Felix Salmon

Will other banks go the way of MF Global?

Felix Salmon
Oct 27, 2011 20:21 UTC

John Carney wonders whether MF Global might turn out to be simply the first of many banks to go bust in a European financial crisis.

All the very serious people on Wall Street keep saying that the problems at MF Global are “isolated” or “unique.” It’s not a bellwether or a canary in the coal mine, they say.

I’m not so sure. There were lots of firms that were supposedly not canaries in coal mines in 2007. Heck, even the entire subprime market was supposedly not a canary in the coal mine for the broader housing market.

There’s a lot of sense here. Banks are reliant on trust — it doesn’t matter whether or not they are insolvent. All that matters is whether the market thinks that they might be insolvent. In fact, all that really matters is whether market participants think that other market participants might think that they might be insolvent. Whenever you think there’s a risk of a run to the exits, the smart thing to do is to run to the exits before everybody else does. And runs kill banks.

Which is one reason why Morgan Stanley, for instance, went to the length of carefully spelling out its European exposures in its third quarter financial supplement (see page 13 of the supplement, 14 of the PDF).

If you take its numbers at face value — and Morgan Stanley does mention that they’re unaudited — then the bank has $287 million of exposure to Greece, $1.8 billion of exposure to Italy, and negative exposure to Portugal and France, thanks to all the hedges they’ve put on. They’re fine!

But of course, if Italy and/or France suffered a major financial crisis, there is no chance at all that US banks — including Morgan Stanley — could emerge unscathed. It’s very worrying to me that Morgan Stanley is putting out these kind of numbers — it implies that people at the bank actually believe that they have no exposure to France. While the real exposure is something that can’t be hedged away with a bit of counterparty-hedging and some judiciously-chosen credit default swaps.

To give one example of how country exposure is incredibly hard to calculate, check out this article from December 2001, when Argentina was imploding.

Citigroup may also have to face losses in Argentina, where Citibank has been active since 1918. The country is nearly bankrupt and has frozen assets at most of its big banks to halt a run on deposits. Though Argentina is an integral part of Citigroup’s Latin American strategy, it contributed just 2% of the company’s overall earnings at the end of the second quarter.

In an absolute worst-case scenario — one where the peso is devalued and the country’s government debt defaults — some analysts estimate Citigroup would lose just $200 million. “The fact that emerging markets are volatile is not a new idea for us,” says CFO Thomson. In fact, Citigroup could ultimately gain business, he says: “In volatile times, customers often leave their local banks and come to Citigroup.”

Citigroup’s losses in Argentina would end up somewhere north of $2 billion, not including a huge hit to the bank’s reputation in the country and across the region. (Depositors, as Thomson said, had fled to Citigroup as a flight-to-safety trade, but all their dollars at Citibank got converted to pesos all the same, and Citigroup refused to make them whole, saying that Citibank Argentina was a subsidiary for which it had no particular responsibility.)

MF Global is, narrowly, just a bank which took on too much risk and too much leverage in the fixed-income space, and which imploded on the watch of a former Goldman Sachs executive who turned out to be much less capable at managing risk than Goldman Sachs is. It’s not the first bank to fit that description: the same can be said of Citigroup (Robert Rubin), Merrill Lynch (John Thain), and Wachovia (Bob Steel).

But more broadly, dominoes are falling right now, as a result of European sovereign-debt exposures. Dexia was first; MF Global is second. No one can say with any certainty how many more there will be. But once the cascade has started, it can be very hard to stop.


This might not be relevant to the article above or the discussion. I was just curious if I could have a copy of th paper “When Countries Go Bust”. I received an email that you will be giving a presentation at Columbia this month an I will not be able to attend but I would love to read the paper the presentation is based on. Thank you very much in advanced.

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Market inefficiency of the day, Irish bank edition

Felix Salmon
Oct 26, 2011 19:01 UTC


You won’t be surprised to hear that shareholders in Allied Irish Banks have not done very well for themselves in the past five years. It did go bust, after all, and had to be nationalized; the share-price chart is above. But recently, as part of the recapitalization of the bank, the number of shares outstanding rose dramatically. Here’s the announcement, which doesn’t quite spell things out:

The Capital Raising will comprise an equity placing (the “Placing”) of ordinary share capital of €5 billion to the NPRFC and an issue of up to €1.6 billion of contingent capital convertible notes (the “Contingent Capital Notes Issue”) to the Minister. The Placing will comprise an issue of new Ordinary Shares for cash at a price of €0.01 per share.

