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All That Glimmers
By EDUARDO PORTER
Gold has had a remarkable ride — doubling in price over the last three years, as investors who lost faith in equities and bonds piled into the stuff. Conservative politicians are even more bullish, pushing gold to replace the dollar and get the government out of the business of managing the economy. “It has been money for 6,000 years,” Representative Ron Paul, a Republican presidential candidate, told the Federal Reserve chairman, Ben Bernanke, during Congressional hearings in July. It’s an “economic law.” Other Republicans, including Newt Gingrich and Herman Cain, have hinted that they might also like to peg the dollar to gold, which would limit the growth of money in the economy to the growth of gold in reserve, stopping the Fed from printing more dollars.
Glenn Beck, the former Fox News commentator, has spun his antigovernment jeremiads into a personal business plan to market gold. He forecast Zimbabwean rates of inflation just around the corner, advised his many viewers to put faith in God, gold and guns and pitched the business of Goldline, a company that sold overpriced gold coins and advertises on his show.
There was a time when the dollar was pegged to gold. Central banks around the world still hold gold in reserve as an investment. But shackling the dollar to the gold supply — or any commodity — is a terrible idea, for precisely the reason some conservatives love it: It would take away one of the government’s main tools of economic management.
In 1945, the British officer R.A. Radford published an essay about the economic organization of the German prisoner-of-war camps where he had been interned for four years. They worked like market economies, with one notable exception: prisoners used cigarettes rather than money as a means of exchange.
It was unstable, to say the least. Big deliveries of cigarettes by the Red Cross to the camp sparked immediate inflation, with the price for having a pair of trousers washed jumping from two cigarettes to four. As cigarettes were consumed, the price of everything else had to fall. And when the Red Cross’s supply of cigarettes was interrupted, the camp economy suffered intense deflation.
Gold can’t be smoked away. Yet, as money, it shares tobacco’s basic drawback: It would shackle the economy to how much gold we could get our hands on. Today the Fed can print dollars at will to meet the growing demand for money as the economy grows, or even to encourage growth. Under a gold standard, the economy couldn’t grow faster than the supply of gold.
To a large extent, the Great Depression happened because the Fed was required to keep enough gold to cover 60 percent of money in circulation, at a fixed price. This forced it to raise interest rates to attract gold reserves and forced the money supply to shrink when banks started hoarding gold. F.D.R.’s decision to jettison the gold peg in 1933 was essential to end the Depression, allowing a major devaluation of the dollar and boosting the amount of money in circulation. This lowered interest rates and primed a surge in investment.
It seems perplexing that Mr. Paul would want to try something that so clearly failed before. We wonder if the fact that much of his wealth is tied up in gold-mining stocks — and that he would certainly benefit if even more Americans caught the gold bug — might have influenced his judgment.
No matter what Mr. Beck may say about a hyperinflationary future, gold is risky. Core inflation is low and falling. Gold is down about 10 percent since August. When the gold bugs figure out that inflation isn’t coming back soon, gold may be in for a real fall.
http://www.nytimes.com/2011/11/08/opinion/all-that-glimmers.html?_r=1&ref=gold&pagewanted=print
Fed Oversight of Nonbank Financial Companies Is Weighed
By EDWARD WYATT
WASHINGTON — Financial companies that are not banks but have more than $50 billion in assets and $20 billion in debt could be regulated by the Federal Reserve and required to meet tougher standards, according to a proposed rule issued Tuesday by the nation’s top financial regulatory board.
The Financial Stability Oversight Council voted unanimously to seek public comment on a proposed rule that laid out the standards by which insurance companies, hedge funds, asset managers and the like could fall under stricter regulation.
Many companies and trade groups lobbied hard for months in hopes that their companies would not fall under the purview of the law, fearing increased regulation. Treasury Department officials declined to estimate how many nonbank financial companies might meet the proposed standards. There are approximately 30 banks in the United States with more than $50 billion in assets.
Several companies are obvious candidates, and a number of them have already submitted comments to the council or had meetings with Treasury Department officials on earlier drafts of the proposed rule.
Among those companies are big insurers like the Mass Mutual Financial Group and Zurich Financial Services; hedge funds like Citadel and Paulson & Company; and asset management and mutual fund companies like BlackRock, Fidelity Investments and the Pacific Investment Management Company.
The new standards and the creation of the oversight council stem from the Dodd-Frank regulatory act, which, in response to the financial crisis, expanded the ability of financial regulators to oversee big companies that could prove to be a threat to the financial system. The council comprises the heads of the major regulatory agencies and other financial industry representatives.
Timothy F. Geithner, the Treasury secretary and chairman of the council, said the ability to designate so-called nonbank financial companies for heightened supervision was “one of the most important things that the Dodd-Frank Act did.”
“The United States in the decades before the crisis allowed a large amount of risk to build up in a wide variety of institutions outside the formal banking system,” Mr. Geithner said. “When the storm hit,” he said, “that put enormous pressure on that parallel financial system, causing a lot of tension and trauma across financial markets, amplifying the pressure on the formal banking system and adding to the broader damage to the economy as a whole.”
Several of the large financial companies that posed the biggest threats during the financial crisis — like Lehman Brothers, Bear Stearns and A.I.G. — were not supervised by a single agency charged with monitoring their financial stability.
Those companies would most likely fall under the newly proposed rules. In addition to applying only to financial companies holding at least $50 billion in assets, the rules would require companies to also meet one of several other characteristics.
These would include having $20 billion in debt, $3.5 billion in derivative liabilities, a 15-to-1 leverage ratio of total assets to total equity, short-term debt measuring 10 percent of total assets or credit-default swaps written against the company with at least $30 billion in notional value.
Companies that meet those standards will then go through another evaluation, where the council will analyze a broad range of industry-specific measures to determine whether significant financial distress at the company could pose a threat to the country’s overall financial stability.
If a company passes the first two hurdles, it would then be considered for heightened regulation and be given a chance to rebut the assertions. Finally, two-thirds of the oversight council, including its chairman, must vote to designate the company as systemically important, a finding that must be renewed annually.
Some insurance trade groups, which have lobbied aggressively against having their members subject to more stringent federal oversight, made the case again on Tuesday that they did not threaten the financial system.
“Property casualty insurers are not highly leveraged or interconnected and have a fundamentally different business model than banks, a fact that warrants different regulatory treatment,” said Ben McKay, a lobbyist for the Property Casualty Insurers Association, a group that counts giants like Ameriprise, Liberty Mutual and Geico as members.
Treasury Department officials, who briefed news reporters on the condition of anonymity after the council’s meeting, said the council would be particularly interested in comments on how to treat asset managers who invested money on behalf of others. The comment period will last 60 days.
BlackRock, for example, manages roughly $3.5 trillion for institutional and individual clients. But in a letter filed in February with regulators, it argued that, as an asset manager, it did not own those assets. They are not on its balance sheet, and the company does not employ significant leverage that magnifies the risk of its investments.
The Treasury Department officials said a decision about whether or not companies fell under its proposed rules would be made on a case-by-case basis.
The Dodd-Frank Act requires the council to assess 10 considerations when evaluating a nonbank financial company, and the proposed rule anticipates grouping those into six categories.
Three of those are meant to assess the potential impact of a company’s financial trouble on the broad economy. They are size; substitutability, or the degree to which other companies could provide the same service if a firm left the market; and interconnectedness, or linkages that might magnify a company’s financial distress and cause that distress to spread through the financial system.
The other three categories seek to measure the vulnerability of a company to financial distress: leverage, or level of borrowing; liquidity risk and maturity mismatch, or its ability to meet short-term cash needs; and existing regulatory scrutiny.
Eric Dash contributed reporting.
http://www.nytimes.com/2011/10/12/business/fed-oversight-of-nonbanks-is-weighed.html?ref=business&pagewanted=print
Questions on a Bank Merger
Representative Barney Frank, a Democrat of Massachusetts, got it exactly right this week when he asked the Federal Reserve to do more than just rubber-stamp the proposed purchase of the online bank, ING Direct, by the Capital One Financial Corporation.
Since that merger would create the fifth-largest bank in the United States, the Federal Reserve should make sure that the new entity is good for the banking sector generally and in full compliance with the Community Reinvestment Act, which requires banks to lend, invest and provide services in poor communities.
A number of civil rights, consumer protection and housing advocacy groups have raised troubling questions about Capital One’s lending policies as they affect creditworthy, low-income minority families. The Department of Housing and Urban Development is currently investigating a formal complaint filed by the National Community Reinvestment Coalition, an advocacy group that focuses on community redevelopment issues.
The complaint alleges that the company shuts out low-income borrowers by requiring higher credit scores than are necessary to meet the standards of the Federal Housing Administration, which insures mortgages mainly for low- and moderate-income families. The complaint also argues that the bank’s policy is racially discriminatory because it has a disparate impact on black and Hispanic borrowers.
These issues should be fully aired before the Federal Reserve approves this proposed deal. Mr. Frank has asked the regulator to extend the public comment period on the transaction for at least 60 days instead of ending it on Monday, as was originally scheduled. Given what’s at stake, that’s a perfectly reasonable thing to do.
http://www.nytimes.com/2011/08/20/opinion/questions-on-the-merger-of-ing-direct-and-capital-one.html?partner=rssnyt&emc=rss&pagewanted=print
Farewell, Sheila Bair
By BEN PROTESS
Wall Street has a reason to celebrate: Today is Sheila Bair’s last day as a regulator.
Over her five-year tenure as chairwoman of the Federal Deposit Insurance Corporation, Ms. Bair emerged as a fierce banking industry watchdog. Her reign spanned some of the industry’s darkest days — the subprime mortgage crisis, the near collapse of Wall Street and several hundred bank failures that depleted the agency’s deposit insurance fund. In the wake of the crisis, Ms. Bair became an unapologetic advocate of financial regulation.
Along the way, her hard-edged tactics have won her few fans on Wall Street, though she has become a darling of Republican and Democratic lawmakers alike. Now she is joining the Pew Center, a nonprofit public policy organization, as a senior adviser. Ms. Bair, according to a Pew news release, will provide “advice and counsel on the ways that federal, state and local governments can best ensure fiscal and economic stability and family financial security.”
DealBook has taken a look back at some of the best — or at least most entertaining – moments in her Washington career.
Cassandra Comes to Washington
As a Treasury Department official in 2002, Ms. Bair was one of the first regulators to sound the alarms that the subprime mortgage market was, to say the least, a little risky. When she became F.D.I.C. chairwoman in 2006, Ms. Bair said she “started hearing that lending standards had deteriorated in subprime. So we started looking into it.”
Poor, Vikram
Ms. Bair can be tough. Just ask Vikram Pandit.
At the height of the financial crisis, Ms. Bair approved a deal for Citigroup to buy Wachovia with some help from taxpayers. But then Wells Fargo stepped in with a better offer. Ms. Bair reversed course, calling Mr. Pandit, Citi’s C.E.O., in the middle of the night to deliver the bad news.
Mr. Pandit protested, according to accounts in “Too Big to Fail,” saying the deal was bad for the country. “Well, I can’t get in the way of this,” she reportedly said.
Help for Homeowners
That was not her only run-in with Citi. During negotiations about a bailout of the Wall Street giant, she said the F.D.I.C. would approve a rescue plan only if Citigroup was compelled to participate in a foreclosure prevention program. Other regulators criticized her demands. But Ms. Bair, a Republican with a progressive streak, got her way.
“There are some people in the Republican Party who resent the idea of helping others,” she told The New York Times shortly after the deal was hammered out. “But the market is broken right now, and unless we intervene, these people and the economy won’t be helped.”
One of the Guys
Chip Somodevilla/Getty ImagesMs. Bair’s role in the bailout negotiations irked some regulatory colleagues, including Treasury Secretary Henry Paulson and Timothy Geithner, then the head of the New York Federal Reserve.
A New York Times story from late 2008 captured the tiff.
White House and Treasury officials argue that Mrs. Bair’s high-profile campaigning is meant to promote herself while making them look heartless. As a result, they have begun excluding Mrs. Bair from some discussions, though she remains active in conversations where the F.D.I.C.’s support is needed, like the Citigroup rescue. A Treasury official involved in the discussions said that while Mrs. Bair was seen as a valuable part of the team, there was a sense of distrust and a concern that she always seemed to be pushing her own agenda.
Watch Out, WaMu
Where prosecutors have hesitated, the F.D.I.C. has pounced. The agency has sued former executives of big banks that failed during the crisis, including a case filed this week against the former chief executive of IndyMac. In March, the F.D.I.C. sued the former top executives of Washington Mutual – and their wives.
Parting Shots
Ms. Bair has led the push for new financial regulation. At her final F.D.I.C. board meeting this week, she signed off on a plan to clawback lavish executive bonuses when a bank fails.
In response to complaints from lobbyists and lawmakers that the rules are too tough, Ms. Bair offered some final words of wisdom: “I see a lot of amnesia setting in now.”
http://dealbook.nytimes.com/2011/07/08/farewell-sheila-bair/?pagemode=print
In U.S. Monetary Policy, a Boon to Banks
By JESSE EISINGER
The most pronounced development in banking today is that executives have become bolder as their business has gotten worse.
The economy is clearly weaker than expected, and housing prices are falling throughout the land, eroding bank asset values. Yet regulators are on their heels in Washington as bankers and their lobbyists push back against the postcrisis regulations, even publicly condemning the new rules.
In a well-covered exchange, Jamie Dimon, JPMorgan Chase’s chief executive, challenged Ben S. Bernanke, the Federal Reserve chairman, about the costs and benefits of the Dodd-Frank rules. More attention has been paid to the banker’s audacity, but the response of the world’s most powerful banking regulator was more troubling. Mr. Bernanke scraped and bowed in apology without mentioning the staggering costs of the crisis the banks led us into.
So this is a good occasion to step way back to understand just how good the banks have it today.
The federal government, in ways explicit and implicit, profoundly subsidizes and shelters the banking industry. True since the 1930s, it is much more so today. And that makes Mr. Dimon no capitalist colossus astride the Isle of Manhattan, but one of the great welfare queens in America.
The protection is so well established that we barely notice it anymore. The government supervises bank activities and guarantees deposits. When people walk into a bank, they assume it is as safe as their local supermarket.
Banks are also the mechanism through which we express economic policy, especially as fiscal stimulus has been eliminated as an option. The result is that the government pays a “vig” to banks in order to reach its policy goals.
