Commentaries

Now raising intellectual capital

Sarkozy walks the walk on bonuses

Nicolas Sarkozy’s plans to reform bank bonuses are out, and for once there appears to be some substance to the French President’s flamboyant style:

Reuters reports:

President Nicolas Sarkozy unveiled new rules for French banks to limit traders’ bonuses on Tuesday and said he would fight to persuade other G20 leaders to adopt the same position.
He said on pay in French banks would now be more closely tied to results.
“From now on, the trader must wait three years to cash in all of their bonus and if in the two years following, their activity loses money, he will not have his bonus,” he said.
Sarkozy, who was speaking after meeting French bankers, said the state would not give mandates to banks who refused to follow the rules and that the head of BNP Paribas had already agreed to put them in place.

None of these proposals are particularly new. The idea of ”clawing back” traders’ bonuses when they subsequently lose money was adopted by UBS last November.  And most big investment banks were vesting bonuses over a three-year period even before the crisis struck. French banks are probably just relieved that Sarkozy is not putting an absolute cap on bonus payments.

Nevertheless, if Sarkozy’s rhetoric is reflected in the fine print of the proposals, France’s bonus regime will be more restrictive than the one recently adopted by Britain’s Financial Services Authority.

Bank of England gets creative

The Bank of England’s changes to the eligible collateral for repo operations announced yesterday contained a curious quirk: the Bank will now accept covered bonds backed by loans to small and medium sized enterprises.

Covered bonds are a kind of secured bank debt, backed by loans or mortgages. If the bank can’t repay the debt, bondholders can liquidate the collateral to get their money back.

Don’t underestimate the European Commission

Will RBS and Lloyds have to follow Northern Rock and defer coupons on their hybrid debt? There’s a nagging fear that any bank that has needed large amounts of state-aid may have to make subordinated bondholders take some of the pain.

Fitch Ratings has just added to the debate with a slew of downgrades of RBS, Lloyds, and six other banks’ subordinated debt, citing an “increased risk of deferral.” The chief threat here is the European Commission, which is getting very keen on the concept of “burden-sharing”, a euphemism for crucifying bondholders.

FDIC bank debt program to end with a whimper

The Federal Deposit Insurance Corp’s debt guarantee program in many ways saved the banking system from collapse during last year’s worst of times. Banks were effectively shut out of the credit markets after Lehman Brothers scared bond investors silly. More than $270 billion of guaranteed debt has been sold since the FDIC adopted the program in October.

The program ends in October, as it should. It’s served its purpose and there’s no reason to keep subsidizing banks with cheap financing now that they’re making gobs of money and handing out jaw-dropping bonuses. But don’t expect the banks to start crying uncle when they have to raise funds the old fashioned way without the FDIC backing. That’s because they don’t have to.

Reality arrives at The Rock

The surprising thing about Northern Rock’s decision to defer coupons on 1.6 billion pounds of its subordinated debt is the timing — arguably, it’s a miracle investors were getting paid anything at all.

The bank on Tuesday said it would stop paying coupons on various subordinated bank bonds, securities that count as regulatory capital.

Banks face commercial real estate stress tests

One of the big uncertainties left at this stage of the credit crisis is the amount of losses banks will have to take from foreclosing on defaulted commercial real estate loans. The question is both how bad those losses will be and when they materialize, and how much money banks can make in the interim to absorb them.

Fitch Ratings is obviously sufficiently worried about the issue to launch a new review, looking at banks’  loans books and underwriting critieria,  and conducting its own stress tests.  

Treasurys not looking so boring anymore

Government securities are not the most exciting investment choices in the best of times, but it looks like U.S. Treasurys are coming into their own, which is good news for the federal government and its financing costs.

Though it may feel like Wall Street has returned to business as usual, it looks like banks, like U.S. households, are building up their Treasury piles now that they’ve had their fill of more exotic investments.

Cash M&A still lifeless

Bond sales are at a record, equity markets are at year-highs, private equity firms are sitting on huge cash piles — Blackstone alone has $29 billion — and banks are lending to each other again.

The ingredients should all be there for a resurgence of cash-driven mergers and acquisitions. But instead, the market is in hibernation.

Geithner of Oz

Photo

Earlier today I wrote that Sheila Bair is one of the few financial regulators who gets it. And by getting it, I mean not sucking up to the banks and the big money interests on Wall Street. You know, the guys (and most of them are guys), who got us into this financial mess. Tim Geithner, on the other hand, is a regulator who just doesn’t get it.

It’s not that the Treasury secretary isn’t smart–he is. And it’s not that he’s not up to job–he is. It’s that Geithner is too much of a politician and his views have been molded by people who work on Wall Street.

Fun commercial real estate figures and charts

Photo

I just came across this research from the Cleveland Fed that has some scary numbers and charts on commercial real estate. They underscore why the Fed and the FDIC are so worried, particularly about construction and development loans, which are seeing the most stress.

Although commercial mortgage-backed securities (securitized CRE loans), have garnered their own significant amount of attention, they account for only 20 percent of outstanding commercial mortgage debt. Loans held by banks, meanwhile, account for 60 percent of the CRE debt market—much more than any other institutional holder. Also, unlike the residential mortgage market (where a majority of lending has been done by a few large banks), the array of banks holding large concentrations of commercial mortgage debt is broad and diverse.

  •