If you do the math, you can see that injecting €5 billion of capital at €0.01 per share means that 500 billion new shares were created. And ever since those shares were created, if you multiply the shares outstanding by the share price, you can see that technically the market capitalization of AIB is somewhere north of €30 billion! Here’s the same stock, only this time charting market cap rather than share price:


Even when a bank has been nationalized, there are good reasons for the shares to continue to be traded. For one thing, it’s helpful when you’re handing out equity to senior management; for another, it’s very useful if and when the time comes to try to privatize the bank and take it off the government’s hands. So at some point there’s going to have to be a reverse stock split, with the shares trading for some sensible amount.

But right now, the shares are genuinely trading at somewhere over €0.06 a piece — and indeed have risen in value quite dramatically over the past three weeks. I have no idea what the mechanism is here, or who’s buying these shares, but if you want proof that markets aren’t always efficient price-discovery mechanisms, this has got to be Exhibit A. It would help of course if these shares could be shorted, but that still doesn’t explain why people are buying at these levels.

(Thanks very much to Patrick Brun for the tip and the data.)


I would avoid making statements about market efficiency when the float is extremely small (0.6%), trading volume is extremely small (€200k worth of shares today), and the stock can’t be borrowed and shorted.

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Is the SEC colluding with banks on CDO prosecutions?

Felix Salmon
Oct 20, 2011 22:44 UTC

Is the SEC colluding with Wall Street’s biggest banks to let them off lightly with respect to their dodgy CDOs? Jesse Eisinger and Jake Bernstein get an astonishing on-the-record admission today, from a Citigroup flack, that might indeed be the case:

The bank says it has settled all of its potential liability to a key regulator – the Securities and Exchange Commission — with a $285 million payment that covers a single transaction, Class V Funding III…

[The SEC] made no mention of the dozens of similar collateralized debt obligations, or CDOs, Citi sold to investors before the crash.

A bank spokesman said the SEC would not be examining any of those deals. “This means that the SEC has completed its CDO investigation(s) of Citi,’’ the spokesman asserted in an e mail.

The SEC, of course, denies this — but it carries the ring of truth. Just look at the SEC’s own list of CDO prosecutions to date: there’s exactly one enforcement action per bank.

And the idea is held more broadly, too — look for instance at Peter Henning’s article on the subject today.

The settlement — in which the financial firm agreed to pay $285 million without admitting or denying guilt — appears to be of little concern to Citigroup investors. They’re likely to be happy that the bank has put the issue to rest.

What makes Henning think that Citigroup has put this issue to rest? As Eisinger and Bernstein demonstrate, Citi had lots of synthetic CDOs — not just Class V Funding III — where someone other than the ostensible CDO manager was intimately involved in choosing the contents, and had a vested interest in picking securities which were extremely likely to fail.

There’s every indication, here, that the banks are doing nod-and-a-wink deals with the SEC. The SEC brings its single strongest case, and the banks agree to a nine-figure fine, on the implicit understanding that the fine covers all their other CDO deals as well. That saves the SEC from having to laboriously put together a separate case for each CDO deal, and it allows the banks to put much of their contingent liability behind them.

But if that is going on, it’s a scandal. For one thing, it’s incredibly unfair to everybody who bought one of the dodgy CDOs which is not prosecuted. Investors in Class V Funding III, for instance, are getting all their money back as a result of this latest settlement. But what about investors in Citi’s other synthetic CDOs, like Adams Square Funding II, or Ridgeway Court Funding II, or even Class V Funding IV? Not to mention the $6.5 billion of Magnetar deals, where — according to all ProPublica’s reporting — Magnetar was intimately involved in choosing what went in and what didn’t. The big sin, remember, in both the Goldman and Citi deals, was one of disclosure: the banks didn’t disclose to investors that the short side of the trade was hand-picking the contents of the deal. And you just know that there were dozens of deals — not just one per bank — where that key disclosure was missing.