When the Federal Reserve lowers interest rates to help buoy the economy during a slowdown, banks are the first beneficiaries. As the Fed lowers short-term rates, banks borrow cheaply and lend out for a lot more, making any new lending highly profitable (assuming the banks make good loans). This is classic monetary policy, and supported nearly universally. But let’s not pretend that it isn’t a boon to banks.
Some think bolstering banks’ fortunes is a major goal, not a side effect.
“The Fed not only wants to stimulate the economy but also to recapitalize the banks, and this is a stealth technique to do it,” said Herbert M. Allison Jr., a former investment banker who has turned banking apostate in a new white paper called “The Megabanks Mess,” published as a Kindle Single. The reason “banks aren’t doing more lending is that they still hold a lot of troubled assets that tie up equity.”
Then there are the more subtle subsidies and protections. Take regulatory forbearance. In 2009, regulators gave banks a gift on their commercial real estate loans. They allowed banks to look primarily at whether the loans were current, rather than at whether the underlying value of the property had declined. Of course, given the commercial real estate collapse, this had the effect of protecting banks from write-downs.
Banks and regulators say this is justified because an underwater borrower isn’t necessarily going to default. True, but it’s hard to see how those borrowers — and therefore the banks — are better off for the crash in their collateral.
Commercial real estate is the least of it. The government is profoundly subsidizing the housing market, too. Hardly a loan gets made today by a bank that isn’t guaranteed by either Fannie Mae, Freddie Mac or the Federal Housing Administration. There is no subprime mortgage business outside of the F.H.A. When banks make mortgages and sell the credit risk to the government, they make a quick, safe profit.
The first effect of these policies, for better or worse, is to keep a floor under the housing market. But it also helps banks that own trillions in real estate assets that the government is propping up.
Another way taxpayers coddle the biggest banks is by implicitly guaranteeing their derivatives business. JPMorgan, widely viewed as safe and well managed, is a huge beneficiary here. It had $79 billion worth of derivatives on its books in the first quarter. Even if it’s hedged, prudent and has thin margins, it’s still going to throw off a nice chunk of profits.
Institutions on the other side of these trades wouldn’t enter contracts without believing that they have some underlying protection — protection that comes from the government.
“No sensible person would put a nickel on deposit in the normal course given the enormity and opacity of the derivatives portfolios,” said Amar Bhidé, a former trader and business professor at the Fletcher School. “It’s entirely a function of deposit insurance and the implicit guarantee that the JPMorgan counterparties have.”
The government’s actions in the financial crisis only cemented that certainty. Counterparties and investors that were previously not guaranteed, like holders of money market funds, were protected at every turn.
This bailout never ended. “In effect, we nationalized the biggest banks years ago,” Mr. Allison said. “We implicitly guaranteed them. The taxpayers are still the ultimate owners of the risk in those banks — they just don’t get equity returns for that ownership.”
So when taxpayers hear a bank chief, like Jamie Dimon, complaining, it’s worth keeping in mind that his 10-figure paycheck is largely coming courtesy of us.
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Jesse Eisinger is a reporter for ProPublica, an independent, nonprofit newsroom that produces investigative journalism in the public interest. Email: jesse@propublica.org. Follow him on Twitter (@Eisingerj).
http://dealbook.nytimes.com/2011/06/29/in-u-s-monetary-policy-a-boon-to-banks/?pagemode=print
Fed Halves Debit Card Bank Fees
By EDWARD WYATT
WASHINGTON — Fees paid by retailers to banks for debit card purchases, a $20 billion annual expense that has been the subject of a furious political battle over the last year, will be cut in half after the Federal Reserve voted Wednesday to cap the charges.
The cap was mandated last year in the Dodd-Frank financial regulation law, but the Fed action was far less draconian than bankers had feared. The new cap of 21 to 24 cents a transaction, down from an average of 44 cents before the law passed, is roughly double the 12 cents tentatively proposed by the Fed last December.
Consumers are unlikely to see any immediate change at the register because they do not pay the fees directly. But merchants have complained that as the cost of debit fees — a charge for processing payments — has risen in recent years, they have had to add it to the prices they charge. The new lower fees may eventually be reflected in lower retail prices for consumers or, most likely, in a slight slowing of price increases. But banks said the caps would not pay for the cost of operating their electronic debit card networks, and they have warned that their customers can expect higher fees for other banking services as a result.
In approving the lower fees, the Fed’s Board of Governors said there was no way of knowing what the effect of the new rules would be, although they will be watching the results closely.
“I think this is the best available solution that implements the will of Congress and makes good economic decisions,” Ben S. Bernanke, the Fed chairman, said in voting to approve the rule. The board voted 4 to 1 in favor, with Elizabeth A. Duke dissenting.
Ms. Duke said her primary concern was about an exemption built into the law that gives smaller banks with less than $10 billion in assets a pass on the fee cap. These smaller institutions could charge retailers a higher transaction fee for debit card purchases.
Ms. Duke and other governors questioned whether and how that exemption would work. The board agreed to monitor the charges, known as interchange fees, to see how the revenues of small banks were affected, and whether merchants appeared to be rejecting cards that they knew would require them to pay a higher processing fee.
The new fee schedule includes three parts: a maximum interchange fee of 21 cents; a 1 cent addition that is allowed if the bank issuing the debit card develops a fraud-prevention program; and a variable charge of 5 basis points, or five one-hundredths of a percentage point, of the value of the transaction to recover a portion of fraud losses.
For the average debit card transaction of about $38, that variable fee would be roughly 2 cents, which would produce an upper limit, on average, of 24 cents a transaction.
The new rules will go into effect on Oct. 1. The Fed will accept comments on the proposal to allow a 1-cent addition for fraud-prevention efforts.
Since the Dodd-Frank law passed last year, lobbyists for consumers and retailers have been butting heads with bankers over the fee-setting process. At one point this month, banks pushed hard for a Senate measure aimed at delaying the fee caps, which was defeated in a floor vote.
Banking trade groups, retailers and consumer advocacy organizations all expressed some dismay at the Fed’s announcement — the bankers because they stand to lose fees and the retailer and consumer groups because the final charges rose sharply from the Fed’s initial proposal.
“While Congress spoke clearly that fee-fat banks can no longer sneak billions of dollars in stealth charges from debit card users, it appears that the Federal Reserve buckled under the weight of the banking lobby,” Bartlett Naylor, a financial policy advocate for Public Citizen, said in a statement.
Mallory Duncan, chairman of the Merchants Payments Coalition, a retailers’ group, called the new rule “unacceptable to Main Street merchants” and said the Fed “very clearly did not follow through on the intent of the law.”
Some banking groups also adopted a glass-half-full position. Frank Keating, president of the American Bankers Association, said the Federal Reserve took “a significant step in reducing the harm that could have resulted from the proposed rule.”
“The final rule still represents a 45 percent loss in revenue that banks use to provide low-cost accounts to our customers, fight fraud and maintain our efficient U.S. payments system,” Mr. Keating said. “Consumers will see higher fees for basic banking services, and banks — particularly community banks — will still feel the revenue pressures that this rule will cause.”
Merchant trade groups said retailers paid $20.5 billion in fees last year to accept debit cards, including processing fees.
http://www.nytimes.com/2011/06/30/business/30debit.html?hp=&pagewanted=print
Higher Reserves Proposed for ‘Too Big to Fail’ Banks
By ERIC DASH
After nearly two years of political jousting, a panel of global regulators said on Saturday that banks deemed too big to fail would have to set aside an additional cushion of capital reserves in what is the centerpiece of their efforts to avoid a repeat of the 2008 financial crisis.
The chief oversight group of the Basel Committee on Banking Supervision proposed that the world’s largest and most complex banks would need to hold a reserve of high-quality capital of between 1 and 2.5 percent of their assets to cope with any unforeseen losses. That would be on top of their proposed minimum capital levels for all banks, currently set at 7 percent of assets.
Regulators plan to impose the surcharge on a sliding scale, based on several factors including the bank’s size, complexity and the closeness of its ties to other large trading partners around the world.
And in what appears to be a nod to regulators pressing for even higher requirements, the committee proposed an additional surcharge on banks who grow larger or engage in risky activities that would “increase materially” the threat they pose to the financial system. The surcharge could raise the requirement to 3.5 percent of assets.
The process is only just beginning. The Basel committee will put out a more detailed proposal in late July, giving banks and policymakers a final chance to weigh in on the new rules before formally approving them. Then, regulators must begin the process of identifying these so-called “systemically important” global banks. The banks, meanwhile, will not have to fully comply with the new rules until January 2019.
The proposed capital requirements are perhaps the most important banking reform since the crisis erupted three years ago and are being followed closely in the world’s financial and political capitals. If banks are forced to hold bigger cushions of capital, they can more easily absorb financial shocks and avoid the need for taxpayer bailouts. But setting aside more capital means that banks also have less money available to lend out — a move that could dampen economic growth and potentially hinder an already anemic global recovery.
Amid aggressive lobbying by some of the largest banks for weaker capital requirements, international financial regulators have spent the last two years trying to strike the right balance. They also are trying to bridge different national standards, which might give countries with more favorable requirements a competitive advantage.
American regulators pushed for a higher surcharge and better loss-absorbing capital, while European regulators, especially those in Germany and France, preferred a lower surcharge and broader definition of capital.
In a statement Saturday, the panel of regulators said the new measures would create strong incentives for large banks to curb risky behavior that could endanger the financial system. “This will contribute to enhancing the resiliency of the banking system and help mitigate the wider spill-over risks,” said Nout Wellink, a central banker from the Netherlands who is chairman of the Basel Committee.
http://www.nytimes.com/2011/06/26/business/26banks.html?ref=business&pagewanted=print
Small Banks and Debit-Card Reform
By SIMON JOHNSON
Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”
It’s not hard to understand why large banks oppose any attempt to overhaul the financial arrangements currently surrounding credit cards and debit cards. In the duopoly run through Visa and MasterCard, big banks earn fees that far exceed their costs.
The excess profit for debit cards would be substantially reduced by a proposed Federal Reserve regulation now on the table that would implement the Durbin Amendment from the Dodd-Frank 2010 financial reform act. That amendment, sponsored by Senator Dick Durbin, a Democrat from Illinois, required the Fed to place a cap on the fees that banks may charge on debit-card transactions.
Senator Jon Tester, a Democrat from Montana, has proposed legislation that would delay and effectively derail implementation of the Durbin Amendment, and the big banks are very much in his camp.
It’s much harder to understand why Independent Community Bankers of America, the trade group for small banks, is pushing so hard for the Tester bill (and effectively shielding big banks from political pressure), because community banks are explicitly exempted from having to lower their fees, and individual executives from at least some small banks publicly support the Durbin Amendment (see, for example, Senator Durbin’s letter to the I.C.B.A. last year).
The most plausible explanation is that I.C.B.A. is one of the country’s largest issuers of credit cards and debit cards — so the representatives from small banks actually have, in this regard, the incentives of a big bank. Although all of its members may be exempt from the debit-card fee provision, the association perhaps is not. To an outsider, this looks like a serious conflict of interest that is undermining the interests of community bankers and distorting the political process.
The I.C.B.A. needs to provide the details of this potential conflict in a transparent manner, including how much money the organization makes from its card business. It also needs to publish the full details of a “survey” that it uses to claim that most community bankers are against the Durbin Amendment. And it probably should also step back from its involvement in the Durbin-Tester debate.
The open secret of the American financial system is that while you and your friends might like to rail against banks over dinner, when the time comes to pay (at the grocery store or in the restaurant), you are likely to offer the merchant some form of plastic card.
While this transaction may seem free to you, the merchant is charged a fee by the bank that issued the card — administered through a card network run by Visa or MasterCard (or American Express or Discover). Specifically, the merchant’s bank (known as the “acquirer”) has to pay “interchange fees” to the card-issuing bank.
For debit cards, which draw directly from your checking account, these fees averaged 44 cents for each transaction in 2009 (which was 1.14 percent of the relevant average retail transaction, according to the Fed, adding up to $15.7 billion economy-wide).
The actual cost of these operations varies, mostly depending on economies of scale in the bank’s processing operation (which is why the Durbin exemption for small banks makes sense). But over our current systems, the cost is very low; on average it is 4 cents for a transaction, according to the Fed. (For the most detailed publicly available study on the effect of lower interchange fees, look at this report on what happened in the Australian debit-card payment system.)
The Durbin Amendment charged the Federal Reserve with lowering the debit-card fees to a reasonable level that will cover costs, and the Fed is proposing to set this rate at not more than 12 cents for a transaction. But this rate would apply only to larger banks. By design, the Durbin Amendment does not apply to banks with less than $10 billion in total assets, and the Fed has confirmed that this exemption can be implemented (see this statement by Ben S. Bernanke, the chairman of the Fed).
Global megabanks are now regarded as “too big to fail” by policy makers, and these companies benefit from huge implicit government guarantees. When you talk with community bankers, they understand and are seriously upset by this arrangement.
But the lobbyists for these community bankers have been unwilling or unable to take on the big banks in any part of the political arena. The Durbin Amendment is a determined attempt to give the small banks an advantage. But the I.C.B.A. is not interested.
It argues that the “carve out” for small banks will not work — through moves by merchants and the card networks, these banks will be squeezed out of the payments system. This is not the view of the Federal Reserve staff, which has studied this closely.
And Senator Durbin is firm on this:
My amendment does not allow discrimination by merchants against issuers of debit cards. As is the case today, under my amendment a merchant who accepts Visa debit cards from large banks would be required to accept Visa debit cards from small banks and credit unions as well. They would also be prohibited from offering discounts for large bank cards and not providing the same discount for small bank cards from the same network.
Perhaps there are legitimate reasons for the I.C.B.A.’s views, but it is also the case that the I.C.B.A. Bancard is a significant player. This is ironic, because the card’s stated purpose is admirable — to help small banks compete:
Today, I.C.B.A. Bancard also serves as an advocate for independent community banks in national policy discussions about payment systems. Part of our mission is to educate community banks about the need to actively offer payment services in order to retain their best customers, earn profitable returns, and be respected as full-fledged participants in the marketplace.
By some rankings, the I.C.B.A. Bancard is among the top 25 debit cards and credit cards in the country.
The I.C.B.A’s main justification for its position is a “survey” of independent community bankers that shows they are opposed to the Durbin Amendment — that is, lowering the debit fees of banks with which they compete. This result is odd, particularly given that a simple online poll by American Banker showed that 60 percent of its readers thought that small banks would gain from the amendment — and this result came after the I.C.B.A. tweeted that it wanted votes against the Durbin plan.
