Commentaries

from Rolfe Winkler:

Move your money

Arianna Huffington and Rob Johnson are organizing a big bank boycott. They want depositors to take their money out of Too-Big-To-Fail banks and put them in smaller, high quality banks.

They've launched a new website and have teamed up with Chris Whalen to give folks other options. Whalen's firm, Institutional Risk Analytics, has a proprietary system that grades banks using FDIC data. Enter your zip code and Whalen provides a list of high quality banks in your area.

It's a potentially powerful combination. Huffington has wide reach due to her media ubiquity and popular website. Johnson, once a portfolio manager for George Soros's Quantum Fund, is a successful veteran of high finance who's spoken out against the danger of derivatives and will head Soros' $50 million Institute for New Economic Thinking. Leveraging Whalen's data means the two can do more than simply ask folks to move their money. They can provide better options.

(You can read more about it in this column published at HuffPo.)

I applaud the effort and plan on taking them up on it. Some of my savings currently reside at a TBTF bank, earning nothing, and I plan to move the account shortly.

When bloggers like me talk about creditors holding banks responsible for the risk they take, that includes bank depositors. If you have deposits in a bank -- a CD, checking or savings account, for example -- you are a creditor of your bank. Moving your deposits out of banks that benefit from too-big-to-fail guarantees is a tangible way you can protest bailouts.

I do have one small quibble with the Huffington/Johnson site, in particular the YouTube video they've produced. The idea that fat cat bankers -- "Potter" from It's a Wonderful Life stands in -- are solely responsible for the crisis oversimplifies the issue. Plenty of smaller banks have gotten themselves into trouble with irresponsible lending. FDIC's problem bank list now stands at 552, composed mainly of smaller banks.That's 7% of all FDIC insured institutions in case you're wondering.

from Rolfe Winkler:

Big banks get reprieve from FDIC

Due to new accounting rules -- FAS 166 and 167 -- banks have to bring certain off balance sheet assets back onto their balance sheets starting next year. More assets, same capital = lower capital ratios. (More in this column about the individual impact on the large banks).

Anyway, the FDIC has agreed to give big banks a 6 month reprieve on raising new capital to buffer the new assets. From Ian Katz at Bloomberg:

The Federal Deposit Insurance Corp. gave banks including Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. a reprieve of at least six months from raising capital to support billions of dollars of securities the firms will be adding to their balance sheets.Bank regulators including the FDIC and Federal Reserve want to permit a phase-in of capital requirements that rise starting next month under a change approved by the Financial Accounting Standards Board. The rule, passed in May, eliminates some off- balance-sheet trusts, forcing banks to put billions of dollars of assets and liabilities on their books.

“We’re still recovering from the damage these structures caused,” FDIC Chairman Sheila Bair said, explaining that the entities contributed to the financial crisis. The phase-in recognizes the “very fragile stage in our economic recovery,” she said at a board meeting Washington.

While Citi and Wells were raising capital this week to repay TARP, FDIC should have had them go for a few billion more to offset the impact of FAS 166/7.

Let the Fed regulate

By John M. Berry

John M. Berry, who has covered the economy for four decades for the Washington Post and other publications, is a guest columnist.

Politics is trumping common sense in Congress as Republicans and Democrats keep heaping abuse on the Federal Reserve. As a result, they could end up adopting an unworkable, risky overhaul of financial market regulation. 

Senator Christopher Dodd of Connecticut, chairman of the Senate Banking Committee, is leading the parade with his plan to strip the central bank of virtually all its oversight of commercial banks.

  ”I really want the Federal Reserve to get back to its core enterprises,” Dodd said. In recent years, the Fed’s regulation of bank holding companies and consumer lending “was an abysmal failure,” he charged.    No, the Fed didn’t cover itself with glory in some of its regulation and supervision, but neither did any of the other financial regulatory agencies. Moreover, the most serious failures last year involved investment banks overseen by the Securities and Exchange Commission, not the Fed.

But there are three more important reasons to keep the Fed in a major role as a regulator of financial institutions. (more…)

Barofsky audit a Fed, not Geithner, problem

Sure, Timothy Geithner led the negotiations with AIG counterparties when he headed the New York Fed last year, but TARP special inspector Neil Barofsky’s audit is damning where it really hurts the Fed. It raises the question of whether the central bank is a tough enough regulator at a time when Senator Christopher Dodd is calling for the Fed to be stripped of such power over big banks.

Big Picture has posted the report in its entirety.

It’s one thing to be a bad regulator during the boom years when, let’s face it, there were bad regulators everywhere. But to shrink from tough negotiations with banks during the height of the crisis when those banks were already benefiting from billion of dollars in state aid will be harder to explain away, though the New York Fed has tried.