Is the SEC trying to protect the banks it’s meant to be prosecuting? Is it quietly agreeing on a one-prosecution-per-bank model? If so, we should be told. And if not, it had better bring prosecution #2 against someone pretty soon. Because right now the pattern is decidedly fishy.


Felix — it’s a settlement agreement, so yes it’s agreed to by both the SEC and Citi. And Citi (or any other company) would only agree to a settlement if they were pretty darn clear that the settlement, for all intents and purposes, ended their liability for such actions with the government.

If Citi thought there was potential for the SEC to go after every single CDO, they would fight it tooth and nail, because — to be honest — they most likely have a decent chance of winning based on the law in many cases. Disclosure cases aren’t easy cases. The SEC simply cannot afford to fight each and every case. So they agree to settle. It’s in the best interest of the SEC and the subject company. If that’s what you call collusion, then, yeah, it’s collusion.

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BofA puts taxpayers on the hook for Merrill’s derivatives

Felix Salmon
Oct 20, 2011 20:28 UTC

Bloomberg had a story, a couple of days ago, about BofA moving Merrill Lynch derivatives to its retail-banking subsidiary. The story was quite long and hard to follow: there were lots of detours into explanations of what a derivative is, or explorations of what the BAC stock price was doing that day. So let me try to cut away the fat.

Bank of America is being hit with downgrades. And as we saw with AIG, when a derivatives counterparty gets hit with downgrades, it has to post lots more collateral. In BofA’s case, the numbers are very large indeed:

Bank of America estimated in an August regulatory filing that a two-level downgrade by all ratings companies would have required that it post $3.3 billion in additional collateral and termination payments, based on over-the-counter derivatives and other trading agreements as of June 30. The figure doesn’t include possible collateral payments due to “variable interest entities,” which the firm is evaluating, it said in the filing.

On the other hand, retail banks are much safer, because they’re protected by the FDIC. If a retail bank is a derivatives counterparty, then it doesn’t need to post nearly as much collateral. The derivatives aren’t themselves insured by the FDIC, but they have extremely senior status, which means that the bank can use its deposit base to pay off derivatives counter parties. And then if there isn’t enough money left to pay depositors, the FDIC will step in and make those depositors whole.

So Bank of America decided to move some unknown quantity of derivatives from Merill Lynch — which doesn’t have an FDIC-insured deposit base — over to its Bank of America retail subsidiary, which does.

The FDIC was not happy about this — it makes it more likely that they will have to pay out in the event that Bank of America runs into trouble. And when the FDIC pays out, that’s a hit to taxpayers, the letter of the law notwithstanding. Jon Weil explains:

The market harbors serious doubts about whether Bank of America has enough capital…

Dodd-Frank lets the FDIC borrow money from the Treasury to finance a seized company’s operations for as long as five years. While the law says the FDIC is supposed to tap the banking industry to pay for any eventual losses, it’s hard to imagine the agency could ever charge enough to cover the costs from a failure at a company with $2.2 trillion of assets

Now it’s worth pointing out here that other big derivatives houses, most notably JP Morgan, have used their retail-banking subsidiary as their derivatives counterparty for years. Now that Merrill is part of BofA, there’s no obvious reason why it should be worse off than JP Morgan is with access to Chase. But Yves Smith makes the case that the two are in fact significantly different:

JPM runs a massive derivatives clearing operation, and a lot of its exposure relates to that. This and the businesses of the other large banks have been supervised by the regulators for some time (you can argue the supervision was not so hot, but at least they have a dim idea of what is going on and gather data). By contrast, no one was supervising the derivatives book at Merrill. The Fed long ago gave up supervising Treasury dealers, and the SEC does not do any meaningful oversight of derivatives. And Chris Whalen confirms that Merrill was and is the cowboy among derivatives dealers.

I’m not entirely convinced by this. I don’t think that JP Morgan’s derivatives operations are particularly assiduously regulated — certainly not to the point that would make the FDIC happy. But I also hate the “everybody’s doing it” defense. The whole point of the Volcker Rule was to stop banks with retail-banking privileges from abusing those privileges in their risky investment-banking operations. And that’s exactly what’s going on here. And as Bill Black points out, the whole thing is dubiously legal in any case:

I would bet large amounts of money that I do not have that neither B of A’s CEO nor the Fed even thought about whether the transfer was consistent with the CEO’s fiduciary duties to B of A (v. BAC).

