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from Tales from the Trail:

Obama compromised by Wall Street contributions, conservative group alleges

President Obama is too closely tied to Wall Street, claims a new web video that takes the tone of Occupy Wall Street, though it was produced by a conservative group.

The video, released by the American Future Fund, an Iowa-based organization designed to be “a voice for conservative principles” and “free market ideals,” alleges that raising tens of millions of dollars from Wall Street gave Obama reason to let (presumably culpable) Wall Street executives off easy:

“Nearly four years after America’s financial collapse, not a single senior Wall Street executive has been charged with a crime. Not one. Why? Could it be because Obama raised $49 million from Wall Street – more than any candidate in history? He rewarded top Wall Street donors and supporters with senior jobs. His chief of staff made millions from Wall Street -- after Wall Street received billions in bailout money."

The ad names Jon Corzine, the former Democratic senator and New Jersey governor who headed MF Global until it filed for Chapter 11 bankruptcy last fall, as a particular example. Corzine “lost $1.6 billion in customers’ money but hasn’t been charged” the narrator says.

“Under Obama, Wall Street keeps winning, and Obama keeps taking their cash. Tell Obama to stop protecting his Wall Street donors.”

Watch, via the American Future Fund:

from MacroScope:

Central bank balance sheets: Battle of the bulge

Central banks across the industrialized world responded aggressively to the global financial crisis that began in mid-2007 and in many ways remains with us today. Now, faced with sluggish recoveries, policymakers are reticent to embark on further unconventional monetary easing, fearing both internal criticism and political blowback. They are being forced to rely more on verbal guidance than actual stimulus to prevent markets from pricing in higher rates.

How do the world’s most prominent central banks stack up against each other? The Federal Reserve was extremely aggressive, more than tripling the size of its balance sheet from around $700-$800 billion pre-crisis to nearly 3 trillion today. Still, the ECB’s total asset holdings are actually larger than the Fed’s – it started from a higher base.

The Bank of England, for its part, went even deeper into uncharted territory, with its assets as a percentage of GDP surpassing the Fed’s. By the same measure, the ECB has overtaken the Bank of Japan, which has been grappling with deflation for some two decades and started from a much higher level.

Taken together, the expansion in reserves is impressive – and speaks to just how deep the global recession proved to be.

from Bethany McLean:

The meltdown explanation that melts away

Although our understanding of what instigated the 2008 global financial crisis remains at best incomplete, there are a few widely agreed upon contributing factors. One of them is a 2004 rule change by the U.S. Securities and Exchange Commission that allowed investment banks to load up on leverage.

This disastrous decision has been cited by a host of prominent economists, including Princeton professor and former Federal Reserve Vice- Chairman Alan Blinder and Nobel laureate Joseph Stiglitz. It has even been immortalized in Hollywood, figuring into the dark financial narrative that propelled the Academy Award-winning film Inside Job.

As Blinder explained in a Jan. 24, 2009 New York Times op-ed piece, one of what he listed as six fundamental errors that led to the crisis came “when the SEC let securities firms increase their leverage sharply.” He continued: “Before then, leverage of 12 to 1 was typical; afterward, it shot up to more like 33 to 1. What were the SEC and the heads of the firms thinking?”

More recently, Simon Johnson, a former chief economist at the IMF, said last November that the decision “by the Bush administration, by the SEC to allow investment banks to massively increase their leverage … in terms of the big mistakes in financial history, that’s got to be in the top 10.”

It is certainly true that leverage at the investment banks zoomed between 2004 and 2007, before the near collapse. And this narrative of the rule change has plenty of appeal -- it serves up villains. Stupid SEC people! Greedy bankers! It also suggests regulators were in the pockets of the big banks, and it offers support for the narrative of financial deregulation that many put at the center of the crisis.

There’s just one problem with this story line: It’s not true. Nor is it hard to prove that. Look at the historical leverage of the big five investment banks -- Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs and Morgan Stanley. The Government Accountability Office did just this in a July 2009 report and noted that three of the five firms had leverage ratios of 28 to 1 or greater at fiscal year-end 1998, which not only is a lot higher than 12 to 1 but also was higher than their leverage ratios at the end of 2006. So if leverage was higher before the rule change than it ever was afterward, how could the 2004 rule change have resulted in previously impermissible leverage?

