By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Morgan Stanley chief James Gorman’s settlement with bond insurer MBIA puts a big chunk of the financial crisis legacy behind the firm. At $1.8 billion, it doesn’t come cheap. But it puts the investment bank on the right track by boosting regulatory capital and tidying up a very messy second year for Gorman.

The bank’s spat with MBIA was, like much of the litigation stemming from the crisis, about who would ultimately bear the cost of wagers gone disastrously wrong. MBIA made a name for itself in the staid municipal bond market by insuring more esoteric instruments, including bonds backed by commercial real estate debt held by Morgan Stanley. The bank recently valued MBIA’s insurance contracts at some $4.9 billion.

By settling the dispute, Morgan Stanley is tacking a $1.8 billion loss to an already-crummy year, all the better to kick off 2012 on a more solid footing. First, the deal frees up capital, getting the firm closer to meeting stiffer requirements coming down the pike under the Bank for International Settlements’ Basel III accord.

The New York bank estimates that closing its MBIA-related positions, even after taking the loss, should unlock $5 billion of capital. That should punch up its ratio of so-called Tier One common equity to risk weighted assets, estimated at over 7 percent at the end of September, by another 75 basis points. That nudges the bank closer to the 8.5 percent to 9 percent cushion it could eventually need.

The loss notwithstanding, investors applauded the move. That alone could encourage the remaining five banks – including Bank of America – still engaged in a legal battle with MBIA to consider similar deals. True, modest applause at year-end hardly makes up for the near 40 percent decline in Morgan Stanley’s stock so far this year. Gorman needs to do more than clean up old messes next year to keep shareholders on his side.

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

The U.S. Federal Reserve is working to improve its monetary policy communications. But its key role as a crisis lender is also now in the spotlight. Ben Bernanke’s Fed would get less flak if it managed this message better as well.

On monetary policy, the U.S. central bank has pledged to keep interest rates near zero for at least two years and is taking big policy steps aimed at getting the economy off the floor. The Fed’s public relations strategy has developed accordingly, with Bernanke now hosting press conferences after some interest rate decisions. Next year, the central bank is expected to reveal more about how it approaches its double-headed mandate to keep both inflation and unemployment down.

But the Fed also serves as the lender of last resort for the U.S. banking system – and, most recently, as the wingman for the European Central Bank and other monetary authorities when the dollar is in short supply in their jurisdictions. It’s a crucial role that keeps money flowing when the system would otherwise seize up.

Yet it took a court order in support of an effort pioneered by Bloomberg to get the Fed to divulge details of the emergency lending it conducted during the 2008 crisis. Even then, Bernanke left it up to the press and the public to interpret the data it eventually dumped.

A figure of $1.5 trillion actually measures the peak of Fed lending in December 2008. That’s hardly small change, but Bloomberg calculated a much higher total – $7.77 trillion – based on the aggregate of all the lending limits and guarantees the Fed provided during the financial crisis, many of which were only partly used. Other news outlets ran with the larger number, sometimes misrepresenting it as the cash actually lent out by the Fed. That would be a full order of magnitude more than the controversial $700 billion Troubled Asset Relief Program, which had required congressional approval.

The misunderstanding and the subsequent back-and-forth have left Bernanke on the defensive. Yet an independent central bank that can act as a lender of last resort when liquidity dries up is a vital safety net. The Fed needn’t be shy about making that case.

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Warren Buffett’s well-known aversion to tech stocks got Twitter feeds chirping about his disclosure on Monday that Berkshire Hathaway had amassed a $10.7 billion stake in IBM. But the move says more about the evolution of Big Blue’s investment profile than it does Buffett’s.

Despite jettisoning its PC business seven years ago, IBM still remains a part of the technology landscape. But to broadly portray the company as part of the same family with Apple and Google hardly captures just how much it has matured.

IBM was once more closely associated with the cutting edge of supercomputers, for example creating the first one to beat a human being at chess. Just a few months ago, however, IBM walked away from Blue Waters, a next-generation project that could, for example, crack the code on tornado formation. Younger Cray instead picked up the deal, in an announcement that came hours ahead of Buffett’s.

That doesn’t make IBM an also-ran but underscores what the Oracle of Omaha might see – and not see – in this tech departure. Big Blue is now a predictable, well-branded consulting and services firm.