The point here is that regulators care much more about Bank of America, the retail-banking subsidiary which holds depositors’ money, than they do about BAC, the holding company which owns Merrill Lynch. And the senior executives at Bank of America have a fiduciary duty to Bank of America — never mind the fact that their shareholdings are in BAC. The Fed, in allowing and indeed encouraging this transfer to go ahead, is placing the health of BAC above the health of Bank of America. And that’s just wrong. Holdcos can come and go — it’s the retail-banking subsidiaries which we have to be concerned about. The Fed should not ever let risk get transferred gratuitously from one part of the BAC empire into the retail sub unless there’s a very good reason. And I see no such reason here.


IanFraser, well frankly, Yves Smith is just dishonest. I have difficulty believing that she is unaware that she is making factually incorrect statements, especially given she is strongly financially motivated to make them.

I am also afraid to say that, yes, I don’t trust what I read in any of those publications. Bloomberg, for instance, seems to have just gone downhill since buying Businessweek. Reuters has been dodgy for as long as I have been around, not only in terms of letting the rather homogeneous ideology of the journalists shine through but in employing people with a shocking ignorance of the basics of their chosen field. Ft was always a mix. One of the reasons I like this blog is that it links to original documents – I tend to skip the commentary and read them.

rootless_e, I think this is at the base of the issue of journalism. It might seem there are “thousands of financial journalists” beavering away, acting as a natural overlapping fact checking machine and I am sure they like to see themselves as harden, cynical men and women who take nothing on faith but the reality is that most of them just cut and paste from each other. I have seen over and over, a single dodgy article become “fact” from sheer repetition from other sources.

I wouldn’t mind except there are real consequences for such nonsense. One only has to look at the focus of financial regulation to see how bad “journalism” can impact the world. In particular, the focus on prop trading vs say money market funds or capital requirement vs liquidity management.

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Citi’s Abacus

Felix Salmon
Oct 20, 2011 12:32 UTC

It’s worth reading the full SEC complaint in the case which was settled by Citigroup yesterday for $285 million. For anybody familiar with Goldman’s Abacus deal, it all rings very familiar; in fact, the wording on the Abacus sign can be applied perfectly accurately to Class V Funding III. It’s worth rehearsing in full:

It’s wrong to create a mortgage-backed security filled with loans you know are going to fail so that you can sell it to a client who isn’t aware that you sabotaged it by intentionally picking the misleadingly rated loans most likely to be defaulted upon.

The loans in this case — just like in the Abacus case — were “synthetic”, or made up of credit default swaps rather than actual loans. Wall Street, at the time this deal was done, had run out of actual loans to securitize, and so was forced to create such things by inventing ever more complex transactions. This one, for instance, is a hybrid CDO-squared: it’s a CDO made up mostly of CDSs written on the mezzanine tranches of other CDOs.

Citigroup had two aims when it structured this transaction; one was fully disclosed to its client-investors, and the other was not. The first was to make millions of dollars — $34 million, to be precise — in fees. The second was to put on a $500 million short position in the CDO market. Citi was a big trader in CDSs on CDOs, and therefore could simply have acquired that short position directly, in the open market. But when Class V Funding III was put together, such protection was already very expensive. And the CDOs that Citi wanted to buy protection on were known in the market to be particularly horrible. Probably, it couldn’t buy protection on those particular names at all. And if it could, the price would be prohibitive.

So Citi created Class V Funding III instead. It gave Credit Suisse Alternative Capital a list of the CDOs it wanted to buy protection on, and CSAC did what it was expected to do — it persuaded itself that it could live with having a large number of them in its deal. After all, CSAC wasn’t investing its own money in this dog — it was just managing it for others. And hey, it was AAA-rated! What could possibly go wrong?