The blame-the-2004-rule position made its first appearance in August 2008, when a former director of the SEC’s trading and markets division named Lee Pickard wrote an op-ed in the American Banker arguing that the SEC contributed to the crisis when it changed something known as the “net capital rule” in 2004. The net capital rule, which governs how much capital broker-dealers have to hold and how that capital is measured, is technical, but Pickard made it simple: Prior to 2004, the broker-dealers’ debt had been limited “to about 12 times its net capital,” but thanks to the change, the investment banks were now able to avoid “limitations on indebtedness.”

from Breakingviews:

Fed strikes right balance with latest stress test

By Antony Currie

The Federal Reserve has found the right balance with its latest round of stress tests of the 19 largest U.S. banks. Unlike its last look under the hood of American finance a year ago, the central bank’s regulators this time are giving investors reams of more useful data to help separate the industry’s sheep from its goats. And they’re acting prudently to ensure capital adequacy in the system.

The results were better than expected considering the extremity of the stress scenario: banks had to prove they had enough capital to withstand a 13 percent unemployment rate, a 50 percent crash in the stock market and a 20 percent slump in house prices. That led investors to assume that few banks would be allowed to reinstate or boost dividends or buy back stock.

As it happens, 15 of them got clean bills of health, prompting first JPMorgan and then others to announce their plans for putting surplus capital to work - though Bank of America submitted no request to do so and Regions Financial decided to use the Fed’s blessing to sell $900 million of common stock.

What’s more, the four banks that failed shouldn’t be cause for alarm. While Citigroup flunked, it only did so by a whisker. Citi’s hardly in bad shape and boss Vikram Pandit still has a few irons in the fire - allowing Morgan Stanley to buy all the bank’s stake in their wealth management joint venture sooner than anticipated would, for instance, free up $10 billion of capital instantly, subject to Fed approval.

The laggards - including Ally Financial, insurer MetLife and SunTrust - may not like the results. But by forcing these banks to further retain earnings and capital, at a time when the economy and markets are relatively stable, the Fed is following through on its enhanced mandate as a macro-prudential regulator under the Dodd-Frank Act.

Bank shareholders shouldn’t get too cocky, though. The tests may prove that bank balance sheets are relatively robust. But most institutions are failing to earn their cost of capital - meaning that even JPMorgan and Goldman Sachs are struggling to trade above book value. That’s not the Fed’s concern, of course. It wants to keep the next financial crisis at bay. This level of transparency helps ensure that outcome.

from Global Investing:

Three snapshots for Friday

The U.S. economy probably created 210,000 jobs last month, according to a Reuters survey. If the forecasts are accurate, the government's jobs report on Friday would mark the first time since early 2011 that payrolls have grown by more than 200,000 for three months in a row. Refresh chart

China's annual consumer inflation slowed sharply to a 20-month low in February, and factory output and retail sales also cooled more than forecast, giving policymakers ample room to further loosen monetary policy to support flagging growth.

Greece averted the immediate risk of an uncontrolled default, winning strong acceptance from its private creditors for a bond swap deal which will ease its massive public debt and clear the way for a new international bailout.

from Breakingviews:

Lehman is back! Is the financial crisis over?

By Antony Currie The author is a Reuters Breakingviews columnist. The opinions expressed are his own. If only 42 really was the answer to life, the universe and everything. That’s how many months Lehman Brothers languished in Chapter 11 protection. The Wall Street firm’s failure in September 2008 triggered a global financial meltdown. Sadly, the emergence of its ghost from bankruptcy three-and-a-half years later scarcely offers even symbolic hope that the crisis is truly over.

Lehman’s was neither a typical bankruptcy of the kind seen, say, at American Airlines nor a quickie reboot like the ones the government funded at Chrysler and General Motors. Instead, the firm offloaded its major businesses just days after going under - the asset management unit to its partners, the U.S. brokerage to Barclays, and the European and Asian operations to Nomura.

Since then, Lehman has been a humongous exercise in asset liquidation for debt holders to fight over. Creditors submitted more than $300 billion in claims and will probably recover around $65 billion over time. The process has been a steady source of bounty for lawyers and other advisers, who between them charged the defunct bank’s estate $1.5 billion in fees.