The I.C.B.A.’s Web site does not disclose details of who was surveyed or by whom, or what questions were asked. Its staff members were friendly but confirmed to me that they would not disclose these details. (My impression is that the survey asked banks how they would respond if their debit interchange fees were greatly reduced — not whether the Durbin Amendment would actually reduce these fees).
It’s time for the I.C.B.A. to disclose those details. Is this a real survey or another instance of lobbying posing as research? The I.C.B.A. should share this information both with its membership and with the public.
http://economix.blogs.nytimes.com/2011/05/12/small-banks-and-debit-card-reform/?ref=business
Mr. Geithner’s Loophole
Until recently, the big threats to the Dodd-Frank financial reform law came from Republican lawmakers, who have vowed to derail it, and from banks and their lobbyists, who are determined to retain the status quo that enriched them so well in the years before, and since, the financial crisis. Now, the Obama Treasury Department has joined their ranks.
In an announcement on Friday afternoon — the time slot favored by officials eager to avoid scrutiny — the Treasury Department said it intends to exempt certain foreign exchange derivatives from key new regulations under the Dodd-Frank law. These derivatives represent a $4 trillion-a-day market, one that is very lucrative for the big banks that trade them.
A loophole in the law — which the bankers and their friends, including the administration, fought for — allows the Treasury secretary to exempt the instruments. The arguments in favor of exemption, beyond a desire to please the banks, were always unconvincing. They still are. The Treasury Department has asserted that the exempted market is not as risky as other derivatives markets, and therefore does not need full regulation.
That claim has been disputed by research, but even if it were true, it would be a weak argument. For instruments to be relatively safer than the derivatives that blew up in the crisis, necessitating huge bailouts, hardly makes them safe. Worse, dealers could probably find ways to manipulate the exempted transactions so as to hedge and speculate in ways that the law is intended to regulate.
The Treasury Department insists its exemption is narrow and regulators will have the power to detect unlawful manipulation. In their spare time, perhaps? The financial crisis made clear what happens when everyone doesn’t have to play by the same rules. And it made clear that the taxpayers are the ones who pay the price.
The department has also said that because the market works well today, new rules could actually increase instability. That is perhaps the worst argument of all. It validates the antiregulatory ethos that led to the crisis and still threatens to block reform.
The Treasury’s plan will be open for comment for 30 days. Count us opposed.
http://www.nytimes.com/2011/05/01/opinion/01sun2.html?partner=rssnyt&emc=rss&pagewanted=print
Springtime for Bankers
By PAUL KRUGMAN
Last year the G.O.P. pulled off two spectacular examples of bait-and-switch campaigning. Medicare, where the same people who screamed about death panels are now trying to dismantle the whole program, was the most obvious. But the same thing
happened with regard to financial reform.
As you may recall, Republicans ran hard against bank bailouts. Among other things, they managed to convince a plurality of voters that the deeply unpopular bailout legislation proposed and passed by the Bush administration was enacted on President Obama’s watch.
And now they’re doing everything they can to ensure that there will be even bigger bailouts in years to come.
What does it take to limit future bailouts? Declaring that we’ll never do it again is no answer: when financial turmoil strikes, standing aside while banks fall like dominoes isn’t an option. After all, that’s what policy makers did in 1931, and the resulting banking crisis turned a mere recession into the Great Depression.
And let’s not forget that markets went into free fall when the Bush administration let Lehman Brothers go into liquidation. Only quick action — including passage of the much-hated bailout — prevented a full replay of 1931.
So what’s the solution? The answer is regulation that limits the frequency and size of financial crises, combined with rules that let the government strike a good deal when bailouts become necessary.
Remember, from the 1930s until the 1980s the United States managed to avoid large bailouts of financial institutions. The modern era of bailouts only began in the Reagan years, when politicians started dismantling 1930s-vintage regulation.
Moreover, regulation wasn’t updated as the financial system evolved. The institutions that were rescued in 2008-9 weren’t old-fashioned banks; they were complex financial empires, many of whose activities were effectively unregulated — and it was these unregulated activities that brought the U.S. economy to its knees.
Worse yet, officials lacked clear authority to seize these failing empires the way the F.D.I.C. can seize a conventional bank when it goes bust. That’s one reason the bailout looked so much like a giveaway: officials felt they lacked the legal tools to save the financial system without letting the people who created the crisis off the hook.
Last year Congressional Democrats enacted a financial reform bill that sought to close these gaps. The bill extended regulation in a number of ways: consumer protection, higher capital standards for major institutions, greater transparency for complex financial instruments. And it created new powers — “resolution authority” — to help officials drive a harder bargain in future crises.
There are many criticisms one can make of this legislation, which is arguably much too weak. And the Obama administration has frustrated many people with its too-lenient attitude toward Wall Street — exemplified by last week’s decision to exempt foreign-exchange swaps, a major source of dislocation in 2008, from regulation.
But Republicans are trying to undermine the whole thing.
Back in February G.O.P. legislators admitted frankly that they were trying to cripple financial reform by cutting off funding. And the recent House budget proposal, which calls for privatizing and voucherizing Medicare, also calls for eliminating resolution authority, in effect setting things up so that the bankers will get as good a deal in the next crisis as they got in 2008.
Of course, that’s not how Republicans put it. They claim that their goal is to “end the cycle of future bailouts,” under the general rubric of “ending corporate welfare.”
But as we’ve already seen, future bailouts will happen whatever today’s politicians say — and they’ll be bigger, more frequent and more expensive without effective regulation.
To see what’s really going on, follow the money. Wall Street used to favor Democrats, perhaps because financiers tend to be liberal on social issues. But greed trumps gay rights, and financial industry contributions swung sharply toward the Republicans in the 2010 elections. Apparently Wall Street, unlike the voters, had no trouble divining the party’s real intentions.
And one more thing: by standing in the way of regulations that would limit future financial crises, Republicans are giving further evidence that they don’t really care about budget deficits.
For our current deficit is overwhelmingly the result of the 2008 financial
crisis, which devastated revenue and
increased the cost of programs like unemployment insurance. And while we managed to avoid large direct bailout costs (a fact not appreciated in public debate), we might not be lucky next time.
More and bigger crises; more and bigger bailouts; more and bigger deficits. If you like that prospect, you should love what the G.O.P. is doing to financial reform.
http://www.nytimes.com/2011/05/02/opinion/02krugman.html?ref=opinion&pagewanted=print
F.D.I.C. Closes 5 Banks, Pushing the Total for the Year to 39
By THE ASSOCIATED PRESS
WASHINGTON (AP) — Regulators shut down banks in Florida, Georgia and Michigan on Friday, a total of five closures that lifted the number of bank failures this year to 39.
The Federal Deposit Insurance Corporation seized First National Bank of Central Florida, based in Winter Park, with $352 million in assets, and Cortez Community Bank of Brooksville, Fla., with $70.9 million in assets.
The agency also took over First Choice Community Bank of Dallas, Ga., with $308.5 million in assets; Park Avenue Bank, based in Valdosta, Ga., with $953.3 million in assets; and Community Central Bank in Mount Clemens, Mich., with $476.3 million in assets.
The Miami-based Premier American Bank agreed to assume the assets and deposits of First National Bank of Central Florida and Cortez Community Bank. Bank of the Ozarks, based in Little Rock, Ark., is acquiring the assets and deposits of First Choice Community Bank and Park Avenue Bank. Talmer Bank & Trust, based in Troy, Mich., agreed to assume the assets and deposits of Community Central Bank.
In addition, the F.D.I.C. and Premier American Bank agreed to share losses on $270 million of First National Bank of Central Florida’s loans and other assets, and on $51.3 million of Cortez Community Bank’s assets.
The agency and Bank of the Ozarks are sharing losses on $260.7 million of First Choice Community Bank’s assets and $514.1 million of Park Avenue Bank’s assets. Talmer Bank & Trust is sharing with the F.D.I.C. $362.4 million of Community Central Bank’s assets.
The failure of First National Bank of Central Florida is expected to cost the deposit insurance fund $42.9 million. The failure of Cortez Community Bank is expected to cost $18.6 million; that of First Choice Community Bank $92.4 million; Park Avenue Bank, $306.1 million; and Community Central Bank, $183.2 million.
Florida and Georgia have been the hardest-hit states for bank failures. Twenty-nine banks were shuttered in Florida last year and 16 in Georgia. Counting the shutdowns on Friday, four Florida banks have been closed this year, and 10 in Georgia.
California and Illinois also have had large numbers of bank failures.
In 2010, authorities seized 157 banks that succumbed to mounting soured loans and the hobbled economy. It was the most in a year since the savings-and-loan crisis two decades ago.
The F.D.I.C. has said that 2010 most likely would be the peak for bank failures.
http://www.nytimes.com/2011/04/30/business/30fdic.html?_r=1&ref=business&pagewanted=print
In F.D.I.C.’s Proposal, Incentive for Excessive Risk Remains
By STEVEN M. DAVIDOFF
The Federal Deposit Insurance Corporation has proposed rules for clawing back compensation paid to executives of “too big to fail” financial institutions that do, in fact, fail. The rules are disappointingly weak. And because they are watered down, bank executives may again be encouraged to take excessive risks.
Why are these compensation rules important? Clawback rules are needed because the financial crisis was caused in part by insufficient penalties for financial executives’ poor performance.
Executives took excessive risk, which doomed their institutions and caused the government to spend hundreds of billions of dollars of taxpayers’ money to rescue many of them. Yet these same executives were rewarded for their failures and have retained tens of millions of dollars in pay.
James E. Cayne, the former chief executive of Bear Stearns, still lives in his $28.24 million apartment at the Plaza Hotel; Joseph J. Cassano the former chief executive of A.I.G. Financial Products, kept more than $100 million in compensation; and E. Stanley O’Neal, who was the chief executive of Merrill Lynch, retired with a pay package valued at more $300 million.
If you are a financial executive, you may want to try to play the same game in the future. Why not? You keep millions in gains, and if you mess up, the government stands behind your institution.
Ending this type of incentive system is therefore critically important to prevent the next financial crisis. Strongly penalizing executives when their institutions fail will help ensure they take care to prevent such disaster.
The Dodd-Frank Act contains provisions intended to address such distorted incentives. The law provides that when a too-big-to-fail institution is put into receivership, the F.D.I.C. can recover the last two years of compensation from any “current or former senior executive or director substantially responsible for the failed condition” of the institution.
The details of this requirement are to be spelled out by the F.D.I.C., but the agency’s proposed rules destroy the law’s letter and spirit.
The F.D.I.C. has proposed that an executive be held substantially responsible for an institution’s failure if “he or she failed to conduct his or her responsibilities with the requisite degree of skill and care required by that position.” The agency proposes that there is a presumption that executives were substantially responsible if they were the “chairman of the board of directors, chief executive officer or chief financial officer” of the failed institution.
At first blush, these would seem to be good rules. The problem is defining “requisite degree of skill and care.” Courts and other regulations often look to state law to flesh out this concept, and most big financial institutions are governed by Delaware law. In Delaware, the state courts have set a high threshold for finding that an executive failed to exercise due care. It is a definition that requires gross negligence, a legal standard that essentially requires that the executive be shown to have acted in bad faith or otherwise willfully committed a known misdeed.
The next time you see a Delaware judge, ask how many executives of bailed-out institutions have been found to have breached this duty in the wake of the financial crisis. The answer will be none.
The F.D.I.C. has thus set up a straw man, a definition that appears appropriate but will instead allow the executive to escape a clawback.
Despite its weakness, the F.D.I.C. proposal still has critics who think the wording is too strong.
The law firm Davis Polk & Wardwell, which represents many large financial institutions, promotes its client memos as “cited within the profession as the definitive treatises on their given subjects.” In a memo on the F.D.I.C. plan, Davis Polk calls it “unreasonable,” “exceedingly vague” and possibly unconstitutional. Davis Polk also criticizes the rules for failing to reference a legal definition of care like “gross negligence.”
Perhaps Davis Polk is performing a public service by pointing out deficiencies. But if you are cynical, you might say the firm is acting for its clients and trying to push the F.D.I.C. to adopt rules that are more favorable to financial executives. And if the F.D.I.C. sticks to its proposed rules, Davis Polk will be in a good position to represent these executives if their institutions fail.
Davis Polk’s comments are emblematic of an unfortunate development. The heart of the Dodd-Frank Act will be put into action through rule-making by various agencies. Few people have the motivation to keep track of the estimated 243 administrative rules required by Dodd-Frank. The financial industry and its representatives are the exception.
The result can be seen in the comments on the first iteration of the F.D.I.C.’s rules covering the procedures for resolution of too-big-to-fail institutions. Twenty-eight of 35 comment letters by my count were from the financial industry, and the F.D.I.C. met personally with Bank of America, MetLife and “financial services representatives,” which included Davis Polk. There were no meetings with public interest groups. With only one voice speaking, the rules are bound to be biased, however unintentionally, to the financial industry’s favor.
What to do?
First, systemically important financial institutions are different from other corporations. Executives and directors of these institutions probably enjoy a federal “too big to fail” subsidy. Because of this, if they engage in excessive risk-taking and fail, they should be automatically penalized whether or not their conduct met a legal standard of care like negligence.
Big financial institutions will complain that this will mean that they will be unable to recruit executives or board members. But Berkshire Hathaway seems to have no problem having Bill Gates as a director even though the company declined to obtain insurance for directors and officers, which leaves them personally liable if they are found to have breached their fiduciary duty. Moreover, compensation for financial services executives remains quite high. If executives are going to make tens of millions of dollars a year shouldn’t they be penalized if their institution fails?
Second, the “substantial responsibility” term used in the Dodd-Frank Act is not a legal standard of care, and the F.D.I.C. should say so explicitly. Congress almost certainly meant this to refer to a person who was part of the decision-making process of the institution. In this case, the board, the chief executive and chief financial officer are clearly “substantially responsible” if the institution fails, being substantially responsible for its governance. There does not need to be financial test or quantitative loss measure as the F.D.I.C. is considering.
This would be a simpler and more effective definition for the F.D.I.C. to use.
The alternative is to continue a system where executives can take excessive risks to earn outsize gains. The executives can then rely on exaggerated legal standards of care to keep their millions and avoid responsibility.