Citi, with CSAC on board, then went out to investors and told them that the portfolio had been selected by CSAC — professional! experienced! expert! — and that they could have confidence in CSAC’s selection of securities. Citi did not tell investors, of course, that Citi itself had actually picked most of the CDOs in Class V Funding III, and they certainly didn’t mention that Citi would be holding a $500 million short position in those securities on its own books indefinitely, as a naked-short prop trade. Here’s how the complaint puts it:

The pitch book and offering circular were materially misleading because they failed to disclose that:

a. Citigroup had played a substantial role in selecting assets for Class V III;

b. Citigroup had taken a $500 million short position on the Class V III collateral for its own account, including a $490 million naked short position; and

c. Citigroup’s short position was comprised of names it had been allowed to select, while Citigroup did not short names that it had no role in selecting.

The fine, in this case, is richly deserved, and the money’s going to the right place — the investors who bought into this dreadful deal. I do wonder how many more of these late-vintage CDOs there are, sitting out there and as yet unprosecuted. (I have to admit that I didn’t think of Citi as being particularly evil in this regard; I thought they were more at the incompetent end of the spectrum.) And I certainly hope that if and when there’s some big mortgage settlement with the banks, that the banks don’t receive in return immunity from prosecution on this kind of deal.


simplemind1, also remember buy side are investment advisors. As such they have a legal fiduciary responsibility to the clients. Market makers do not.

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Mortgage refinance doesn’t belong in the settlement talks

Felix Salmon
Oct 18, 2011 13:23 UTC

The WSJ has the latest mortgage-settlement trial balloon, and it’s pretty weak tea: under the terms of the deal, if (a) you’re underwater on your mortgage, and (b) you’re current on your mortgage payments, and (c) your mortgage is owned by the bank outright, rather than having been securitized, then you would be given the opportunity to refinance your mortgage at prevailing market rates.

It’s worth remembering, at this point, that mortgages are by their nature prepayable. When you write a fixed-rate mortgage, you make a general assumption that if mortgage rates fall substantially, the borrower is going to pay you off and refinance. The underwater questions we’re talking about here were written during the housing boom, when banks simply assumed that house prices always went up; those banks cared massively about prepayment risk at the time, and spent huge amounts of money and effort trying to hedge it.

As it happened, mortgage rates did fall substantially — with the result that the banks’ hedges paid off. But then the banks realized that they could make money on both legs of the deal — that they could collect on their mortgage-rate hedges, without having to worry about prepayment. Because now the borrowers are underwater, they’re not allowed to refinance. So the banks continue to cash above-market mortgage payments every month — something they never expected that they would be able to do.

Naturally, they’re clinging on to this undeserved income stream for dear life:

The refinance program would be particularly costly for banks because they would be forced to give up expected interest income on loans for which borrowers are current on their loan payments and, given their payment histories, unlikely to default. Banks can’t reduce rates on loans they don’t own because the result would be a net loss to the investor.

“Nine months ago this would have been inconceivable,” said one person familiar with the banks’ thinking.

Well no, it’s not inconceivable at all. In fact, wholesale mortgage refinance for underwater borrowers is a major part of Barack Obama’s jobs bill, and the CBO has been costing it in various ways. At heart, it’s a way of rectifying a market failure, and thus makes perfect sense.

But that’s precisely why I don’t think that this plan deserves a place in the mortgage-settlement talks. For one thing, it’s downright unfair and invidious to allow 20% of underwater homeowners to refinance while ignoring the other 80%. More to the point, giving homeowners the ability to refinance their mortgages is what you do, if you’re a bank. It’s not some kind of gruesome punishment.

So let’s keep mortgage-refinance proposals in the arena of public policy, where they belong, and where they can be implemented universally rather than piecemeal. And let’s keep holding the banks’ feet to the fire in the mortgage-settlement talks, and try to get something much more substantive out of them than this.


we are almost 300% underwater in our mortgage, we are current on our payments and we both work and have no promblem making payments. BUT the city just did reconstruction on the ditches and roads and now our front yard is under water literally! we just bought new windows last year and we are not sure if we can walk away, shortsale???