From the report:

FRBNY’s decision to treat all counterparties equally (which FRBNY officials described as a “core value” of their organization), for example gave each of the major counterparties (including the French banks) effective veto power over the possibility of a concession from any other party…

It also arguably did not account for significant differences among counterparties, including that some of them had received very substantial benefits from FRBNY and other Government agencies through various other bailout programs (including billions of dollars of taxpayer funds through TARP), a benefit not available to some of the other counterparties (including French banks)…

…the refusal of FRBNY and the Federal Reserve to use their considerable leverage as the primary regulators for several of the counterparties, including the emphasis that their participation in the negotiations was purely “voluntary,” made the possibility of obtaining concessions from those counterparties extremely remote.

Sure, it’s a fine line of when to use such leverage, but the report goes on to note that the Fed didn’t shy away from using it when, for example, it and Treasury compelled banks to take TARP funds. Similarly, the government played hard core with General Motors and Chrysler creditors when the automakers barreled toward bankruptcy.

The conspiracy theorists are sure to jump on the below.

from Rolfe Winkler:

It’s good to be in finance

From WSJ: Wall Street on track to award record pay

Major U.S. banks and securities firms are on pace to pay their employees about $140 billion this year -- a record high that shows compensation is rebounding despite regulatory scrutiny of Wall Street's pay culture.

Workers at 23 top investment banks, hedge funds, asset managers and stock and commodities exchanges can expect to earn even more than they did in 2007, according to an analysis of securities filings for the first half of 2009 and revenue estimates through year end by The Wall Street Journal. Total compensation and benefits at the publicly traded firms analyzed by the Journal are on track to increase 20% from last year.

These companies paid $130 billion in compensation and benefits in 2007, at the stock market's peak. That fell to $117 billion last year.

Using company filings for the first half and revenue estimates for the second half, WSJ estimates projected compensation per employee at top Wall Street investment firms. Here is a link to the raw data, below a list of the top 10.

NOTE: This includes only public companies

• Blackstone: $4.04 million per employee
• Och-Ziff: $878k
• Goldman Sachs: $743k
• Jeffries: $514k
• Lazard: $473k
• BlackRock: $318k
• Legg Mason: $291k
• Eaton Vance: $280k
• IntercontinentalExchange: $279k
• Morgan Stanley: $263k

The commitments committee

The bursting of the dot-com bubble pales in comparision to the financial crisis. In retrospect, it seems a comic-book lesson about the all-too-obvious consequences of irrational exuberance: What were they thinking?

Yet the Internet bubble was in many ways a warm-up for the much larger credit bubble. The common thread, Jonathan Knee, a senior managing director at Evercore Partners, writes in DealBook, is the enabling role played by financial institutions.

In both crises, a bank had to agree to sponsor the poisonous security, whether shares of a profitless dot-com or a risky debt instrument. Banks leave such decisions to the commitments committee, a “once-hallowed, almost sacred institution.” Knee says:

The seriousness with which these firms undertook decisions to underwrite reflected not only a self-interested preoccupation with the long-term value of their own reputations but a genuine belief that they were playing an important role in protecting the overall integrity of the financial markets.

The fundamental question asked by commitments committees was: should their respective institutions sponsor a particular security? It was not just a cynical assessment of whether there was a market for the stock or bond issuance at hand.

“The Internet boom,” Knee contends, “marked a wholesale break with this tradition.”

Knee, the author of “The Accidental Investment Banker,” sounds almost misty-eyed in recounting the standards of yore. Was Wall Street ever so upright and just? He is also not very convincing in suggesting that the recent consolidation in the financial industry should mean a return to standards because the institutions that remain “have a more deeply vested interested in ensuring the health of the overall system.” Wasn’t that also true in 2007?

Still, he is right to note that regulatory reforms in the wake of the dot-com bust failed because “none spoke to the core question of maintaining underwriting standards.”

China might keep the weakest bank all to itself

Faced with a backlash against foreign investors, Beijing may be tempted to offer shares in the last of its big four banks to a domestic audience.

That decision may reflect China’s new found confidence in the wake of the credit crisis. But it also means Chinese investors will retain full responsibility for the country’s weakest bank.

The Agricultural Bank of China might end up just listing in Shanghai without any endorsement from foreign institutions, bankers close to the deal say. The bank claims it is still keeping its options open.

But if AgBank pursues this path, it would be in sharp contrast to the privatisation of China’s three other large banks, all of which attracted foreign strategic investors before listing in both Hong Kong and Shanghai.

There are three explanations for this change of direction. First, China has become a lot more confident in its banks, which have weathered the financial storm better than their foreign counterparts.

This means it has less need for foreign banks to provide a seal of approval before launching a public offering. China’s Social Security fund is expected to be AgBank’s only strategic investor, though China Life also stands a good chance of participating, bankers say.

AgBank is probably not happy with the arrangement, as its chairman has said it wanted to have foreign strategic investors and failure to attract them will be regarded as a loss of face. But the post-credit crunch list of qualified foreign investors with deep pockets and rural banking expertise is very short.

The other GSE problem

It’s hard to keep all the U.S. housing agencies straight. Fannie Mae and Freddie Mac are still basket cases relying on government support, while the Federal Housing Administration and its partner, Ginnie Mae, are setting off alarm bells with their more aggressive efforts to support overstretched homeowners.