Public interest groups also need to be more engaged in the rule-making process. If these organizations don’t submit comments, why can’t the F.D.I.C. and the other rule-making agencies seek them out?
The heart of Dodd-Frank is about setting the right incentives. The cynical question is whether the F.D.I.C. is catering to the right ones.
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Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions.
http://dealbook.nytimes.com/2011/04/12/in-f-d-i-c-s-proposal-incentive-for-excessive-risk-remains/?pagemode=print
Fed Profit Rose Sharply To $82 Billion Last Year
By BINYAMIN APPELBAUM
WASHINGTON — Profit at the Federal Reserve banks soared to a record $82 billion last year, a windfall for taxpayers that also underscores the depth of the Fed’s continued involvement in the nation’s financial markets.
The 12 regional banks that make up the Federal Reserve system held $2.4 trillion in government debt, mortgage-backed securities and other investments at the end of 2010, according to a combined financial statement the Fed published Tuesday. The banks transfer almost all of their profits to the Treasury Department. The $79 billion received by the government this year is a 66 percent increase over last year’s payment of $47.5 billion.
The Fed transferred roughly $25 billion a year in the decade before the crisis.
“It’s interest that the Treasury didn’t have to pay the Chinese,” Federal Reserve Chairman Ben S. Bernanke told Congress in January.
The extraordinary results reflect the unique business model of a central bank. The Fed pays for its investments by creating new money, with the result that the return on those investments, after expenses, is pure profit.
The Fed has greatly expanded the scale of its investments since 2008 as it sought to rescue the banking industry and spur growth, roughly tripling the size of its balance sheet from about $800 billion at the end of 2007.
The financial statements show that the Fed earned about $3.5 billion last year from the Maiden Lane subsidiaries it created to buy assets from the investment bank Bear Stearns and the insurance company American International Group.
The Fed also made $45 billion from its portfolio of roughly $1 trillion in mortgage-backed securities, amassed to keep mortgage loans cheap and available.
And it made $26 billion from its holdings of $1.1 trillion in government debt. That part of the portfolio has continued to expand in 2011, as the Fed pursues a plan to purchase $600 billion in Treasury bonds to hasten recovery.
This article has been revised to reflect the following correction:
Correction: March 22, 2011
An earlier version of this article misstated last year's Fed payment to the Treasury. It was $47.5 billion, not $47.5 million.
http://www.nytimes.com/2011/03/23/business/economy/23fed.html?ref=business&pagewanted=print
In Proposed Mortgage Fraud Settlement, a Gift to Big Banks
By JESSE EISINGER
Luis Alvarez/Associated Press
Lurking in a proposed mortgage fraud settlement with the state attorneys general is a clause that could be worth billions for the big banks.
Yes, I mean the settlement that might extract the supposedly large sum of $20 billion from the banks to settle foreclosure fraud. The one denounced as a “shakedown” by Senator Richard Shelby of Alabama.
Despite such rhetoric, the settlement might let the banks avoid tens of billions of write-downs, thanks to a clause with a biblical flavor: the last shall be first.
The proposed agreement — which is preliminary and subject to intense negotiations being led by Tom Miller, the attorney general of Iowa — would allow banks to treat second mortgages, like home equity lines of credit, just like the first mortgages. Under the proposal, when a bank writes the principal down on the first mortgage, the second should be written down “at least proportionately to the first.”
Suddenly, the banks would be given license to subvert the rules of payment hierarchy, as Gretchen Morgenson pointed out in ?The New York Times on Sunday. Yes, the clause says the other alternative is to wipe out the second’s value entirely, but given a choice, the banks would be extremely unlikely to do that.
So how is this a gift? Because when the principal on the first mortgage is reduced, the second lien is typically wiped out. The first lien holder has the first right to any money recovered, and the second lien holder has to wait its turn.
The proposal “seems astonishingly generous to the second-lien holders,” said Arthur Wilmarth, a law professor at George Washington University. “And who are those? Of course, they are the big mortgage servicers.”
And who owns the big mortgage servicers? The biggest banks.
Throughout the financial crisis, we have heard plenty of intoning about the sanctity of contracts. But this suggests that the banks, with the authorities’ tacit approval, think contracts are for thee and not for me. The price to get the banks to do the right thing contractually with mortgage modifications and foreclosure is to allow them to not do the right thing elsewhere.
To understand the significance of this issue, cast your mind back to the height of the housing bubble. People used their homes as A.T.M.’s, withdrawing billions from their equity to finance motorboats and meals at Applebee’s.
The top four banks now have about $408 billion worth of second liens on their balance sheets, according to Portales Partners, an independent research firm specializing in financial companies. Wells Fargo, for instance, has more money in second liens than it has tangible common equity, or the most solid form of capital. If banks had to write these loans down substantially, acknowledging the true extent of their losses, they would have to raise capital — and might even teeter on the brink of insolvency.
The performance of second liens is among the biggest puzzles in banking today: why are they doing better than the firsts? When Wells Fargo disclosed its earnings, for instance, it classified 5.3 percent of its first mortgages as nonperforming, but put only 2.4 percent of its second liens in that category. That seems very odd because it’s much easier to lose your home if you don’t pay your mortgage than if you don’t pay your home equity line.
Investors are deeply skeptical about the value in these loans, bidding about 50 cents on the dollar for them these days. Even allowing that banks probably hawk the least attractive loans and that investors bid low to generate a high return for the risk, many of these loans are still probably not worth 100 cents on the dollar.
Yet banks have taken relatively few write-downs on second loans so far. In fact, even when the first clearly is in trouble, sometimes the banks appear to resist writing loans down. Bill Frey, who runs Greenwich Financial Services, has instigated lawsuits to try to recoup the value of mortgage securities by getting the banks to buy back faulty mortgages that were in the pools he examined. He analyzed mortgage securities made up of loans by Countrywide Financial, which is now owned by Bank of America, looking for instances when the second lien was still extant, even though the first lien attached to the same property had been modified. Such a situation would suggest that a bank was not marking down a second lien even when the underlying, more senior first lien was impaired. He says he found multiple instances in every one of the 200 pools he examined.
Mr. Frey argues that the banks should charge off those seconds. “That’s the concept of subordination,” he said. “It’s been around since the Magna Carta. Maybe we should get on the bandwagon.”
This is not simply a fight between hedge funds, which own the securities that contain the first liens, and banks that house the seconds. Many mortgage securities are held by small banks, life insurance companies and pension funds. “I can see little reason why a pensioner should take the loss instead of Bank of America, when it’s Bank of America’s bad loan,” Mr. Frey said.
A Bank of America spokesman said that it charges off second loans when borrowers haven’t made payments for 180 days. The bank doesn’t, nor is it required to, charge them off just because the first lien has been modified, he says. But if a first mortgage is modified, the bank will increase its reserve because it’s more likely that the second will sour.
Since the fall, the Office of the Comptroller of the Currency has been examining how banks across the industry are treating their second liens, according to two people familiar with the review. The O.C.C. declined to comment.
But so far, the agency has evinced a rather blasé attitude about the potential problem on banks’ balance sheet. Don’t expect forceful action any time soon.
In this case, making the last first may mean that weak banks continue to inherit the earth.
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Jesse Eisinger is a reporter for ProPublica, an independent, nonprofit newsroom that produces investigative journalism in the public interest. Email: jesse@propublica.org. Follow him on Twitter (@Eisingerj).
http://dealbook.nytimes.com/2011/03/16/in-proposed-mortgage-fraud-settlement-a-gift-to-big-banks/?pagemode=print
ING Puts Its U.S. Online Banking Unit Up for Sale
By MICHAEL J. DE LA MERCED
The ING Group has put its ING Direct USA online banking unit up for sale to help comply with terms of the financial firm’s bailout by the Dutch government, an ING spokesman confirmed to DealBook on Wednesday.
The ING Direct division, one of the first big forays by a bank into online banking in the United States, will likely be sold before 2013, the spokesman, Raymond Vermeulen, said.
Selling off the ING Direct USA is meant to satisfy requirements imposed by the European Commission as part of the firm’s 10 billion euro bailout in 2008.
The Dutch firm is already preparing initial public offerings for its insurance unit, which would be broken up into its American business and the remaining parts.
ING has hired Deutsche Bank to help sell the unit, a person briefed on the matter told DealBook on Wednesday. Mr. Vermeulen and a Deutsche Bank spokesman, Scott Helfman, declined to comment.
Shares in ING closed up nearly 2.8 percent on Wednesday, initially spurred by a report in The New York Post that ING Direct USA had been put up for sale.
The Post, citing unnamed people, added that the CIT Group was one potential contender. A CIT spokesman, Curt Ritter, declined to comment.
http://dealbook.nytimes.com/2011/03/09/ing-puts-u-s-online-banking-unit-up-for-sale/?pagemode=print
Banks to be sanctioned for foreclosure violations
Bank regulators found violations of state and local foreclosure laws
Feb. 17, 2011, 10:14 a.m. EST
By Ronald D. Orol, MarketWatch
WASHINGTON (MarketWatch) — Major U.S. banks are about to get penalized for “critical deficiencies” and shortcomings in how they handled foreclosures, a top federal regulator said Thursday.
“These deficiencies have resulted in violations of state and local foreclosure laws, regulations, or rules and have had an adverse affect on the functioning of the mortgage markets and the U.S. economy as a whole,” said Acting Comptroller of the Currency John Walsh in prepared remarks before a Senate Banking Committee hearing to examine the Dodd-Frank Act six months after its congressional approval.
“The OCC and the other federal banking agencies with relevant jurisdiction are in the process of finalizing actions that will incorporate appropriate remedial requirements and sanctions with respect to the servicers within their respective jurisdictions,” said Walsh.
The OCC and other bank regulators, including the Federal Deposit Insurance Corp., have been investigating bank servicers in the wake of revelations about foreclosure-documentation errors at big banks and a stalled application process for many troubled borrowers seeking to modify their mortgages.
Regulators have been reviewing files in response to concerns that mortgage-servers are improperly racing documents through the foreclosure process.
Loan servicers, often owned by the biggest U.S. banks, collect a fee for administrating all aspects of a loan, including sending monthly payments to mortgage investors, maintaining records and collecting and paying taxes and insurance.
The regulators conducted foreclosure-processing examinations at servicers owned by Bank of America Corp. /quotes/comstock/13*!bac/quotes/nls/bac (BAC 14.83, -0.01, -0.07%) , Wells Fargo & Co. /quotes/comstock/13*!wfc/quotes/nls/wfc (WFC 33.01, -0.29, -0.87%) , J.P. Morgan Chase & Co. /quotes/comstock/13*!jpm/quotes/nls/jpm (JPM 47.66, -0.28, -0.58%) , and Citigroup Inc. /quotes/comstock/13*!c/quotes/nls/c (C 4.91, +0.01, +0.18%) , according to Walsh’s testimony. Each of the banks are also among top securitizers of mortgage loans and holders of second mortgages.
The agencies also examined Ally Financial Inc. (formerly GMAC LLC), MetLife Inc. /quotes/comstock/13*!met/quotes/nls/met (MET 47.63, +0.11, +0.23%) , PNC Financial Services Group /quotes/comstock/13*!pnc/quotes/nls/pnc (PNC 64.32, -0.57, -0.88%) /quotes/comstock/13*!pnc/quotes/nls/pnc (PNC 64.32, -0.57, -0.88%) /quotes/comstock/13*!pnc/quotes/nls/pnc (PNC 64.32, -0.57, -0.88%) /quotes/comstock/13*!pnc/quotes/nls/pnc (PNC 64.32, -0.57, -0.88%) SunTrust Banks Inc. ( /quotes/comstock/13*!sti/quotes/nls/sti (STI 32.03, -0.32, -0.99%) ,and others.
Walsh added that the examinations have also found deficiencies at bank servicers oversight and monitoring of third party law firms and vendors.
“By emphasizing timeliness and cost efficiency over quality and accuracy, examined institutions fostered an operational environment that is not consistent with conducting foreclosure processes in a safe and sound manner,” Walsh said.
He added that a small number of foreclosure sales should not have proceeded because the borrower had already been approved for a trial modification or had filed for bankruptcy shortly before the foreclosure action.
Ronald D. Orol is a MarketWatch reporter, based in Washington.
http://www.marketwatch.com/story/banks-to-be-sanctioned-for-foreclosure-violations-2011-02-17?siteid=YAHOOB
F.D.I.C. Closes Banks in Oklahoma and Wisconsin
By THE ASSOCIATED PRESS
Published: January 28, 2011
Regulators on Friday closed small banks in Oklahoma and Wisconsin, lifting to nine the number of bank failures in 2011. The Federal Deposit Insurance Corporation took over First State Bank of Camargo, Okla., with $43.5 million in assets, and Evergreen State Bank, based in Stoughton, Wis., with $246.5 million in assets. Bank 7, based in Oklahoma City, agreed to assume the assets and deposits of First State Bank. McFarland State Bank of McFarland, Wis., is acquiring the assets and deposits of Evergreen State Bank.
http://www.nytimes.com/2011/01/29/business/29fdic.html?ref=business
Bad Asset Purchase Program Turning a Profit
By BEN PROTESS
Andrew Harrer/Bloomberg News
The Treasury Department building in Washington, D.C.Wall Street’s trash has become a treasure for select asset managers, and perhaps even taxpayers.
The Treasury Department’s equity investment in bad mortgage assets – a federal program that combined capital from the government and private asset managers — has grown 27 percent since it was created in 2009, according to new data released Monday. The gains have come as the mortgage bond market has staged a comeback, producing generous returns over the last year.
The government’s returns are the latest indication that the so-called Public-Private Investment Program will not drain taxpayer funds, as many originally expected.
Still, some skeptics question the numbers and note that roughly $9 billion remains at risk.
“It’s too early to celebrate,” said Linus Wilson, a finance professor at the University of Louisiana, Lafayette, noting that some of the investors have up to eight years to pay back the government
The Treasury Department turned to private investors in the spring of 2009 as soured mortgage-related securities stymied lending.
Using bank bailout money, the government agreed to provide cheap loans to investors who gobbled up the bad mortgage securities from Wall Street. The government also planned to match whatever money that private investors posted.
The public-private partnership ultimately yielded eight asset funds, overseen by firms like Alliance Bernstein, Oaktree Capital and BlackRock, the world’s largest asset manager.
The Treasury Department began the program to unlock the frozen credit markets and stabilize the banking industry. Both efforts were successful.