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Annals of transparent banking, Citi edition

Felix Salmon
Oct 11, 2011 13:35 UTC

On Saturday, two NYT columnists — Ron Lieber and Joe Nocera — attacked the sorry state of bank checking accounts. And their conclusions were almost identical. Here’s Ron:

If you’re trying to figure out your own next move amid all of this uncertainty, well, good luck. As Adam Levitin, a Georgetown law professor, noted in a blog post on creditslips.org this week, it’s hard to make apples to apples comparisons between one checking account and another, and harder still to move your money once you do decide to switch banks. This might be a good place for the Consumer Financial Protection Bureau to set standards.

And here’s Joe:

The government will never force Bank of America — or any other bank — to reduce or eliminate its fees; it doesn’t have the nerve. But, at the least, it could insist that banks display their fees in a uniform way so that customers can compare how they’re being gouged and make banking decisions on that basis. That kind of reform could stir competition and bring down fees.

This, of course, is precisely what the new Consumer Financial Protection Bureau is supposed to do — and would do if the Senate Republicans would ever allow a director to be approved.

I couldn’t agree more, and I’ve been pushing this move quite hard, both on my blog and whenever I’ve had the opportunity to talk to someone from the CFPB. I’m pretty sure this does not require a director to be approved — it just needs the CFPB to collate checking-account details into one big database, and then publish an API allowing people to interrogate that database any way they like.

As it happened, I’d spent most of the previous afternoon at the big Citibank hub in Long Island City, talking about their checking accounts, savings accounts, and, most of all, the new Citibank website, which they unveiled last week with great fanfare.

We didn’t get into the fraught question of the level of fees. But I did ask to see how easy it was, on the new site, to bring up the details of your checking account — what kind of account it is, what the fees are, what the minimum balance is to avoid those fees, and the like.

At this point, we were in the large, sun-drenched office of Tracey Weber, the head of internet and mobile for North America consumer banking. We’d started in a windowless conference room, where Tracey had attempted to show me the website by running through a series of PowerPoint slides. When I said that I’d rather see the website by seeing the website, there was a flurry of confusion, which ended up with Weber having to log in to her own personal Citibank account on her work computer.

Weber, it turns out, gets the same underpowered Dell setup, with a single small monitor, as anybody else. But I could still see what was going on: information about fees and the like are in an entirely separate section of the website. You don’t need to log out to see them, but you certainly can’t get personalized information about them. Even something as simple as savings accounts are — still — very hard to understand: when the screen presenting the two different choices came up, we had to call up a product guru to explain why anybody might prefer the first to the second. And even he couldn’t really manage that. What’s more, the single most salient feature of a savings account — its interest rate — was nowhere to be seen.

Bits of the site look slick — especially the animated expense-analysis pie chart, where you’re able, for some reason, to drag pieces of the pie out to isolate them. But once you’ve done that, you can’t actually delve into that piece and see what spending went into it: for that, again, you need to go to an entirely different transactions screen.

After spending a good couple of hours with Weber, I came away convinced that I couldn’t reasonably blame her for any of the weaknesses with the website: she was just clearly caught up in the middle of an enormous bureaucracy where it was basically impossible to get anything done. Citibank has business relationships with vendors like Yodlee and Popmoney, so it’s possible to use Citi’s website to see the details of your non-Citi bank accounts or to send money to other people armed with nothing but their email address.

But beyond that kind of bought-in functionality, Citi.com is still at heart a vast list of products and services, which you need to be incredibly financially literate to navigate. I defy anybody, for instance, to be able to tell me the difference between, say, an Inter Institution External Transfer to an account in the US, versus a Wire Transfer to an account in the US. (The answer, by the way, is to use neither a lot of the time: if you’re sending money to someone else in the US, Popmoney is the way to go.)

Weber has no control of Citibank’s product suite — her job is to present everything that Citi offers, and that’s always going to be a bit messy. And she’s no technologist, either — when I asked why there were separate downloads for Citi’s iPhone and iPad apps, rather than simply having a universal version, she had no idea what I was talking about.

I’m sure that at the margin some of the language on the new site is easier to understand than some of the language on the old site. But you just need to look at the language of Weber’s announcement to see how far Citi has to go on that front. “Citibank formulated the personal finance management experience with the tools most important to its clients,” we’re told; she adds for good measure that “Citibank continues to strengthen its standing by delivering modern solutions”.