Unlike many plucky upstarts, IBM has a long-term plan, one it outlined in detail back in March when Buffett says he began buying shares. Second, the company’s management looks steady for its industry, if the smooth CEO succession unveiled last month is any gauge. Investors hardly blinked last month when IBM promoted an insider, Virginia Rometty, to take over from Sam Palmisano.

Finally, IBM also looks cheap, in contrast to the frothy multiples that often characterize stocks in the sector or Big Blue’s peers. IBM trades at 14.8 times earnings, according to Thomson Reuters data, compared to Oracle’s 18.4 times and Accenture’s 17.4. The tech industry trades at a median multiple of 21.9.

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

U.S. money market funds have played a supporting role in the euro zone crisis – they’re short-term lenders to European banks. Before that, they lent to the likes of Lehman Brothers. The regulators of the $2.5 trillion market, meanwhile, want to end the fiction that they are just rebadged savings accounts.

The Securities and Exchange Commission is considering forcing money market funds to float their net asset values, like other mutual funds do, rather than having flexibility to hold them at the traditional $1 a share. That veneer of stability – broken only very rarely, for instance right after Lehman’s collapse in 2008 – is one feature that can make investors complacent. The SEC’s proposed change is a big one, but worth making since it would force investors to recognize the risks and remove cover for the funds’ managers.

Mary Schapiro, the SEC chairman, also this week floated the idea of forcing money market funds to hold capital reserves. The logic goes that banks are required to have a cushion to absorb volatility in their assets, so why not money market funds – especially if they are going to own potentially risky things like Lehman debt or French bank CDs. That way the funds won’t require Uncle Sam’s deep pockets to stabilize them, as they did in 2008 after one prominent fund “broke the buck” and a run on others ensued.

Such a requirement would also surely reduce the yield the funds could pay investors. That could shrink their appeal: it hasn’t been noticeable in recent years with interest rates ultra-low, but money market funds used to attract investors by paying out a good bit more than deposit accounts for what was perceived as equivalent risk.

But perhaps money market funds need to shrink for the greater good. Euro zone banks were still borrowing $218 billion from them in October, according to JPMorgan. With lending mostly very short term, that’s dangerously hot money if the funds get the jitters. The industry has already shrunk more than a third from its peak, but it’s still bigger than the total assets under management in hedge funds globally. Further SEC reforms might ensure money market funds aren’t players in the next crisis.

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

The Avon lady needs to look in the mirror. Andrea Jung may be a powerful figure in U.S. business, but the chief executive of the $8 billion Avon Products has twice failed to turn the cosmetics company around. Never mind the federal probe into possible wrongdoing, Avon’s performance has been dismal.

The company’s stock is down more than 20 percent since the beginning of the year, substantially underperforming peers like L’Oreal and Revlon. A big chunk of the decline came after its quarterly report on Thursday. But Jung can’t blame the current tough times, even if they haven’t helped. She presided over several years of strong performance after becoming CEO in 1999. But the company’s shares have significantly underperformed the broader market and major rivals at least since 2005, when the marketing maven first gave the company a makeover.

She took the restructuring scalpel out again four years later, but it didn’t produce lasting results. Sales growth ran in double digits early in Jung’s tenure, but won’t even reach mid-single digits this year. Moreover, she seems to accept that her strategy in one big market, Brazil, needs a rethink, and the company’s U.S. performance has been disappointing, too.

Some investors may have been disinclined to rock the boat given Avon’s juicy 5 percent dividend yield. But a squeeze on the company’s free cash flow has put that in doubt. The $37 million of free cash generated in the first nine months of this year is well short of the dividend outflow of $302 million in the same period. Dipping into cash holdings to maintain the payout may not be a sustainable approach.

Avon’s new chief financial officer, Kimberly Ross, will have that to grapple with when she starts next month. Plus there’s a Securities and Exchange Commission probe into whether the company broke bribery and disclosure laws for her and her colleagues to worry about. Jung said on Thursday that the buck stops with her. After 12 years in charge and two ineffectual revamp efforts, the Avon board should hold her to that and give someone else a chance.

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

There’s a growing chorus among U.S. legislators to get the government out of the housing business. That’s understandable given the possible $311 billion bill that Fannie Mae and Freddie Mac may rack up for taxpayers, according to a Federal Housing Finance Agency estimate on Thursday. But the recent failure of PMI Group’s mortgage insurance business is a reminder that chunks of housing’s private sector need fixing, too.