At the time, critics questioned the wisdom of turning the federal government into a vulture investor. The Nobel Prize winner Joseph Stiglitz called the program a “robbery of the American people.”
Now the new data from the Treasury Department shows that investors have drawn $5.2 billion in equity from the department for their purchase of bad mortgage assets. That money has produced $1.1 billion in unrealized gains, bringing the government’s investment to roughly $6.3 billion.
When you include $314 million in equity gains already doled out to the Treasury Department, the government’s return jumps to $1.4 billion, a 27 percent increase.
The new data also offers a peak inside the assets themselves. By the end of 2010, the funds collectively accumulated about $21.5 billion worth of residential and commercial mortgage-backed securities.
Most of these assets – 81 percent – are in residential mortgages. Nearly half of the residential mortgages consist of so-called Alt-A loans, a risky type of loan offered to borrowers who typically do not identify their incomes or net worth. Subprime loans account for about 10 percent of the combined bad assets.
Despite taking on the risky assets, all eight private funds were profitable at the end of 2010, according to the data.
Angelo, Gordon & Company’s fund led the way with a net return, exclusive of management fees and expenses, of nearly 60 percent. The next highest return came from Alliance Bernstein’s fund, which grew 37 percent. BlackRock saw its funds jump 36 percent, while Invesco’s asset fund rose 31 percent.
The government plans to use the proceeds to help pay down the nation’s hefty debt.
Yet not everyone is ready to declare victory.
The private investors have tapped roughly $20.4 billion from the government, between matching equity contributions and the cheap loans. That leaves them with roughly $9 billion, or 30 percent, of their purchasing power outstanding.
“We’ll see if they get paid off in full,” Professor Wilson said. He questioned the wisdom of allowing the investors to collect $324 million in dividends from the investments without first fully repaying the taxpayer.
Professor Wilson is also skeptical of highlighting the 27 percent return for taxpayers. That figure applies only to the government’s equity investment. The government also has committed $14.7 billion in loans to the investors at ultra-low rates. The government, according to Mr. Wilson, will receive Libor plus 1 percent.
When you blend the return on equity and debt, taxpayers so far have received a 9.74 percent return, Professor Wilson said.
Neil M. Barofsky, the special inspector general assigned to monitor the use of bailout money, also has criticized the program. In a report last year, he said the Treasury Department unnecessarily excluded smaller, well-qualified asset managers from the program. The Treasury Department required that an asset manager have $10 billion in eligible assets under management.
Correction: The original story said investors collected $324 billion in dividends. It should have been $324 million in dividends.
http://dealbook.nytimes.com/2011/01/24/toxic-asset-purchase-program-turning-a-profit/
Fed’s Contrarian Has a Wary Eye on the Past
By SEWELL CHAN
KANSAS CITY, Mo. — All year, Thomas M. Hoenig has been saying no.
As the lone dissenter on the Federal Reserve committee that sets interest rates, Mr. Hoenig, the president of the Federal Reserve Bank of Kansas City, has been a persistent skeptic of just about everything the Fed’s chairman, Ben S. Bernanke, has done to try to stimulate the flagging recovery.
Mr. Hoenig’s latest, loudest objections, aimed at the Fed’s risky $600 billion infusion into the markets to reinvigorate the economy, have made him a champion of the Fed’s critics in Congress, on Wall Street and among business leaders, who, like Mr. Hoenig, fear that the central bank is risking runaway inflation, asset bubbles and a weakened dollar.
At 64, Mr. Hoenig has witnessed jolts in the nation’s economic history that make him deeply skeptical of short-term fixes. He says he believes the Fed’s tools for fixing the economy in the short run are limited and the potential for things to go disastrously wrong is very high.
If it were up to him, he would keep interest rates very low, but would not promise to keep them at essentially zero for “an extended period,” as the Fed has announced. He says he thinks that trying to lower long-term rates, as the Fed is doing by buying bonds, is a mistake. The recovery, however slow and painful, he says, cannot be hurried.
As the longest-serving regional Fed president, his views are shaped by the uncontrolled inflation of the 1970s, the spike in land prices that followed and the ensuing banking and thrift crises.
To him, Mr. Bernanke’s plan is “a dangerous gamble” and “a bargain with the devil,” strong words that have rankled some officials of the Fed, where dissent is tolerated but not celebrated.
In an interview on Dec. 6 in his office here, he did not appear to relish going against the grain, but lately he has not been running from the spotlight. “It’s never easy to disagree against a majority,” he said. “It’s hard. It’s not something that I take lightly.
“Some people think I should be more part of the group,” Mr. Hoenig said. “I’m not a group person.”
A month after the Fed announced its intentions to buy bonds and push down interest rates, investors have done the opposite by driving up long-term rates, hardly a help to a sputtering recovery.
Mr. Hoenig, who is likely to vote no again on Tuesday when the committee meets for the last time this year, said it was too early to say whether the market reaction and the uncertainty had vindicated his position.
“I don’t want to say that I’m right and someone else is wrong,” he said. “Only time will tell whether I’m correct.”
The son of a Midwestern plumbing contractor, Mr. Hoenig (pronounced “HAWN-ig”) spent his career at the Kansas City Fed. He is cautious, courtly and hardly a partisan, though he recently addressed Congressional Republicans at their invitation. In his unwavering dissents, seven this year, and in his wariness of Wall Street, his views seem rooted in the agrarian and populist tradition that is mistrustful of concentrations of power.
He has called for breaking up giant Wall Street banks and severely restricting their trading activities, a stance that has endeared him to some liberals. He is commonly characterized as an inflation hawk, a label Mr. Hoenig rejects as overly simplistic. If he is hawkish on anything, he says, it is financial stability.
“I don’t like having unemployment at 9.8 percent,” he added. “It’s just unacceptable.” He concedes, however, there is not much the Fed can do about it.
As a young economist, he witnessed the rampant inflation of the 1970s, which was curbed only after Paul A. Volcker became Fed chairman in 1979 and promptly raised interest rates to double-digit levels, setting off two painful recessions. The strong medicine worked; inflation has been largely under control since 1982.
During the 1980s, Mr. Hoenig worked in bank supervision and regulation at the Kansas City Fed, where an agricultural crisis and land bubble prompted a string of bank failures. Those included the collapse of Penn Square Bank in Oklahoma City in 1982, Mr. Hoenig’s first experience managing a crisis, and later the Continental Illinois insolvency, then the nation’s largest bank failure.
Mr. Hoenig said he believed the Fed had not always learned from its mistakes. By keeping interest rates too low for too long, in his view, the Fed contributed to the dot-com bubble that burst in 2001 and the even bigger housing bubble that popped in 2007. (Before this year, Mr. Hoenig had dissented four times, in July 1995, May and December 2001 and October 2007, all in opposition to lowering short-term interest rates.)
“It is my concern that, by understandably wanting to see things move more quickly, we create the conditions for repeating the mistakes of the past,” he said.
Mr. Hoenig’s mantra is that monetary policy works with “long and variable lags,” meaning that the consequences of today’s policies may not be felt until much later. By keeping short-term interest rates near zero, as the Fed has done since December 2008 — and which he supports but not indefinitely — the central bank is increasing the risk of inflation and instability down the road, he says.
But most Fed officials say they believe that Mr. Hoenig’s worries are exaggerated. In a televised interview this month, Mr. Bernanke said he was “100 percent” confident of the Fed’s ability to tighten monetary policy and raise interest rates when the time came, and called fears of inflation “way overstated.”
Other economists say Mr. Hoenig’s viewpoint has seemed inflexible.
“I find it hard to understand why Hoenig is still worried about inflation when the obvious trend is downward, toward lower inflation with a risk of deflation,” said Joseph E. Gagnon, a former Fed economist who is at the Peterson Institution for International Economics in Washington.
Mr. Hoenig’s contrarian disposition partly reflects his Midwest upbringing, far from the Wall Street-Washington axis of influence.
The second of seven children, Mr. Hoenig grew up in Fort Madison, Iowa. He attended a small college in Kansas, was drafted into the Army and served a year in an artillery unit in Vietnam, then received a Ph.D. in economics at Iowa State. He joined the Kansas City Fed in 1973 and became president in 1991.
Lu M. Cordova, the chairwoman of the Kansas City Fed’s board, said Mr. Hoenig did not seek attention. Indeed, he sought the board’s guidance before he delivered a March 2009 speech, “Too Big Has Failed,” which received widespread notice. “He really agonized about whether to speak out or not,” she said.
Even critics of Mr. Hoenig acknowledge he has been prescient.
In a speech in 1999, shortly after Congress repealed the Glass-Steagall Act, the Depression-era law that separated investment banking from commercial banking, he warned that “in a world dominated by mega-financial institutions, governments could be reluctant to close those that become troubled for fear of systemic effects on the financial system.”
Sure enough, in 2008, the Fed helped sell Bear Stearns to JPMorgan Chase, rescued the American International Group and, after the collapse of Lehman Brothers, bailed out the financial system.
The crisis has only made the biggest banks even bigger. “They have enormous power,” Mr. Hoenig said. “Just look at their lobbying expenses. I use the word — and it’s a fairly flammable word — oligarchy. These things are huge and powerful, and that’s where the money is. This country through its history has abhorred concentration of financial power, and for good reason.”
Tuesday’s Fed vote will be Mr. Hoenig’s last, because the presidents of the Fed’s regional banks, other than New York, share votes under a rotation system. Mr. Hoenig does not have a vote next year, and he must retire after he turns 65 in September. As for his future, Mr. Hoenig, a train enthusiast who reads biography and history in his spare time, is certain that he will not follow other Fed veterans who have gone to work on Wall Street. “I can tell you one thing,” he said. “I’ll never work for a too-big-to-fail bank.”
http://www.nytimes.com/2010/12/14/business/14fed.html?ref=business&pagewanted=print
Under Attack, Fed Officials Defend Buying of Bonds
By SEWELL CHAN
With the Federal Reserve under attack at home and abroad, it is making an unusual public bid to keep itself away from the political crossfire.
After a barrage of criticism over the last week — including from foreign leaders, Congressional officials, economists and Alan Greenspan, the former Fed chairman — the Fed came out to explain its efforts to inject $600 billion more into the sagging economy.
One worry of Fed watchers as well as its defenders is that some of the domestic criticism may have the subtext of challenging the Fed’s traditional independence in deciding monetary policy without political interference.
In a rare on-the-record interview, William C. Dudley, president of the Federal Reserve Bank of New York, said that the Fed’s move was not intended to affect the value of the dollar, but rather to encourage a faster, stronger recovery that will also assist international growth.
“We have no goal in terms of pushing the dollar up or down,” Mr. Dudley said. “Our goal is to ease financial conditions and to stimulate a stronger economic expansion and more rapid employment growth.”
And in an interview with The Wall Street Journal, the Fed’s new vice chairwoman, Janet L. Yellen, defended the decision in broadly similar terms. “I’m having a hard time seeing where really robust growth can come from,” she said. “And I see inflation lingering around current levels for a long time.” Ms. Yellen said she was “not happy to see us caught up in a political debate."
The comments by Mr. Dudley, who is also the vice chairman of the Federal Open Market Committee, which sets monetary policy, and by Ms. Yellen amounted to an unusual rebuttal, the first by top Fed officials, of criticism of its decision this month to pump money into the banking system. The plan is to spur the recovery by buying government securities to lower long-term interest rates.
Kenneth A. Froot, who teaches international finance at Harvard Business School, said, “The Fed needs to get the word out more clearly” because of the politically volatile times. Mr. Froot added, “This is a very rare circumstance where the basic authority we vest in institutions like the Fed has, more than ever, been challenged,” by politicians and economists who are often identified with political parties.
The bond markets have been increasingly uneasy about the Fed’s actions. On Monday, bond prices fell and yields jumped as a result of the concerns.
The criticism has tended to fall along three lines. Some have accused the Fed of deliberately weakening the dollar to make American exports more competitive. Others fear the Fed’s decision could ignite inflation down the road. Still others say the policy will be ineffective absent additional fiscal stimulus.
Fed officials were clearly unsettled by an opinion piece by Mr. Greenspan in The Financial Times on Thursday, at the start of meetings of the Group of 20 nations in Seoul, South Korea. Mr. Greenspan said the United States was “pursuing a policy of currency weakening” and increasing the risks of trade protectionism.
In an open letter to Ben S. Bernanke, the Fed chairman, on Monday, a group of conservative economists, writers and investors urged that the Fed’s action “be reconsidered and discontinued,” arguing that the bond purchases “risk currency debasement and inflation.” The group included Michael J. Boskin, a former chairman of the White House Council of Economic Advisers; the historian Niall Ferguson; Douglas Holtz-Eakin, a former director of the Congressional Budget Office; and the economist John B. Taylor, one of Mr. Bernanke’s most prominent critics.
Mr. Dudley did not single out any critic, but suggested that the criticisms were unfounded.
“There is no long-term conflict between what the U.S. is trying to accomplish and what other countries are trying to accomplish,” Mr. Dudley said, echoing statements by President Obama and Treasury Secretary Timothy F. Geithner. “A strong economic recovery in the U.S. is in the interests of the global economy.”
While Mr. Dudley said the effect on the dollar was not a consideration, he acknowledged that when interest rates adjust, “oftentimes there will be consequences for the dollar.” He added, “We have seen some dollar weakness in this period, but it doesn’t seem to be unusual, given the changes that we’ve seen in interest rates in the U.S. compared to interest rates abroad.”
Mr. Dudley rejected the idea that the Fed might be setting the stage for uncontrollable inflation in years to come. He said the Fed had tools for draining the bank reserves sitting on its balance sheet.
“We are very, very confident that those tools will be completely effective at keeping inflation in check,” he said. “We are completely willing to use those tools, when the time comes, to prevent an inflation problem. Higher inflation is not a way out. It is not a solution.”
Mr. Dudley argued that the Fed’s efforts had their intended effect. Since August, when the Fed first hinted that it might take further steps to spur the recovery, stock prices have risen and long-term interest rates have fallen. That makes it easier for consumers to buy homes or refinance mortgages, and for businesses to borrow and invest.
“You’ve seen a significant easing of financial conditions over that time period,” he said. “I have to believe that the expectation of a second large-scale asset purchase program was the primary driver of those changes.”
