced even slight opposition to President Obama's pick to head the Securities and Exchange Commission," the Post reports, despite what the Journal described as "pointed questions from lawmakers about whether her time spent defending Wall Street banks would impinge on her ability to police Wall Street." Importantly, Mary Jo White indicated flexibility on reforming money market funds, telling the Senate Banking panel that "any new rules would not interfere with 'the value' of the funds," according to the Times, which says the remark "alarmed investor advocates." Wall Street Journal, New York Times, Washington Post

Receiving Wide Coverage ...Whale Inquest: Ina Drew, JPMorgan's former chief investment officer, and Doug Braunstein, its former chief financial officer, will testify about the London Whale trading loss before Senator Carl Levin's investigations subcommittee Friday. It will be Drew's first public appearance since the trading losses were disclosed last year. Notably absent from the witness list: Jamie Dimon. Incidentally, the CEO turned 57 on Wednesday, prompting the Times' DealBook to remind readers that five years ago Dimon's birthday celebration at a Greek restaurant was interrupted by an urgent phone call about Bear Stearns … an anecdote staler than week-old pita bread.

Receiving Wide Coverage ...Stress Tests, Part II: Second round of results of the Federal Reserve's stress tests are in. The big items to note, per the headlines: Ally Financial and BB&T had their capital plans denied; JPMorgan Chase and Goldman Sachs received "conditional" approval for theirs since the Fed has concerns about their "ability to adequately estimate losses" when faced with a severe economic event (Both now have until September to resubmit capital proposals); and Citigroup and Bank of America — "two of the nation's most troubled banks during the crisis" — got the go ahead to reward their shareholders. The Journal has a nice round up of the banks' response to their results that outlines what their capital plans look like. Specifics about the Fed's decision regarding each bank are a bit harder to come by since, as the FT Alphaville blog puts it "the Fed wouldn't tell the banks how it arrived at its estimates, or say much that sounded like it might have come from a sentient being." General reaction to the results is mixed. The FT says the Fed's approval of about $30 billion of share buybacks represents "a vote of confidence in the strength of the U.S. financial system." The Journal cites analysts who believe the action "shows continuing unease with the risks posed by giant financial firms despite their capital raising in recent years." And Slate blogger Matthew Yglesias adopts an even more cynical stance. "This right here is the real bank bailout," he writes.

Receiving Wide Coverage ...Cyprus: Bailouts? Been there. Bank runs? Done that. But the European rescue package for this Mediterranean island has introduced a cruel twist: Making depositors pay. All depositors. The proposed one-time "stability levy" would not only take 9.9% out of uninsured deposits above 100,000 euros, but also 6.75% of insured deposits below that threshold, no matter how small the savings. This detail sparked panic, as Cypriots queued up at ATMs over the weekend to withdraw as much cash as they could (the "stability levy" was helpfully announced at the beginning of a three-day religious holiday on the island), and outrage. The FT's Wolfgang Munchau calls the plan "a wealth tax with hardly any progression. … If one wanted to feed the political mood of insurrection in southern Europe, this was the way to do it. The long-term political damage of this agreement is going to be huge. In the short term, the danger consists of a generalised bank run, not just in Cyprus" but across the continent. It would be rational for depositors in countries with shaky finances, such as Italy, Spain or Portugal, to withdraw their savings because "the Cyprus rescue has shown that the creditor nations will insist from now that any bank rescue must be co-funded by depositors," Munchau writes. One Cyprus bank employee told the U.K.'s Guardian newspaper, "There's a feeling they're trying this on us before they do it elsewhere." As a consolation prize of sorts, depositors in Cyprus will get equity in their banks. Why are they being "bailed in" rather than bank bondholders? Because there aren't any bank bondholders, or hardly any; Cypriot banks have very little senior debt. (Though those few bondholders "aren't being touched," apparently because "the German government [influential in the EU] was determined that the Cypriot rescue should not be seen by German taxpayers as in effect rescuing Russian money launderers with deposits in Cyprus," writes the BBC's Robert Peston.) This brings us to the broader significance of Cyprus, aside from the usual contagion stuff: The importance of long-term senior debt in a bank's capital structure. Former FDIC chairman Sheila Bair has called attention to the declining issuance of such debt by U.S. banks relative to deposits and other short-term borrowings. Among other problems, she wrote in Fortune in December, "Replacing long-term debt with deposits … increases the government's exposure if the banks get into trouble again, shifting risk from private bondholders to the government." In a comment letter to the Fed almost exactly a year ago, Bair (along with MIT's Simon Johnson, Stanford University's Anat Admati and Wharton's Richard J. Herring) called for a "mandatory proportion of unsecured debt" in a bank holding company's funding mix to help absorb losses. The Cyprus debacle may support this school's argument. Meantime, Cyprus' government is scrambling to renegotiate the deal with Brussels to shift more of the burden to the larger depositors as financial markets freak out.

Receiving Wide Coverage ...Citi Settles: In a story that will sound familiar, Citigroup has agreed to pay $730 million to settle claims that it misled its bond and preferred stock investors about possible exposure to losses on securities backed by subprime mortgages. The settlement is now the second-largest class action settlement related to the financial crisis. Bank of America's $2.4 billion payout to shareholders over the health of Merrill Lynch still takes the top spot. Citi, which maintains it did nothing wrong and merely settled "to eliminate the uncertainties, burden and expense of further protracted litigation," plans to cover the costs with "existing litigation reserves," the FT reports. One analyst told the Journal he thinks "we're starting to see the light at the end of the tunnel" in terms of the litigation, "which is one reason why these stocks have been trading better." New York Times, American Banker