PMI, like its rivals Radian and MGIC, was once a highflier in the mortgage boom. It even sported a $4 billion market capitalization. Last week, PMI was effectively seized by the Arizona Department of Insurance. The state regulator took over its mortgage-writing unit after prohibiting it from issuing new policies. That’s a death knell in an industry that needs new premiums to counterbalance claims delivered by the housing bust.

And PMI is hardly alone. Only one of the six major home loan insurers has an investment-grade credit rating. A few are dangerously close to breaching their risk-to-capital limit of 25 to 1 – the minimum required to ensure they have enough firepower to pay claims. It took just one quarter for PMI to race through this threshold, moving from 24.4 to 1 to 58.1 to 1 by the end of June, according to CRT Capital.

The duration of the housing crisis has made life hard for mortgage insurers. They make their money by insuring lenders against future losses on mortgages that don’t come with a 20 percent down payment from the borrower. As home sales have slumped and banks become loath to lend to borrowers who don’t deliver chunky down payments, the business has suffered.

But bad practices prevalent in the good years bear a good part of the blame. For instance, as lenders loosened their credit standards during the boom, many mortgage insurers felt compelled to give banks a share of their premium income. That left the insurers with a smaller cushion to weather losses from claims during the housing collapse.

If the government ever hopes to extricate itself from the business of housing finance, it needs to ensure private sector backstops are well fortified and well regulated.

By Agnes T. Crane and Christopher Swann The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

There seems to be no end to bad news for bankers. They’re already on the defensive. Third-quarter earnings look set to be shoddy. Another 10,000 job cuts may be in the offing. And protesters are ready to camp outside Jamie Dimon’s house. Yet financials still haven’t shrunk enough, suggesting more pain is to come.

Despite the fallout from the 2008 financial crisis, the sector actually accounts for a bigger share of the U.S. economy than before the financial crisis, representing 8.4 percent of total GDP. Manufacturing’s output, while still larger, shrank between 2006 and 2010. Moreover, job cuts in New York City’s securities industry have only slimmed high finance’s payrolls by 22,000, or 12 percent, according to Thomas DiNapoli, the New York state comptroller. He expects another 10,000 pink slips to be sent out by the end of 2012, but if culls after previous financial mishaps are any guide, that may prove too optimistic. The Big Apple lost twice as many Wall Street jobs after the dot-com crash, for example.

Compensation also still seems out of whack. The average Joe at a securities firm saw his paycheck increase 16.1 percent in 2010 to more than $360,000. That’s 5.5 times higher than the going wage in the private sector, according to the comptroller. In 1980, it was only twice as fat.

There are a number of reasons Wall Street survived the aftermath of the 2008 crisis better than many had expected, chief among them taxpayer support and trillions of dollars pumped into financial markets, inflating asset prices and trading desk profits. But with the economy stalling and Uncle Sam running out of ways to jump-start it, more cuts look likely. Longer term, new regulations are likely to whack profitability further, enforcing even more trimming.

Bringing banks back into balance won’t just be painful for the pin-striped suit brigade. Reducing the industry’s contribution to the economy means fewer taxes for federal, state and local governments to collect, especially for New York, where no other sector looks healthy enough to pick up the slack. But it’s an adjustment that’s past due.

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Orson Welles once hawked Californian wine using the tagline: “Paul Masson will sell no wine before its time.” The same could be said about the U.S. Treasury and 50 or 100-year bonds. Maybe it’s finally the right moment to actually sell some.

The Federal Reserve’s latest maneuver, colloquially known as Operation Twist, is squarely focused on reducing longer-term interest rates. By mid-2012, it plans to buy about $116 billion-worth of Treasuries maturing in 20 to 30 years’ time. That represents roughly a quarter of the outstanding stock, excluding what the central bank already has on its balance sheet, according to Deutsche Bank. Following the Fed’s announcement of its plan, 30-year yields have already dropped below 3 percent.

One reason is the Fed will be muscling in on scarce supply. Pension and retirement funds, along with insurance companies, need long-dated paper to match their distant liabilities. These investors own more than half the 20 to 30-year U.S. government bonds not already in the Fed’s hands, Deutsche reckons. They want more safe long-term investments — but the central bank’s move will leave fewer available.

