Commentaries

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from Rolfe Winkler:

Ending the off-balance sheet charade

Investors have more than one reason to celebrate two new accounting rules. Besides forcing banks to fess up to the risks they are carrying on their books, new standards for off-balance sheet assets will make it harder for companies to inflate earnings artificially.

The new rules - FAS 166 and 167 - are desperately needed to prevent banks from hiding assets to increase leverage. Lending that isn't supported by capital is a main ingredient behind unsustainable credit bubbles, and banks' off-balance sheet games played a big role in the most recent one.

But another reason banks like off-balance sheet structures is that it enables them to manufacture profits.

Coming up to the end of a quarter, if a company is a bit short of its earnings target, it can package some assets together into a security and "sell" them to an off-balance sheet entity.

Volker cuts through it

Paul Volcker, the former Fed chairman whose nerves of steel broke the back of double-digit inflation 30 years ago, shows that he’s still one of the few in government that wants to call the tough shots.  Too bad he isn’t more influential. If he were, I doubt Wall Street would be talking about getting back to business as usual.

From the WSJ:

Mr. Volcker, who currently is chairman of the White House’s Economic Recovery Advisory Board, suggested banks should be restricted to trading on their client’s behalf instead of making bets with their own money through internal units that often act like hedge funds.

Barclays risky assets move a little too cozy

Barclays has come up with an interesting way to solve an optical problem. Concerned that the bank’s shareholders are nervous about possible future writedowns of wobbly assets with a value of $12.3 billion, it has sold them to its own employees.

This isn’t necessarily a bad idea. But there are two things to dislike about this deal. First, it looks pretty cozy to sell to your own workers. And second, the deal looks potentially very favourable for the purchasers.

Re-elected Barroso faces market challenge

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bozoJose Manuel Barroso promised the European Parliament that as re-elected president of the European Commission he will have more authority to fight for Europe and defend its single market against economic nationalism.

But after five years of toadying to the big member states, he will need to show more spine to enforce state aid and competition rules on Germany, Britain and France in the teeth of strong national financial or commercial interests.

from Rolfe Winkler:

Break up the big banks

President Barack Obama pledged on Monday "to put an end to the idea that some firms are 'too big to fail.'"  Though he outlined some worthy prescriptions, he failed to face up to the very size and power of the financial institutions that makes "too big to fail" possible.

For the big have gotten even bigger since the start of the financial crisis. At the end of 2007, the Big Four banks -- Citigroup, JPMorgan Chase, Bank of America and Wells Fargo -- held 32 percent of all deposits in FDIC-insured institutions. As of June 30th, it was 39 percent.

CMBS rides again

Well, sort of.

UK supermarket retailer Tesco is planning a 559 million pound securitisation of retail stores and distribution centres.

It’s good to see some kind of CMBS market getting going in Europe given the vast amount of real estate loans that need refinancing in coming years. But, like some of the earlier deals this year, this transaction is just a very tentative toe in the water, rather than a market revival.

from Rolfe Winkler:

Breaking down the Geithner plan

Paul Miller, the analyst that covers banks and thrifts for FBR Capital Markets, put out a report today breaking down Tim Geithner's Framework for Reforming Banking Firms. Geithner's plan is a good document, showing that Treasury takes very seriously the need to establish tougher, more robust capital requirements for banks. Miller broke down the recommendations in the handy chart below.

If you have trouble reading it, here is the PDF (linked to with permission).

(Click the table to enlarge in a new window)

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Miller can take some credit for influencing Geithner's report. More than any other analyst, he has emphasized the importance of tangible common equity as the best buffer to protect banks from collapse.

Obama urging Wall Street to do the right thing

In his speech, Obama emphasizes that big banks should take it upon themselves to give back to the community after the tax payer has done so much to put them on them on the road to recovery. While I agree with the point in theory, I’m not sure Wall Street is built to think about the moral imperative of creating a better society when it’s primary goal is to make money.

Wall Street, and I use this term broadly, has already demonstrated that when it’s presented with a  choice, it chooses the money. While many bristle at the thought of more regulation, especially when it means it could undermine financial innovation – God forbid – one of the important take aways from the crisis should be there needs to be a counterweight to greed. The industry cannot regulate itself.

There he goes again…

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sarkobamaHo hum! Another G20 summit, another Sarkozy walkout threat.

The French president’s menaces to throw his toys out of his pram have become a regular feature of the run-up to each meeting of the world’s leading economic powers, making them a much debased coinage.  Sarko’s strops are now as routine a precursor to G20 gatherings as the vacuuming of red carpet or the deployment of flower arrangements.

In April, he vowed to storm out of the London G20 summit and refuse to sign the final communique unless France and Germany got their way on binding regulation of all financial markets. He declared victory and dropped the threat before the meeting even began. This time, according to his chief-of-staff, the issue at stake is binding curbs on bankers’ bonuses. It is a strange cause for a conservative politician to be pushing, but with Sarkozy, the emphasis is on politics rather than ideology.

A compelling case for carry in Treasuries

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Under normal circumstances, U.S. Treasuries should probably be getting clobbered.

The worst of the credit crisis is over, the economy is expected to snap back in the second half of the year, and the appetite for riskier, higher-yielding assets should be siphoning off demand from boring, safe-haven assets like Treasuries.

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