In the meantime, the worst of the crisis, in the United States at least, has become history. But the effects are lingering. Other failures from September 2008 are still struggling. Taxpayers have so far committed $180 billion to keep Fannie Mae and Freddie Mac afloat, with no sign of any meaningful reform. American International Group has at least paid back some of the aid it received, but managed only a 2.3 percent return on equity last year.

A mix of unresolved new regulations, a slow U.S. recovery and Europe’s sovereign debt crisis make profit hard to come by for banks and other insurers, too. It’s also unclear whether the financial system is now any better placed to cope with another Lehman-like collapse, despite the hopes attached to reforms in the United States and elsewhere.

Perhaps most tellingly, Western governments and taxpayers’ funds are now far more enmeshed in keeping financial markets functioning than for decades - and are likely to stay that way for some time. Lehman’s emergence from bankruptcy is a landmark of sorts. But for the future of the financial system, it’s irrelevant.

from Financial Regulatory Forum:

U.S. Justice Department unit to ramp up hiring as mortgage probes advance

By Emmanuel Olaoye

NEW YORK, March 6 (Thomson Reuters Accelus) - The U.S. Justice Department plans to step up its hiring of staff to investigate abuses in the packaging of residential mortgage backed securities and to work with regulators to uncover serious fraud, a senior department official told Thomson Reuters in the wake of criticisms that Obama administration efforts were insufficient.

Last week, the former chairman of the Financial Crisis Inquiry Commission claimed that the government was not doing enough to uncover serious fraud. In a New York Times opinion piece, Phil Angelides said the 55 attorneys, agents and analysts assigned to the administration's new mortgage packaging Working Group were not enough to uncover serious fraud. Angelides also criticized the absence of federal regulators in the Working Group. The official, who spoke on condition of anonymity citing the investigations underway, said the Justice Department was "ramping up our staffing significantly" as investigations advance and documents come in.

"At the original press conference we said this was our initial commitment. We envision substantially more personnel being devoted to [the Working Group] than just those 55. We're going to go beyond that," the official said. "It doesn’t make any sense to ramp up before you start getting materials in. We're doing that now. Like I said we envision having substantially more staff than that initial number," the official said.

He did not specify hiring targets, but the department has requested a $55 milllion increase for the fiscal year beginning in October to finance the working group. The department will focus its hiring on analysts and accountants with expertise in investigating complex financial transactions.

President Barack Obama announced the creation of the Working Group in his State of the Union speech in January. The unit was established to look into the packaging of toxic mortgages into mortgage-backed securities in the buildup to the financial crisis. Observers have criticized the government’s failure to bring criminal prosecutions against sponsors of fraudulent mortgage backed securities. They have criticized the record of officials who head the Working Group in prosecuting mortgage originators in recent years.

Also, the spotlight on the sponsors of mortgage-backed securities has raised questions about the level of coordination among the Justice Department and regulators in bringing prosecutions.

from MacroScope:

When 500 billion euros no longer pops eyes

There was a time when 500 billion euros in cash was truly spectacular.

But investors and speculators hoping for an even more eye-popping cash injection at the European Central Bank's second and most likely last three-year money operation on Wednesday are likely to be disappointed, based on past Reuters polls of expectations.

"Here, have some cash"

Ever since the ECB started offering cheap, long-term loans to keep cash flowing through banks during the financial crisis, a clear pattern has emerged in the forecasts of money market traders attempting to gauge their size.

They have consistently underestimated the size of a given new loan tender the first time it is offered, only to overshoot on subsequent operations of the same maturity.

It is already widely understood on many trading desks that Wednesday's sale, which the ECB is not likely to repeat, is an offer that is too good to refuse rather than a vital lifeline to keep the financial system afloat.

from Breakingviews:

New US finance sheriff carves out shadowy domain

By Rob Cox and Daniel Indiviglio The authors are Reuters Breakingviews columnists. The opinions expressed are their own.The American banking industry has had a rough few years. The subprime meltdown, financial crisis and economic hardship have slammed stocks, slashed bonuses and crunched jobs. But life has been pretty sweet for a motley crew of companies - from cash checkers and credit bureaus to money wirers and debt collectors - operating on the edges of the regulated financial services industry. That may be about to change.