The Treasury could just issue more 30-year debt. Foreign holders prefer shorter maturities, so that could attract more domestic investment. And it would lengthen the average maturity on U.S. debt, which is scarcely more than five years currently. Though that figure has been increasing somewhat, America’s debt profile is still front-ended compared with other large, developed economies, so there’s room to extend it.

But if the Treasury ramps up sales of 30-year bonds just as the Fed is buying them, it risks criticism as a policy conflict. One way to avoid that could be to go even longer. Treasury kicked off a debate on the merits of a 50 or 100-year bond in February. At that time, 30-year bonds were yielding more than 4.5 percent. Today’s much lower rates surely make adding debt that runs another couple of decades that much more attractive.

Welles was famously inebriated while filming some of his wine commercials. The Treasury shouldn’t get drunk on ultra-long bond issuance. But there may genuinely never be a better time to sell them in judicious quantities.

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Fast cars and fast money can go to the heads of traders. U.S. money market funds are a vehicle for pretty cautious investors, but the managers have a dizzying $2.5 trillion to play with. The Federal Reserve is raising concerns that they’re driving way too fast.

French bankers can be forgiven for feeling run over. In August, JPMorgan calculates that funds withdrew $39 billion from French banks, which are perceived as vulnerable in the euro zone sovereign debt crisis. There is an irony here. The funds’ goal is to prevent losses, but such sudden shifts make the financial system less stable.

There’s another irony. Money market funds are prized by investors in part because they are supposed to have less counterparty risk than banks. Yet, roughly three-quarters of the $1.5 trillion managed by prime money market funds (the non-government part of the market) is estimated to be invested in bank debt.

These funds have basically been on the run for years. Low short-term rates make profits elusive and customers have deserted the funds -– assets are down nearly 30 percent since the 2009 peak. Money has moved into more traditional bank deposits, and will continue to do so as long as short-term yields stay low -– the Federal Reserve has pledged at least two years.

Also, while safety is the funds’ watchword, it has been hard to find. Money markets bailed out of U.S. financial institutions after Lehman Brothers proved that investment banks can indeed fail. European banks looked safer –- until Greece struck and investors ran again.

The August lurch away from France was part of a trend. According to a Fitch Ratings survey of the 10 largest U.S. money market funds, exposure to Europe fell by 27 percent on a dollar basis from the end of May through August. Holdings in Japanese, Canadian and Australian banks all increased. Safe havens, however, are becoming scarcer. Few U.S. non-financial companies, for example, are suitable. Some are now cash hoarders and others have too low credit ratings.

By Agnes T. Crane and Robert Cyran The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

Warren Buffett isn’t too old to try something new. His Berkshire Hathaway conglomerate is buying back an unlimited amount of both classes of shares, at up to a 10 percent premium over book value. Investors like to copy what Buffett does, but stock repurchases are best left to the Oracle of Omaha. If shares of other companies were truly undervalued, Berkshire probably wouldn’t be buying its own.

The moment seems right for Berkshire. Its shares have suffered badly this year, falling 17 percent before Monday’s announcement. For a company that prides itself on beating the S&P 500, small wonder Buffett pulled the trigger on an option he has, at least in theory, supported for years.

Shareholders liked the decision, pushing Berkshire shares up 6 percent. What’s good for Buffett, though, might not be so for other corporate bosses. Along with his hunting companion Charlie Munger, Buffett has been touting an M&A quest for an elephant. Yet Berkshire’s $165 billion market value has made it tough to bag one big enough to help the company’s returns.

In recent years, Berkshire has found smaller but satisfying game in finance. Fat dividends from preferred stock in Goldman Sachs, General Electric and most recently Bank of America have proven appetizing. And although Berkshire will keep at least $20 billion of cash on hand, the decision to turn inward for rewards suggests the herd might be starting to look thin.

It’s something investors would be wise to keep in mind. The view that stocks are undervalued remains entrenched on Wall Street and in boardrooms. Companies are buying back stock in droves, and sometimes borrowing to do so, without giving investors objective measures to justify the decisions.

But there may yet be a strategy to mimic from Berkshire’s buyback. Since Buffett has put a price on what’s undervalued, and given his history of well-timed investments compared to the appalling track record of most corporate share buybacks, maybe other companies should consider buying Berkshire stock instead of their own.