Commentaries

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The EC bank smackdown

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Dexia and ING’s recent decisions to call some of their subordinated debt has puzzled market observers, as they seem to fly in the face of the European Commission and its crusade on burden-sharing for banks that have received state aid.

The Commission wants junior creditors of bailed-out banks to share some of the pain along with the public sector, and wants to make sure public funds aren’t used to repay equity or junior debt if a bank can’t. Holders of some of RBS’ subordinated debt recently found this out to their horror when the bank chose not to call the bonds at the first opportunity. The Dexia and ING bondholders, by contrast, will have had a nice pay day. The Dexia upper tier 2 bond was trading below par in the mid 70s area, according to CreditSights.

It looks like the EC wasn’t too pleased with Dexia and ING’s generosity, as last night it issued a stiff press release reminding banks of its rules. That’s not good news for any bondholders who had been hoping that the Dexia and ING calls may have signalled a thawing in the EC’s stance.

Here’s the EC statement:

State aid: Commission recalls rules concerning Tier 1 and Tier 2 capital transactions for banks subject to a restructuring aid investigation

Fed knows transparency when it sees it

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From the start of the financial crisis, the Federal Reserve has fought to keep secret the many measures it has taken to prop-up the banking system.

The Fed has opposed releasing information about the trillions of dollars in loans it made during the crisis or the tens of billions of dollars in troubled assets it has taken on its balance sheet. For instance, the Fed still won’t say just what it acquired, when it took on some $29 billion in troubled assets from Bear Stearns last year.

The EC bank debt riddle

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The European Commission seems to enjoy messing with bankers’ and investors’ heads in its crusade against subordinated bank debt.

Earlier this year the EC roiled markets by insisting holders of bank subordinated debt securities should suffer along with the taxpayer for bailouts. It stopped RBS from calling some tier 2 bonds, and also cracked down on KBC.

European Commission defanged by hybrid debt

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Fans of the weird and wonderful world of hybrid debt will have enjoyed the European Commission’s U-turn with Belgian bank KBC.

The EC wants banks that have benefitted from state aid to “burden share’’ with private sector investors by deferring optional coupons on their subordinated bonds. That sounds simple enough — after all the essence of subordinated debt is that it can defer interest without counting as a default. Burden sharing, whether imposed by the EC or not, is what hybrid debt is all about.

The big Fed news

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A federal judge’s ruling that the mighty Federal Reserve must release information about some $2 trillion in “emergency” loans made during the financial crisis is a big blow to the central bank’s self-styled image as an impenetrable shrine.

US District Judge Loretta Preska should be applauded for not taking the Fed’s bait that to release information about the banks and financial institutions that received those loans would imperil the financial system. Preska rightfully concludes that the Fed’s fear is based on mere speculation and “conjecture.”

Trust still matters

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Trust is one of those touchy-feely words that gets thrown around a lot, but whose true value isn’t felt until it’s lost.

The Congressional Oversight Panel’s latest report on the troubled assets still embedded in bank balance sheets reminds us that one of the first casualties of the credit crisis, trust, is still up for grabs.

Managing incentives, UK banks edition

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Confused about the British government’s approach to its bank investments? You’re in good company. Consider the following statements from Royal Bank of Scotland and its main shareholder(emphasis is ours):

June 23rd: Sir Philip Hampton, chairman of RBS, on the £9.6m cash-and-shares pay package awarded to Stephen Hester, the bank’s chief executive:

It’s a start, but AIG still needs lots of handholding

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As part of the government plans to overhaul AIG’s massive bailout package (announced in March), the company said Thursday it would give the government stakes in two of its most cherished assets – American Life Insurance Company, Alico, and American International Assuarance, AIA, – in return for paying down a good portion of its loan with the central bank.

In its press release, the company was sure to say that this is “a major step toward repaying taxpayers,” which is always important to flag to help offset the anger surrounding the bonus snafu and Ben Bernanke’s public blasting of the company.  And reducing outstanding debt on the credit facility to $15 billion from $40 billion gives some comfort that little by little, the government’s AIG entanglement is getting a little less, well, twisted.

Lehman creditors, you didn’t lose any money

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You read that right. Peter Wallison, a senior fellow at the American Enterprise Institute, a right-leaning think tank, doesn’t think Lehman’s collapse caused any “substantial losses.”

In an op-ed in The Wall Street Journal, Wallison, in criticizing the Obama administration’s financial regulatory overhaul plan, concludes that the only reason Lehman’s bankruptcy caused so much market turmoil is because no one thought the federal government would allow it to fail.

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