Even so, Mr. Dudley cautioned, “One shouldn’t view this instrument as a panacea or a magic wand that’s going to make the economy recover rapidly.” He said the Fed’s action, known as quantitative easing, was “not going to be extremely powerful” but was nonetheless necessary to reduce the risk, however slim, of a double-dip recession.
“It’s going to be a long and bumpy road to a strong and vigorous expansion, but this will be helpful rather than hurtful,” he said.
Uncertainty about fiscal policy — whether the Bush-era tax cuts will be extended, and in the long term, how the nation will rein in its record deficits — has complicated the recovery, Mr. Dudley said.
Asked whether fiscal gridlock had forced the Fed to act, he said, “We’re going to worry about what we can worry about, which is monetary policy.” The Fed, he said, has to “take the world as it is.”
Mr. Dudley, who joined the New York Fed in 2007 from Goldman Sachs, where he was the chief United States economist, also provided details about how the Fed’s outlook had evolved.
“We were going into the year expecting the economy to pick up steam,” Mr. Dudley said. In the spring, “We were starting to see the glimmers” of a healthy recovery in private-sector employment, he said. But by the summer, growth began to stall; it is now estimated at an annualized rate of 2 percent. Inflation, already low, fell further.
The economy was “vulnerable to a shock that could tip us into deflation,” he said.
In recent speeches, Mr. Dudley and Charles L. Evans, president of the Chicago Fed, mentioned the possibility of allowing inflation to run higher in the future to make up for inflation’s being too low today, an approach known as price-level targeting. But in the interview, Mr. Dudley emphasized that he had not endorsed that approach.
“The problem with a price-level target is that it’s difficult to explain what you’re doing in a way that doesn’t create larger anxiety about the long-term inflation target,” he said. “We clearly want people to understand that we are committed to price stability over the long run.”
Mr. Dudley declined to discuss the deliberations of the committee, but acknowledged that the decision was not easy.
“Reasonable people can disagree about how big the costs are versus how big the benefits are,” he said. “It’s completely reasonable to expect that not everyone is going to see it exactly the same way, because these policies have not been used much on a historical basis.”
http://www.nytimes.com/2010/11/16/business/economy/16fed.html?hp=&pagewanted=print
Regulators close seven more banks in U.S.
– Fri Oct 22, 9:32 pm ET
WASHINGTON (Reuters) – The Federal Deposit Insurance Corp said on Friday that U.S. regulators closed seven more banks, bringing the total so far this year to 139.
The biggest was Hillcrest Bank of Overland Park, Kansas, which had approximately $1.65 billion in total assets and $1.54 billion in total deposits.
Regulators also closed First Arizona Savings, Scottsdale, Arizona; First Suburban National Bank, Maywood, Illinois; First National Bank of Barnesville, Barnesville, Georgia; Gordon Bank, Gordon, Georgia; Progress Bank of Florida, Tampa, Florida; and First Bank of Jacksonville, Jacksonville, Florida.
A newly chartered bank subsidiary of NBH Holdings Corp, Boston, Massachusetts, will assume all of the deposits of Hillcrest Bank.
The new NBH subsidiary, also called Hillcrest Bank, also agreed to purchase essentially all of the failed bank's assets, the FDIC said.
First Arizona Savings had approximately $272.2 million in total assets and $198.8 million in total deposits.
At the time of closing, the bank had an estimated $1.8 million in uninsured funds.
The FDIC said it was unable to find another financial institution to take over the banking operations of First Arizona Savings. As a result, checks to depositors for their insured funds will be mailed on Monday.
First Suburban National Bank had about $148.7 million in total assets and $140.0 million in total deposits.
Seaway Bank and Trust Company, Chicago, Illinois, assumed all of First Suburban's deposits and agreed to purchase essentially all of the failed bank's assets.
First National Bank of Barnesville had approximately $131.4 million in total assets and $127.1 million in total deposits.
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United Bank of Zebulon, Georgia, assumed all of the Barnesville bank's deposits and agreed to purchase essentially all of the assets.
Gordon Bank had approximately $29.4 million in total assets and $26.7 million in total deposits.
Morris Bank of Dublin, Georgia, paid a premium of 0.5 percent for the deposits of Gordon Bank and agreed to purchase about $11.5 million of the failed bank's assets. The FDIC will keep the remaining assets for later disposition.
Progress Bank of Florida had approximately $110.7 million in total assets and $101.3 million in total deposits.
Bay Cities Bank of Tampa, Florida, assumed all of Progress Bank's deposits and agreed to purchase essentially all of the failed bank's assets.
First Bank of Jacksonville had approximately $81.0 million in total assets and $77.3 million in total deposits.
Ameris Bank of Moultrie, Georgia, assumed all of the Jacksonville bank's deposits and agreed to purchase essentially all of the failed bank's assets.
FDIC Chairman Sheila Bair has said she expects the number of bank failures this year to exceed the 2009 total of 140, but that total assets of the failures will probably be lower.
This week, the FDIC said estimated bank failures will cost the Deposit Insurance Fund $52 billion from 2010 through 2014, down from an earlier estimate of $60 billion.
The Deposit Insurance Fund, financed by banks that pay into the fund, guarantees individual accounts up to $250,000.
While failures are still occurring at a fairly brisk pace, it is now mostly smaller institutions, community banks, that have been collapsing.
Washington Mutual, which had $307 billion in assets when it was seized in September 2008, remains the largest bank to fail during the financial crisis.
(Reporting by Doug Palmer; editing by Carol Bishopric, Gary Hill)
Fed Stands Pat and Says It Is Still Ready to Buy Debt
By SEWELL CHAN
WASHINGTON — Officials at the Federal Reserve signaled on Tuesday for the first time that they were worried that the slow-moving economic recovery could be undermined by very low rates of inflation, and hinted strongly that it might resume buying vast amounts of government debt to spur the recovery. While the central bank’s Federal Open Market Committee did not take any new steps on interest rates, it communicated in unmistakable terms its concerns about the fragility of the economic recovery and a threat to stable prices.
It said that underlying inflation levels, which have hovered at about half the Fed’s 2 percent target rate, were “somewhat below those the committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.”
That was a departure from just six weeks ago when the committee commented that inflation measures had “trended lower in recent quarters.” The concern over low inflation has raised fears of deflation — a sustained drop in wages and prices.
Last month, the Fed said it was “prepared to provide additional accommodation if needed” to support the recovery and get inflation back to normal.
For now, the Fed took no such action. It will continue to maintain its portfolio of securities by reinvesting the proceeds from its holdings of mortgage-related bonds to buy long-term Treasury debt, the tactic it announced on Aug. 10. That strategy was intended to prevent the possibility of a slight tightening of monetary policy that would have occurred as bonds held by the Fed were paid off and money was taken out of the economy.
On Tuesday the Fed’s policy-making committee did what most market analysts expected; it deferred the decision on whether it should begin a big new push to speed the recovery by creating money for large-scale purchases of Treasury securities, a strategy known as quantitative easing. Such easing would push down long-term interest rates, which could help reduce the already low cost of borrowing.
“They can’t say unequivocally that we’re going into another recession, but they certainly can’t promise a rapid recovery,” said Michael D. Bordo, an economist at Rutgers University and an authority on monetary policy. “They’re in this limbo state.”
Moments after the central bank announced its decision, stock prices, which had been flat most of the day, rose with the Dow increasing as much as 80 points. But some investors wanted the Fed to take bolder steps and the rally fizzled. The Dow ended the day up 7.41 points.
Last March, the Fed completed a big round of quantitative easing after buying $1.4 trillion in mortgage-related securities and $300 billion in Treasury debt in the space of 15 months.
In a speech on Aug. 27, at the Fed’s annual symposium in Jackson Hole, Wyo., the Fed chairman, Ben S. Bernanke, left no doubt that a big new round of quantitative easing was one option if the recovery needed a lift. Other options include signaling that the Fed intends to keep rates low for even longer than markets already expect, or lowering the interest paid on reserves that banks hold at the Fed — a step that could encourage banks to lend more.
“The committee put a marker down in August,” said Ellen E. Meade, an economist at American University who studies Fed decision-making. “They want to keep it out there, but they don’t want to use it just yet. They opened the door on quantitative easing, and they’re keeping it open until they’re sure they need to close it.”
Angel Gurría, secretary-general of the Organization for Economic Cooperation and Development, said, “The Fed needs to be vigilant but doesn’t necessarily need to restart the program at this stage.”
He added: “We need to know if this is a short-term weakness or if it has longer staying power. We believe it is more likely that the weakness is temporary and that we will probably recover from this recent bump. It’s a pothole, not a ditch.”
The committee began its meeting on Tuesday at 8 a.m., an hour earlier than usual, to leave plenty of time for discussion in an acknowledgment of the Fed’s uncertainty.
Though the recession officially ended in June 2009, as the academic arbiters of the nation’s business cycles announced Monday, the 9.6 percent unemployment rate shows no signs of improvement.
“On balance, has the economy been worsening since Jackson Hole? Probably not,” Professor Meade said. “Have there been a few signs that things have gotten better? Maybe. The urgency that seemed to be on the margins in August may have lessened, and that’s the argument for waiting.”
While the Fed tries to operate outside of political cycles, the fact that this was the last scheduled policy meeting before the midterm elections cannot have escaped its members’ notice. The committee is next scheduled to gather for a two-day meeting on Nov. 2 — Election Day — and Nov. 3.
“All else equal, if they can postpone action until after the midterm election, they would prefer to do that,” said Jonathan H. Wright, an economist at Johns Hopkins University and a former Fed researcher.
There is a growing expectation among Wall Street economists that the Fed will resume quantitative easing later this year, either at the November meeting or at the committee’s final meeting this year, on Dec. 14. Of course, the forecasters have been known to err.
“I think there’s a big split within the committee,” Professor Wright said. “To get the F.O.M.C. to really do any of the remaining options that they have open to them, it would take some really clear signal of the economic outlook worsening.”
To no one’s surprise, the Fed on Tuesday left the benchmark short-term interest rate — the federal funds rate, at which banks lend to each overnight — at near zero, its level since December 2008, and reiterated that the rate would likely remain “exceptionally low” for “an extended period,” the wording it has consistently used since March 2009.
And equally expectedly, Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City, was the lone dissenter in the committee’s 8 to 1 vote. He has objected at every committee meeting this year to the Fed’s language on keeping short rates low, and he also opposed the decision made in August to reinvest proceeds from mortgage-related securities in new purchases of government debt.
The Tuesday meeting was unusual in one respect. There were only nine officials voting, not the normal 12. That was because the Fed’s seven-member board of governors now has three vacancies, after the retirement of Donald L. Kohn on Sept. 1.
President Obama has nominated three people to fill the seats, but the Senate has not yet confirmed them. Along with the seven governors, the committee includes the president of the Federal Reserve Bank of New York and a rotating group of four other regional Fed presidents.
http://www.nytimes.com/2010/09/22/business/economy/22fed.html?ref=business&pagewanted=print
Retiring Fed Official Considers More Bank Action
By SEWELL CHAN
WASHINGTON — The former vice chairman of the Federal Reserve, who retired last week after 40 years at the central bank, says that the economy is in “a slow slog out of a very deep hole,” and that the Fed should consider additional stimulus unless the recovery shows signs of “decent progress.”
The departure of the official, Donald L. Kohn, who as the Fed’s No. 2 official played a pivotal role in its handling of the financial crisis, is something of an end of an era. A staff economist who worked his way up through the ranks, Mr. Kohn was one of the last direct links to Paul A. Volcker and Alan Greenspan, the chairmen who defined the modern Fed.
“Each day, he brought to the role of public servant enthusiasm, dedication, intelligence and a deep sense of purpose,” said Ben S. Bernanke, the Fed chairman since 2006, who had recommended that President George W. Bush nominate Mr. Kohn to be his top deputy.
In a telephone interview from Seattle, where he was vacationing before starting work as a senior fellow at the Brookings Institution, Mr. Kohn, 67, said he believed the Fed should take additional measures — like resuming purchases of government securities to keep long-term interest rates low — if the recovery continued to slow.
“To not trigger something, I would want to see that there was the prospect of progress in the forecast toward achieving both much higher levels of employment and, eventually, higher inflation, closer to my 2 percent target,” he said.
Mr. Kohn said it was imperative that inflation expectations remained well anchored. “If those expectations begin to drift down, we could get into a situation where real interest rates start to rise,” he said.
If the Fed resumes purchases of Treasury securities, it need not specify a limit, as it did the last time, he said.
“To have a substantial effect, people would have to anticipate substantial purchases,” Mr. Kohn said. “Does the Federal Reserve need to announce it’s buying $1 trillion? Not necessarily. If the Fed said, ‘We’re buying a smaller amount now, but we’ll continue to watch the situation and if it warrants, we’ll buy more,’ that sort of thing would give the public and the markets a sense that someone was out there, ready to buy if the economic situation weakened further or didn’t improve.”
Mr. Kohn also distinguished the latest recession from previous ones. “It didn’t begin with the Fed slamming the brakes on the economy,” he said. “It began when the economy collapsed under the weight of the housing bubble — and then you had the panic over losses that resulted from the bubble’s collapse.”
He added: “It’s going to be a slower recovery. But acceptance of that reality is not a reason for the central bank not to do everything it can to help that recovery along.”
A Philadelphia native and graduate of the College of Wooster in Ohio, Mr. Kohn joined the Federal Reserve Bank of Kansas City in 1970, shortly before receiving his Ph.D. from the University of Michigan. He transferred to the Fed’s headquarters in 1975 and began an ascent through its research divisions, serving as director of monetary affairs from 1987 to 2001.
Mr. Bush named him to a 14-year term on the board of governors — a rare promotion from within the Fed — in 2002. Mr. Kohn announced in February that he would retire when his separate, four-year term as vice chairman expired on June 23, but later agreed to remain on the board until Sept. 1, at Mr. Bernanke’s request.
While Mr. Kohn and Mr. Bernanke became close, they have not always been in lockstep. When both were governors under Mr. Greenspan, Mr. Kohn opposed Mr. Bernanke’s view that the Fed should make monetary policy more transparent by announcing an explicit inflation target.
Mr. Kohn, along with Timothy F. Geithner, then president of the New York Fed and now Treasury secretary, defended Mr. Greenspan’s approach, which relied more on discretion than on well-articulated rules.
The outcome was a compromise. As chairman, Mr. Bernanke named Mr. Kohn to lead a subcommittee on Fed communications, and the Federal Open Market Committee now publishes inflation forecasts every quarter. As a result, the Fed implicitly has an inflation target of 1.7 to 2 percent, though it is not officially called that.