But the Federal Home Loan Banks, a government-sponsored enterprise (GSE) that is the lesser-known cousin to Fannie and Freddie, is one to watch — particularly as small regional banks grapple with deteriorating loan portfolios and fewer financing alternatives.

The FHLB is a system of 12 regional banks that provide cheap financing — thanks to the government’s implicit backing — to its 8,100 member banks. Set up during the Depression to support the home real estate market, the FHLB’s primary mission is still firmly rooted in making sure home buyers have access to credit by giving banks the funding they need to extend loans.

Some of the FHLB’s branches, however, made the classic bad investment choice during the credit market boom: They loaded up on subprime mortgages. Unlike Fannie and Freddie, the FHLB wasn’t forced by the subsequent losses into the arms of the government, but they have put a damper on their lending, according to Ben Garber, economist at Moody’s Investors Service.

Citing the Federal Reserve’s flow of funds data, Garber notes that FHLB lending to savings institutions shriveled by $166 billion, to $190 billion for the year ending in the second quarter — a 10-year low and nearly half of what the total was at the end of the first quarter of 2008.

In the big picture, this is positive since it means the much needed deleveraging of the financial system is taking place. But for smaller, regional banks weighed down by commercial real estate loans that are growing more delinquent with each passing day, this kind of number is worrisome, especially as other stop-gap measures begin to disappear.

The Federal Deposit Insurance Corp’s guarantee program, which was set up during the height of the crisis to bolster confidence in qualifying bank debt sold to investors, is scheduled to expire in October.

Treasury line of credit should be Bair’s last option

With the FDIC’s staring at an incredibly shrinking deposit insurance fund, it’s no wonder that Sheila Bair is out about talking about the regulators looking at options to replenish it. That includes tapping the $500 billion line of credit the agency has with the U.S. Treasury put in place for a rainy days.

Borrowing from Treasury should be avoided until it’s absolutely necessary since it is likely to give the banking lobby leverage to shirk higher fees now and in the future, as  Wrightson ICAP noted in a recent report earlier this month.

The banking lobby will argue that the FDIC should rely on funds from the Treasury rather than industry resources until market conditions improve.  Unfortunately, as the FDIC knows full well, there never seems to be a good time to hike deposit insurance premiums as far as the banking industry is concerned.  Setting the precedent of borrowing from the Treasury will stiffen resistance to contributions to the insurance fund across the board.  In addition, activating the Treasury credit line might encourage other regulatory agencies to view the DIF as a free resource for patching holes in the financial system….The FDIC doesn’t want to start flashing a platinum credit card in public as long as other agencies might want it to pick up the dinner tab.

And right on cue, at least one lawmaker is calling on the FDIC to head to Treasury rather than the banks, for more funds.

From the Wall Street Journal:

Sen. Carl Levin (D., Mich.) sent a letter to Federal Deposit Insurance Corp. Chairman Sheila Bair on Tuesday urging her to borrow money from the Treasury Department instead of hitting thousands of community banks with another special assessment to recapitalize the insurance fund that backstops deposits.

While it’s true that many small banks are suffering under the weight of souring loans, especially those made to the commercial real estate market, taxpayers shouldn’t have to be bearing the biggest share of the burden.

Push comes to shove in EU-Dutch bank spat

Push is coming to shove in a stand-off between the European Commission and the Dutch government over the future of state-rescued banks. The outcome has implications for the whole of Europe.

Markets should watch Brussels’ actions on ING, ABN AMRO and Fortis Bank Nederland carefully because they will set a precedent for forthcoming decisions about British, German or Irish banks that could reshape the European banking landscape. They may also determine whether, and when, taxpayers can expect to recover their investments in the banking sector.

EU competition czar Neelie Kroes this week withheld approval of a government guarantee for the bulk of a 28 billion euro portfolio of ING bad loans. The European regulator, whose job is to ensure state aid does not distort competition, said the guarantee required further investigation because the Dutch government may have illegally subsidised the bank by overvaluing the assets.

Compounding the Dutch problems, Deutsche Bank has pulled out of a deal to buy some of the operations of ABN AMRO, the Dutch lender. Brussels had originally ordered the sale when it allowed Fortis to buy ABN AMRO’s Dutch retail banking operations in 2007. Though Fortis has since been broken up, the Dutch government still wants to merge the two retail banks, both of which are now under state control.

The initially proposed deal would have left the Dutch taxpayer with a potential 300 million euro loss on the assets, which include commercial bank HBU. The government may yet reach a compromise with Deutsche or be able to sell other Fortis or ABN assets to meet the Commission’s conditions.

Nevertheless, the issues at stake between Kroes and her countrymen are broadly the same as those with Britain, Ireland or Germany.

The Commission aims to maintain a level playing field by making state-aided banks shrink their balance sheets by spinning off or winding up activities. This is designed to compensate  healthy banks for the distortion of competition with taxpayers’ money. Brussels also seeks to ensure that bailed-out firms have a viable future without public funds. And it aims to ensure adequate consumer choice by averting excessive concentration and promoting vigorous domestic and cross-border competition.