Even the login screen is ridiculously confusing: before you can even enter your username, you have to choose between one of nine different Citi websites to log into. If you have a Citi bank account, and a Citi credit card, and a Citi mortgage, and Citi ThankYou rewards, which of those sites are you meant to log in to? Why can’t Citi just make sure that each username is unique, and log you in to whatever your account is automatically?

None of this is ever going to be fixed internally, by Weber or anybody else. In order to understand what’s going on at Citi, Lieber and Nocera are right: we need a trusted third party — the Consumer Financial Protection Bureau — to tell us. Some banks — probably smaller ones, with flatter management structures — will have transparent fee structures, be a pleasure to use, and will generally count as best-in-class. Those banks should get some kind of gold star from the CFPB. And big banks like Citi will steam on regardless, with every cosmetic change to their website accompanied by a massive increase in fees somewhere else.


You can’t have people display fees in standardized ways, because new, simpler banks might want to charge different fees. If you want change in the world, make doctors and hospitals publish their price lists and fees.

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Explaining the ECB’s latest program

Felix Salmon
Oct 7, 2011 17:46 UTC

The ECB announced yesterday that it’s going to be throwing a bunch more cash at European banks. No one knows how much it’ll end up being, exactly, but it’ll almost certainly be in the hundreds of billions of euros.

The commentary on the decision, some of it very good, can get extremely technical extremely quickly. And so, at the request of Nick Rizzo, here’s a quick English-language explanation of what’s going on.

At heart, what the ECB is doing is very simple: it’s lending money to European banks for 12 or 13 months at low interest rates.

If you’re a European bank, that money is attractive, because many banks, especially ones on the European periphery, are finding it hard to borrow money these days.

This is not a bank recapitalization plan — it injects no new capital into Europe’s banks. If those banks are facing solvency issues, then this program — known as LTRO — is not going to help on that front. And right now, in the wake of Dexia’s fall, markets are worried again about bank solvency. (And as Intesa Sanpaolo unhelpfully pointed out in its own defense, Dexia aced the Eurozone stress tests.)

But it’s a great relief to banks facing funding difficulties to be able to lock in one-year money at low rates. For 12 months from October 25, or 13 months from December 21, they’ll be able to have a large sum of money without having to worry about rolling it over.

But there’s the rub — there’s no indication from the ECB that it will offer to roll over these funds at all. On November 1 2012, or January 31 2013, all the borrowed money has to be repaid to the ECB, with interest.

So the banks borrowing this money are unlikely to turn around and lend it to small businesses on a five-year term, or otherwise use it to increase lending and boost the real economy. Instead, they’re much more likely to invest it in bonds which carry a decent yield, especially from Spain and Italy. Because those bonds yield somewhere between 2.3% and 4.4% — significantly more than the cost of the ECB funds — the banks should be able to take their ECB money, invest it in short-dated Spanish and Italian debt, and get a comfortable yield pickup along the way. For instance, suppose you buy an Italian bond yielding 3.9% which matures in December 2012, while borrowing money from the ECB at 1%. Put €1 billion into that trade, and you make a profit of €29 million.

The ECB is happy about this, because it helps to support the price of Italian and Spanish debt. But there are definitely risks here, too. For one thing, especially since the Moody’s downgrade, Italian and Spanish debt ain’t what it used to be. Once upon a time, short-dated bonds from Italy and Spain were pretty much as good as cash, for European banks: any time they needed immediate liquidity, they could just swap their bonds for cash in the repo market. But no longer — counterparties are increasingly wary of accepting that paper as collateral, especially given how volatile it can be in price terms.

And of course if the banks step in to buy lots of Spanish and Italian debt now, maturing at the end of 2012, there’s a huge question as to what happens then. Neither Spain nor Italy will default next year. But in a year’s time, people might well start worrying about where those countries are headed, if the Eurozone continues with its muddle-through approach to the crisis.

The ECB, then, is kicking the can down the road — which is exactly what it should be doing, if the problem in the European financial sector is mainly a liquidity problem. Liquidity problems go away over time.

But if you think there’s a huge solvency problem in Europe, can-kicking has a tendency to cause more harm than good.


One question which I repeatedly return to:

How does government financing through the fractional reserve banking system on unlimited tender money from the ECB differ from government financing by the ECB itself.