Along with Mr. Bernanke and Mr. Geithner, Mr. Kohn headed the Fed’s response to the 2008 market turmoil, in which the Fed came under criticism for arranging the sale of Bear Stearns to JPMorgan Chase, for not preventing the bankruptcy of Lehman Brothers and for bailing out the American International Group.
Mr. Kohn said of the crisis, “There isn’t any decision that we made that I would undo,” but added, “I regret that we, the U.S. government, didn’t have the tools to deal with Bear Stearns, Lehman, A.I.G., in a more stabilizing way that produced less moral hazard,” referring to the idea that a company may behave more recklessly in the future if it believes it will not have to bear the full consequences of its actions.
Like Mr. Bernanke, Mr. Kohn said he failed to recognize the fragility that resulted from excessive risk-taking and reliance on short-term, wholesale financing markets.
“I don’t think I appreciated the lack of diversification, the amount of leverage, the amount of maturity transformation that made the system so vulnerable to a decline in housing prices,” he said. “Everybody — but certainly the regulators and the markets — became complacent about the housing market and whether housing prices could ever decline across a broad front.”
Mr. Kohn urged the two political parties to agree to rein in the long-term growth of public debt. “If one could get the Democrats and Republicans to each agree to do things that they don’t like to do, in the interest of putting at least a piece of the budget on a more sustainable track, that would be a powerful signal,” he said.
Mr. Kohn said that while leaving the Fed was a big adjustment, “I also know that after 40 years, it’s time to move on, to do other things, to dial back the intensity a little bit.”
http://www.nytimes.com/2010/09/06/business/economy/06fed.html?ref=business&pagewanted=print
Sterling Financial raises $730 million in capital
Spokane bank goes back to hedge funds and institutional investors to raise more money under orders of federal regulators.
By Sanjay Bhatt
Seattle Times business reporter
The parent company of Sterling Savings Bank announced Friday it had raised $730 million from private equity and institutional investors, a milestone that helps the state's second-largest bank avoid being seized by regulators and sold to the highest bidder.
In a regulatory filing, Spokane-based Sterling Financial said it had reached agreements with 30 investors for $388 million through a private placement.
Thomas H. Lee Partners and Warburg Pincus Private Equity X also increased their investments in Sterling Financial to $170 million each in exchange for stock and warrants. Each firm will control 22.6 percent of the company's common stock and get a seat on Sterling's board. The transaction is expected to close Thursday, when it will become the largest recapitalization of a Washington state bank since the financial crisis began in 2008.
"It dramatically increases their chances of survival," said Jeff Rulis, a banking analyst for D.A. Davidson in Lake Oswego, Ore. "Coming from the edge of the abyss, I'd imagine they'd be prudent with extending that credit."
Sterling Financial has been operating under increased regulatory scrutiny for the last year. In the first six months of this year, its net loss was $138.1 million.
Shares of Sterling stock closed unchanged Friday at 64 cents. It has traded as high as $2.98 a share in the last year.
Friday's announcement ends the bank's quest to reel in enough capital to meet regulatory requirements. The Treasury Department had committed to convert its $303 million investment of preferred stock through the TARP program into common shares, contingent on Sterling finding more investors. Essentially, Treasury is accepting 20 cents on the dollar for its investment in Sterling, Rulis said.
The upshot: Sterling said it will issue 4.2 billion shares of common stock, up from 52 million shares outstanding.
Les Biller, former vice chairman and chief operating officer of Wells Fargo, will become chairman of the board, and Managing Director David Coulter of Warburg Pincus and Managing Director Scott Jaeckel of Lee Partners will become directors.
Sterling, with $9.74 billion in assets, absorbed its subsidiary Golf Savings Bank earlier this month. Golf Savings was the third-largest mortgage originator in Washington state.
Going forward, Sterling will limit its construction and real-estate lending, and focus on consumer banking and lending to small and medium businesses, said Ezra Eckhardt, president and chief operating officer of Sterling Savings Bank.
"Our organization will be able to return to a position of strength and be able to grow and meet the needs and expectations of customers," Eckhardt said.
Regulators on Friday shut down two Florida banks and one in Virginia, lifting to 113 the number of U.S. bank failures this year. Eight banks in Washington state have failed this year.
Sanjay Bhatt: 206-464-3103 or sbhatt@seattletimes.com
http://seattletimes.nwsource.com/html/businesstechnology/2012678195_sterling21.html?dbk
Donations Save Philanthropic Chicago Bank
May 19, 2010, 4:40 am
A troubled Chicago community bank with a philanthropic reputation has won uncommon Wall Street backing to save it from a government takeover, while similarly sized rivals flounder and fail, Reuters reports.
The privately owned ShoreBank, a community development lender on Chicago’s South Side near the home base of President Barack Obama and some of his top aides, is getting assistance from a consortium of Wall Street banks, including Goldman Sachs, Citigroup, JPMorgan and Bank of America, sources have said.
Spokesmen for Citigroup and General Electric each confirmed $20 million investments on Tuesday, and JP Morgan previously said it was ready to inject $15 million. Another source said Goldman injected $20 million.
ShoreBank, which has $2.3 billion in assets, was reported to have exceeded the $125 million in rescue capital it needed to avoid a takeover by the Federal Deposit Insurance Corporation.
A ShoreBank spokesman declined to comment on specific investments, saying only that capital-raising efforts so far had been “encouraging.”
Small banks are failing at a rapid pace due to troubled real estate loan portfolios, but ShoreBank’s dedication to community development and environmental causes apparently secured its special status.
“I think this is a very unique circumstance. But ShoreBank is kind of a unique institution in that regard,” said Geoff Smith, senior vice president at the Woodstock Institute, which studies lending in poor communities.
“When you think of other banks, they don’t usually get bailed out in this manner,” he said.
Mr. Smith and others say ShoreBank’s philanthropic reputation — it traditionally provided loans for small residential renovation projects in impoverished areas — and its Washington ties may have saved it.
http://dealbook.blogs.nytimes.com/2010/05/19/donations-save-philanthropic-chicago-bank/
Private Equity Group Buys 3 Failed Banks
July 19, 2010, 6:26 am
North American Financial Holdings, run by the former chief of Bank of America’s investment banking unit, bought three failed U.S. lenders, as the number of banks taken over by the Federal Deposit Insurance Corp. this year hit 96, Bloomberg News reported.
North American has taken over two banks in Florida and one in South Carolina, the F.D.I.C. said Friday. The private firm acquired First National Bank of the South, based in Spartanburg, S.C., with $682 million in assets; Miami-based Metro Bank of Dade County, with assets of $442.3 million; and Turnberry Bank of Aventura, Fla., with assets of $263.9 million.
North American, headed by Gene Taylor and backed by other longtime Bank of America executives, has raised $900 million from investors to buy banking assets.
Bloomberg noted that the North American is only the second privately-backed firm this year to be granted permission by the F.D.I.C. to purchase failed banks. Through June, the F.D.I.C. had awarded only three of 86 failed banks to private investors, with all three taken over by privately-backed Premier American Bank.
Under F.D.I.C. rules, a bank acquired by private investors has to keep an extra cushion of capital to protect against losses in the first three years of ownership. This has deterred many private equity shops from buying more distressed lenders.
Along with the three banks purchased by North American, the F.D.I.C. also announced that it has seized three other lenders: Woodlands Bank, based in Bluffton, S.C., with $376.2 million in assets; Mainstreet Savings Bank of Hastings, Mich., with $97.4 million in assets; and Olde Cypress Community Bank of Clewiston, Fla., with assets of $168.7 million.
Bank of the Ozarks, based in Little Rock, Ark., agreed to assume the assets and deposits of Woodlands Bank, while CenterState Bank of Florida is assuming the assets and deposits of Olde Cypress Community Bank; and Commercial Bank, based in Alma, Mich., is acquiring the assets and deposits of Mainstreet Savings Bank, The Associated Press reported.
The failure of Woodlands Bank is estimated to cost the deposit insurance fund $115 million. Estimated costs for the others are: First National Bank of the South, $74.9 million; Mainstreet Savings Bank, $11.4 million; Metro Bank of Dade County, $67.6 million; Turnberry Bank, $34.4 million; and Olde Cypress Community Bank, $31.5 million.
With 96 closures nationwide so far this year, the pace of bank failures far outstrips that of 2009, which had been a brisk year for shutdowns. By this time last year, regulators had closed 57 banks. The rate has accelerated as banks’ losses mounted on loans made for commercial property and development.
The number of bank failures is expected to peak this year and be slightly higher than the 140 that failed in 2009.
http://dealbook.blogs.nytimes.com/2010/07/19/private-equity-group-buys-3-failed-banks/
Volcker Pushes for Reform, Regretting Past Silence
By LOUIS UCHITELLE
JUST before the Fourth of July weekend, Paul A. Volcker packed his fishing gear and set off for his annual outing to the Canadian wilds to cast for Atlantic salmon.
He left behind a group of legislators in Washington still trying to nail down a controversial attempt to overhaul the nation’s financial regulations in the wake of the country’s most serious economic crisis since the Great Depression.
A well-regarded lion of the regulatory world, Mr. Volcker had endorsed the legislation before he went fishing, but unenthusiastically. If he were a teacher, and not a senior White House adviser and the towering former chairman of the Federal Reserve, he says, he would have given the new rules just an ordinary B — not even a B-plus.
“There is a certain circularity in all this business,” he concedes. “You have a crisis, followed by some kind of reform, for better or worse, and things go well for a while, and then you have another crisis.”
As the financial overhaul took final shape recently, he worked the phone from his Manhattan office and made periodic visits to Washington, trying to persuade members of Congress to make the legislation more far-reaching. “Constructive advice,” he calls it, emphasizing that he never engaged in lobbying.
For all of what he describes as the overhaul’s strengths — particularly the limits placed on banks’ trading activities — he still feels that the legislation doesn’t go far enough in curbing potentially problematic bank activities like investing in hedge funds.
Like few other policy giants of his generation, Mr. Volcker has been a pivotal figure in the regulatory universe for decades, and as he looks back at his long, storied career he confesses to some regrets, in particular for failing to speak out more forcefully about the dangers of a seismic wave of financial deregulation that began in the 1970s and reached full force in the late 1990s.
Despite his recent efforts to ensure that the financial legislation might correct what he regards as some of the mistakes of the deregulatory years, he’s concerned that it still gives banks too much wiggle room to repeat the behavior that threw the nation into crisis in the first place.
Some analysts share Mr. Volcker’s worries that the proposed changes may ultimately not be enough.
“It could be we will look back in 10 years and say, ‘Wow, Volcker really changed the tone of the debate and the outcome,’ ” says Simon Johnson, an economist at the Massachusetts Institute of Technology and a historian of financial crises and regulation. “But I kind of worry that is not going to happen.”
Hear, hear, says Mr. Volcker.
“People are nervous about the long-term outlook, and they should be,” he says.
AMONG the tools that Mr. Volcker has been able to deploy when regulatory debates heat up is the public support he enjoys in financial and political circles.
He earned that esteem over many years, and is famously credited for making tough-minded choices to tame runaway inflation as Fed chairman from 1979 to 1987, when he served under Presidents Jimmy Carter and Ronald Reagan.
At the age of 82, Mr. Volcker is from a generation of Wall Street personalities who accepted strict financial regulation as a fact of life through much of their careers. In his recent push for more stringent financial regulations than he believed Congress — and the Obama administration, for that matter — were inclined to approve, he lined up public support for a tougher crackdown from other well-known financiers who are roughly his age, including George Soros, Nicholas F. Brady, William H. Donaldson and John C. Bogle.
His most visible contribution to the current regulatory overhaul effort is what has come to be known as the Volcker rule, which in its initial form would have banned commercial banks from engaging in what Wall Street calls proprietary trading — that is, risking their own funds to speculate on potentially volatile products like mortgage-backed securities and credit-default swaps.
Such bets added considerable tinder to the financial conflagration that erupted in 2008. Many went horribly awry, and the federal government used taxpayer money to bail out banks, Wall Street firms and even a major insurer.
“I did not realize that the speculative trading by commercial banks had gotten as far out of hand as it had,” says Mr. Volcker, explaining why he first proposed the rule 18 months ago.
Congressional handicappers and Wall Street originally gave the Volcker rule a slim chance of becoming part of the overhaul bill — until, in fact, it got solidly on track to do just that.
Mr. Volcker thinks that Congress has watered down his trading rule — more on that later — but rather than roar in protest, he has resigned himself to the present shape of the Volcker rule as well as the overall legislation.
“The success of this approach is going to be heavily dependent on how aggressively and intelligently it is implemented,” he says, emphasizing that a new, 10-member regulatory council authorized by the bill will have to be vigilant and tough to prevent the nation’s giant banks and investment houses from pulling America into yet another devastating credit crisis. “It is not just a question of defining what needs to be done, but carrying it out in practice, day by day, bank by bank.”
The 2,400-page financial overhaul legislation, already passed by the House, is coming up for a vote in the Senate this week.
The Obama administration says it is now satisfied with the broader legislation, and in particular with the Volcker rule in its amended form.
“The Volcker rule was designed to make sure that banks could not engage in proprietary trading or create risks to the system through their investments in hedge funds or private equity,” says Neal S. Wolin, the deputy Treasury secretary. “We accomplished that.”
Some members of Congress who have backed the bill still say that it is not as restrictive as they would like, but that a more sweeping bill — one that also hewed to Mr. Volcker’s original conception — wouldn’t make it through the Senate, where the vote is expected to be close.
Representative Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, subscribes to that view. He says that there are stronger measures he would have preferred to see in the bill, including the original version of the Volcker rule, but that political reality dictated otherwise.
“I would give the present bill an A-minus,” Mr. Frank says, “when you consider that six months ago people were saying the Volcker rule had no chance.”
Mr. Frank is quick to point out that Mr. Volcker signed off on the compromises that got the Volcker rule into the bill. Mr. Volcker doesn’t dispute that.
“The thing went from what is best to what could be passed,” he says.
THE financial bill has been routinely described in the news media and on Capitol Hill as the most far-reaching regulatory overhaul since the Great Depression, which in some aspects it may be. But it certainly falls short of re-establishing some of the strict boundaries that the earlier laws put in place.