The recent recess appointment by President Barack Obama of Richard Cordray to lead the newly formed Consumer Financial Protection Bureau will, for the first time ever, throw a federal regulatory lasso around the biggest players in the shadows of finance. In the same way that enhanced regulation has curbed many of the excesses on Wall Street, so, too, may the increased scrutiny of this netherworld of the money industry.

To measure the CFPB’s impact, Breakingviews has created a proxy equity index of companies who may now fall under the purview of the agency. The “Cordray Index” consists of 15 publicly traded companies. It comprises big firms like $11 billion Western Union and $15 billion credit scorer Experian (the one non-U.S. component of the index) and those with market caps below $1 billion, such as repo-man Portfolio Recovery Associates and Advance America, a chain of stores making cash advances.

Taken as a whole, this non-bank universe has had a lucrative crisis. The index, in which we have given equal weighting to the stocks, has returned some 25 percent since the beginning of 2007, when the first rumbles of the subprime crisis began to hit the markets. By comparison, the S&P 500 Index is just now returning to its 2007 levels and banking stocks are down by nearly two-thirds.

It’s not hard to explain these divergent fortunes. For starters, few members of the Cordray Index have credit exposure. So, unlike banks, they have not had to work through piles of crummy loans. And as chartered banks pulled back, that pushed millions of customers - particularly those labeled subprime - into the arms of the alternative financiers. Economic distress, in short, has given this industry a whole new slug of newly impoverished customers.

New rules included in the Dodd-Frank Act, however, put them under a national regulatory spotlight for the first time. Just last week the CFPB announced its first formal plans to oversee some players in the non-bank financial sector. It proposed supervising debt collectors with more than $10 million in annual receipts and consumer credit reporting firms with more than $7 million in annual receipts. Additional non-bank sub-sectors will be added to this list.

Even if these companies already eschew rotten practices, with new cops on the beat, it’s hard to imagine they won’t be sweating a little more and increasing their compliance procedures. The bureau’s consumer protection mission is broadly defined, so what may seem perfectly legal to these firms might appear unfair to the watchdog. Its new oversight introduces a layer of regulatory risk that these companies have never experienced on a national level.

from MacroScope:

Europe’s wobbly economy

Things are  looking a bit unsteady in the euro zone's economy.  Just ask Olli Rehn, the EU's top economic official, who warned this week of  "risky imbalances" in 12 of the European Union's 27 members. And that's doesn't include Greece, which is too wobbly for words. 

Rehn is looking longer term, trying to prevent the next crisis. But the here-and-now is just as wobbly. The euro zone's economy, which generates 16 percent of world output, shrunk at the end of 2011 and most economists expect the 17-nation currency area to wallow in recession this year and contract around 0.4 percent overall. Few would have been able to see it coming at the start of last year, when Europe's factories were driving a recovery from the 2008-2009 Great Recession. And it shows just how poisonous the sovereign debt saga has become.

Not everyone thinks things are so shaky.  Unicredit's chief euro zone economist, Marco Valli, is among the few who believe the euro zone will skirt a recession -- defined by two consecutive quarters of contraction -- in 2012. This year is "bound to witness a gradual but steady improvement in underlying growth momentum," Valli said, saying the fourth quarter was the low point in the euro zone business cycle.

That could still happen. Business surveys support the idea that the worst is behind us, while European Central Bank President Mario Draghi agrees that last year's collapse in confidence has now steadied, albeit at low levels. So far, the ECB has not given a strong signal on whether it will take interest rates below the 1 percent level for the first time, but the bigger risk is whether a disorderly Greek default or the threat of a severe credit freeze -- which the ECB's nearly 500 billion euros in loans has so far helped avoid --  come back to crush the green shoots of growth.

The ECB's latest lending survey showed for the last three months of 2011 reinforces the concerns of a credit crunch, as banks are still not passing the money on to the real economy. Thirty-five percent of banks reported they had tightened the standards they apply to loans to businesses, compared to only 16 percent in the third quarter. The ECB is set to make its second offer of three-year loans at the end of the month and that could ease credit risks, but may also discourage banks with bad loans on their books to reform.

So, in economist-speak, the risks are still on the downside and uncertainty remains high. Basically, things are still looking wobbly.