Is Basel II, 0 Risk weighted capital for sovereign debt and the fractional reserve system at the heart of all problems?

Posted by Finster | Report as abusive

Could the CFPB stop a debit-card charge?

Felix Salmon
Oct 4, 2011 21:21 UTC

Pace the president, does Bank of America’s $5 debit-card fee really show the need for the Consumer Financial Protection Bureau? Not really: the CFPB does not exist to prevent banks from charging stupid fees as part of a self-defeating protest against the Durbin amendment. If BofA wants to charge $5, or $50, or even $500 to people using its debit cards, then so long as it gives them fair warning, does so transparently, and is happy to see them close their accounts, it should be allowed to do so.

The fact that the fee was a mistake can be seen easily by the fact that it caused a huge uproar, while much bigger increases to Citibank’s monthly checking-account fee went largely unremarked-upon. At Citibank, the basic free-checking account now carries a $10 fee, waived if you use direct deposit or have a $1,500 average balance. And Citi’s more fully-featured checking account, which used to have a $12 monthly fee, has seen that increased to $20; in order to avoid that fee, the average balance has also been raised, from $6,000 to $10,000.

The era of big-bank free checking is over. But that has nothing to do with Durbin, and everything to do with the regulation of overdraft fees. (And, of course, low interest rates.) If banks need to charge a monthly fee in order to make money on their checking accounts, then so be it. But I do think that the current level of checking-account fees is excessive, and that charging for debit transactions is downright idiotic.

All four of the big banks have a standard checking account with a monthly fee which is waived once you keep a monthly balance of more than $1,500. At Wells Fargo, that fee is $5. At Citi, it’s $10. At Chase, it’s $12. And at BofA, it’s also $12, rising to $17 if you use your debit card.

Then there’s the next tier up, where fees only get waived once you have a significant amount of money on deposit. Again, Wells Fargo has the best deal: the minimum is $5,000, and if you drop below it, the charge is $15 per month. At Citi, it’s $15,000 or $20/month. At Chase, it’s $15,000 or $25/month. And at BofA, it’s $10,000 or $25/month — plus that $5/month fee for debit-card usage, even for people keeping a five-figure sum on deposit. That fee only gets waived once you reach $20,000 on deposit.

What expensive services are the banks providing which require fees of hundreds of dollars a year? Branches, mainly, and tellers, and paper statements. And, of course, the enormous overhead associated with being a huge global bank. It’s certainly not debit-card payments — which are pretty much the cheapest way that any customer can transact, from the bank’s perspective. It costs vastly more for a bank to process a paper check than it does for them to process a debit-card payment — so why would they charge an extra monthly fee for the latter and not for the former?

I’m all in favor of banks charging a reasonable fee for expensive services, rather than trying to hide the cost of those services in painful and unexpected charges. But my idea of “reasonable” is more or less what we charge at Lower East Side People’s: $3 a month, for people carrying a balance of less than $75 — essentially, a way to discourage people from keeping bank accounts open and unused with no money on deposit.

As for the proper role of the CFPB, one thing I’m desperately looking forward to is a simple public database of all the banks offering federally-insured checking accounts, with a very easy way of comparing the features and fees of each. It would be particularly great if the CFPB could bestow some kind of gold star on the best and cheapest products, and could thereby help steer Americans away from bad accounts at megabanks, and towards much better accounts at smaller banks and credit unions.

Although, if BofA continues to carry on like this, I reckon it’ll lose a lot of customers anyway, sooner or later.


Big Banks like Bank of America have huge costs to account for (not to mention their profits). That $ has to come from somewhere, hence their new debit card fees and whatever they come up with next. To avoid this, I’ve been checking out my local credit unions. For example, Obee.com, is a local community based credit union in my hometown of Lacey WA. Did you know they and other similar institutions still offer no fee debit cards? Even better, they still offer points for their rewards points systems for purchases made on your debit card. They have competitive loan rates (auto, home, personal, credit cards) and online instant application processes. Even mobile banking and more. I don’t need Bank of America or any of those oversized institutions. Surely there must be some good options in your local cities too!

Posted by ckbuster | Report as abusive