Those laws, most notably the Glass-Steagall Act, forbade commercial banks (what are now, for example, Citigroup, JPMorgan Chase and Bank of America) and investment banks (like Goldman Sachs and Morgan Stanley) from mingling plain-vanilla products like savings accounts, mortgages and business loans with the more high-octane, high-risk endeavors of trading.
Such rules managed to keep the banks and the Wall Street investment houses — and the broader economy that depended on them — out of a 2008-style crisis for several decades. But the gradual unwinding of those regulations began in the 1970s as Mr. Volcker rose to prominence, first as president of the Federal Reserve Bank of New York in 1975, and then as Fed chairman.
Mr. Volcker says that most of the deregulation came after he left the Fed. His reluctance to deregulate contributed in part to his departure under pressure from the Reagan administration. His replacement, Alan Greenspan, openly campaigned to weaken and finally repeal Glass-Steagall, and President Bill Clinton signed the repeal into law in 1999.
Although Mr. Volcker opposed the repeal, he didn’t go public with his concerns. “It is very difficult to take restrictive action when the economy and the financial markets seemed to be doing so well,” he says of his silence at the time. “But eventually things blew up.”
He also says he failed to anticipate just how wild things would become, post-Glass-Steagall: “Those were the days before credit-default swaps, derivatives, securitization. All of that changed the landscape, and now some adjustment must be made.”
There were other, earlier silences. Starting in the 1970s, ceilings came off the interest rates banks could place on most deposits and loans. A rising inflation rate made the ceilings impractical, and competition from unregulated money market funds was siphoning big chunks of deposits from the banks.
“The lifting of interest-rate ceilings was inevitable,” he says. “I was for doing it more gradually, but it got such a momentum that we moved the limits more abruptly than I wanted to.”
In the wake of those changes, banks were suddenly free to charge more for risky loans, and that encouraged risky lending. The subprime mortgage market grew out of this dynamic, as did the panoply of complex, mortgage-backed securities, credit-default swaps and heart-stopping leverage that finally produced the 2008 crisis.
In retrospect, Mr. Volcker regrets not challenging the widely held assumptions that underpinned much of this. “You had an intellectual conviction that you did not need much regulation — that the market could take care of itself,” he says. “I’m happy that illusion has been shattered.”
THE Volcker rule, in its initial, undiluted form, was an attempt to resurrect the spirit of Glass-Steagall.
The administration initially did not want to separate banks and investment houses, and wanted federal regulation and protections in place for both the Banks of America and the Goldman Sachses of the world. Mr. Volcker disagreed. Let Goldman Sachs and others trade to their hearts’ content, he argued in Congressional testimony last fall, and if they fail they can lose their own money, not get a dime in bailouts from taxpayers, and then be dismantled by the government in an orderly fashion.
Old-fashioned commercial banks that made loans to individuals and businesses were much more essential to the financial system, he argued, and deserved broader federal support than pure Wall Street trading shops.
But in exchange for that support, Mr. Volcker said, commercial banks had to agree to a partial resurrection of Glass-Steagall that corralled their trading activities. His hope is that the trading restrictions will make the nation’s banks embrace the business of commercial and consumer lending more fully and move away from speculative trading.
To encourage that shift, Senator Carl Levin, Democrat of Michigan, and Senator Jeff Merkley, Democrat of Oregon, co-sponsored an amendment to the financial bill that would have incorporated the Volcker rule with all of its original restrictions. Mr. Volcker even had a hand in writing the amendment, so much so that Senator Merkley suggested, only half-jokingly, that it should be called the Merkley-Levin-Volcker amendment.
The White House, after resisting, signed on to the proposal, and so did Congress after much internal wrangling — but the legislation now contains what Mr. Volcker considers an annoying and potentially dangerous loophole.
Instead of forbidding banks to make investments in hedge funds and private equity funds, the amendment allows them to invest up to 3 percent of their capital in such funds, so long as the fund is “walled off” from the bank in a separate subsidiary.
Banks won’t be allowed to leverage their investments by lending to a hedge fund; such a loan, if sizable enough, could endanger the bank if the hedge fund should fail. In addition, if regulators discover that a bank is overexposed to a given fund, they are required to intervene and, in some cases, may even be able to shut down the fund or restrict its activities, in order to preserve a bank’s well-being.
But the lending restriction is not as clear-cut as it should be, cautions Senator Merkley.
“We have to get some clarification on that,” he says.
Nor is it clear that a bank wouldn’t try to come to the aid of a hedge fund or a private equity firm in danger of failing if that failure would also cause financial or reputational problems for the bank.
For all of that, Henry Kaufman, a Wall Street economist and a contemporary of Mr. Volcker, wonders how effectively regulators will enforce any of the bill’s numerous mandates. “The legislation is a Rube Goldberg contraption,” he says, “and there are very long timelines before the Volcker rule is fully implemented.”
Whatever warts exist in the Volcker rule, its author says that other positive elements of the larger bill are still worthy and important.
“Don’t take the Volcker rule out of perspective,” he says. “It is one aspect of a broad reform, and it became a big issue because the administration initially disagreed.”
MR. VOLCKER has had a lukewarm relationship with the Obama White House, where the approach to the economy and financial regulation has been dominated by Timothy F. Geithner, the Treasury secretary, and Lawrence H. Summers, director of the National Economic Council.
Both men were at the center of the deregulatory whirlwind that swept across Wall Street and Washington over the last decade or so, and analysts have considered them to be friendlier to Wall Street and less inclined to pursue tougher regulations than Mr. Volcker would be.
Mr. Volcker supported Mr. Obama in the 2008 presidential election, and the new president named him to lead his Economic Recovery Advisory Board, a group of distinguished outsiders with little real impact on White House policy — until Mr. Volcker publicly proposed the ban on proprietary trading by commercial banks.
After the proposal gained support outside Washington, the president embraced it and dubbed it the Volcker rule. That gave Mr. Volcker more access to the White House and the Treasury on regulatory policy, but people who work with him say that the White House doesn’t regularly seek his input on other issues.
However complicated his relationship with Washington, Mr. Volcker says his personal life has taken a turn for the better. He had been a widower since 1998, until six months ago when he married Anke Dening, his longtime administrator, executive secretary, adviser and constant companion. Ms. Dening, who is German-born and speaks several languages, travels regularly with her husband and often serves as his interpreter.
When it comes to interpreting the financial legislation, Mr. Volcker says he remains less than impressed. “We have to have a regulatory system that reflects today’s problems and tomorrow’s potential problems,” he says. “This bill attempts to do that. Does it do it perfectly? Obviously it does not go as far as I felt it should go.”
http://www.nytimes.com/2010/07/11/business/11volcker.html?src=un&feedurl=http://json8.nytimes.com/pages/business/index.jsonp&pagewanted=print
Rules May Hit Every Corner of JPMorgan
By ERIC DASH and ANDREW MARTIN
June 25, 2010
The J. P. Morgan & Company bank building in Manhattan in 1915.
Not since the Great Depression, when the mighty House of Morgan was cleaved in two, have Washington lawmakers rewritten the rules for Wall Street as extensively as they did on Friday.
And perhaps no institution better illustrates what would — and would not — change under this era’s regulatory overhaul than the figurative heir to that great banking dynasty, JPMorgan Chase & Company.
Unlike in the 1930s, the modern House of Morgan will remain standing. So will its cousin, Morgan Stanley, which broke off in 1935 after Congress placed a wall between humdrum commercial banking and riskier investment banking.
The proposed Dodd-Frank Act, worked out early on Friday morning, stops far short of its Depression-era forerunner. But in ways subtle and profound, it has the potential to change the way big banks like JPMorgan do business for years to come.
“It’s a tough bill, and shows the pendulum is swinging toward tighter regulation,” said Frederick Cannon, a banking analyst at Keefe, Bruyette & Woods in New York. “This is going to pressure bank earnings well into the future.”
Of course, all the big banks would feel some effect. Goldman Sachs, for example, would have to rein in its high-rolling traders. Wells Fargo would be subjected to stricter rules on consumer lending. And many large banks would feel the pinch of lower transaction fees on debit cards.
But JPMorgan Chase — forged by a merger of J. P. Morgan & Company with Chase Manhattan in 2001, after the wall came down between commercial and investment banking — and its chief executive, Jamie Dimon, will have to contend with all that and more.
It is the largest player in derivatives, the financial vehicles that have been widely faulted for adding excessive risk to the system. It runs the largest hedge fund in the banking industry, the $21 billon Highbridge Capital unit, and makes billions of dollars’ worth of trades in its own account. And it has a network of retail branches in nearly every corner of the country.
“Given its franchise diversity, JPM is impacted by virtually all of the coming regulatory reforms,” Keith Horowitz, an analyst at Citigroup who follows big banks like JPMorgan, wrote in a research note last week.
One part of the bill would push much of the buying and selling of derivatives onto clearinghouses, forcing banks to put up collateral against each trade. For JPMorgan, that could tie up billions of dollars that would otherwise have gone toward lending or the bank’s own trading.
A smaller portion of trading in derivatives would take place over exchanges, making prices visible to the public and pushing down prices — and profit margins.
Banks would be required to hold more capital in reserve to cover potential trading losses. In some cases they might also be prohibited from using federally insured bank deposits for risky trading. That would hit JPMorgan hard because of its heavy reliance on customer deposits to finance other businesses.
Both changes would take even more money out of play and lower profits.
JPMorgan has already begun dismantling its so-called proprietary trading operation, to comply with new restrictions on banks making speculative bets using their own capital. Analysts say that will force the bank to give up about 2 percent of its revenue.
Under the proposed bill, the bank would also have to be more careful about separating its money from the money it manages for clients in its private equity and hedge fund units, because of a rule to limit the amount banks can invest in such funds. Still, JPMorgan would be able to hang on to Highbridge and several other investment funds because of a special exemption.
It is more difficult to judge how the new rules could affect the Chase side of JPMorgan. A newly created consumer financial protection agency would have broad new authority over financial products like mortgages and credit cards, but it may be years before the agency issues new rules governing such products.
Recent legislation imposing new restrictions on credit cards and overdraft fees has already taken a bite out of bank revenue. The new legislation would add to that drain on revenue by restricting the fees banks can charge for debit card transactions.
In his research note, Mr. Horowitz estimated that the legislation would ultimately reduce the bank’s earnings by as much as 14 percent. That estimate could be cut in half or more because several of the most severe measures in the bill have since been dropped or diluted.
Of course, these assessments do not take into account all the steps that JPMorgan and other banks could take to mitigate the effect of the legislation, like passing on some costs to customers or seeking exemptions from regulatory agencies.
Indeed, JPMorgan could feel a greater effect from deliberations taking place at the United States Federal Reserve and among central bankers in Switzerland. Both sets of regulators are considering a requirement that banks hold additional capital as a cushion against losses. They also may alter the businesses the banks can invest in, or the regions where they can expand.
Indeed, Mr. Dimon has delayed raising the bank’s dividend until international rules are set on capital requirements.
Investors seemed to signal relief that the legislation did not turn out to be as tough as it might have been, sending the share prices of most major banks up about 3 percent on Friday.
Charles Geisst, a professor of finance at Manhattan College and a Wall Street historian, said the bill, which is expected to be signed by President Obama before the Fourth of July holiday, was the most comprehensive financial regulation since the Great Depression because it touched on so many different areas. But he said its effects would not be as fundamental as the impact of changes made in the wake of the Depression.
“It doesn’t go anywhere near,” he said. “It doesn’t change institutional behavior like that did. This is business as usual, with some moderation.”
http://www.nytimes.com/2010/06/26/business/26morgan.html?hp=&pagewanted=print
House and Senate in Deal on Financial Overhaul
By EDWARD WYATT
June 25, 2010
WASHINGTON — Nearly two years after the American financial system teetered on the verge of collapse, Congressional negotiators reached agreement early Friday morning to reconcile competing versions of the biggest overhaul of financial regulations since the Great Depression.
A 20-hour marathon by members of a House-Senate conference committee to complete work on toughened financial regulations culminated at 5:39 a.m. Friday in agreements on the two most contentious parts of the financial regulatory overhaul and a host of other provisions. Along party lines, the House conferees voted 20 to 11 to approve the bill; the Senate conferees voted 7 to 5 to approve.
Members of the conference committee approved proposals to restrict trading by banks for their own benefit and requiring banks and their parent companies to segregate much of their derivatives activities into a separately capitalized subsidiary.
The agreements were reached after hours of negotiations, most of it behind closed doors and outside the public forum of the conference committee discussions. The approvals cleared the way for both houses of Congress to vote on the full financial regulatory bill next week.
The bill has been the subject of furious and expensive lobbying efforts by businesses and financial trade groups in recent months. While those efforts produced some specific exceptions to new regulations, by and large the bill’s financial regulations not only remained strong but in some cases gained strength as public outrage grew at the excesses that fueled the financial meltdown of 2008.
Representative Barney Frank of Massachusetts, who shepherded the bill through the House, said the bill benefited from the increased attention that turned to the subject of financial regulation after Congress completed the health care bill.
“Last year when we were debating it in the house, health care was getting all of the attention and it was not as good a bill as I would have liked to bring out because we were not getting public attention,” Mr. Frank said. “What happened was with the passage of health care, the American public started to focus on this.”
Senator Christopher J. Dodd of Connecticut, the Democratic chairman of the Senate Banking Committee, said legislators were still uncertain how the bill will work until it is in place. “But we believe we’ve done something that has been needed for a long time,” he said.
Treasury Secretary Timothy F. Geithner also praised the conference committee for its work. “All Americans have a stake in this bill,” he said. “It will offer families the protections they deserve, help safeguard their financial security and give the businesses of America access to the credit they need to expand and innovate.”
Legislators had aimed to finish their reconciliation work before President Obama travels to a G-20 meeting this weekend in Ontario, and to approve and deliver a final bill for the president’s signature by Independence Day.
At two minutes before midnight Thursday, some 14 1/2 hours after they began work Thursday morning, members of the House-Senate conference committee approved a final revision of the measure known popularly as the Volcker Rule.
The rule, named for Paul A. Volcker, the former Federal Reserve chairman who proposed the measure this year, restricts the ability of banks whose deposits are federally insured from trading for their own benefit. That measure had been fiercely opposed by banks and large Wall Street firms, who viewed it as a major incursion on some of their most profitable activities.
“One goal of these limits is to reduce participation in high-risk activity that can cause significant losses at institutions which are central to the financial system,” Mr. Dodd said. “A second goal is to end the use of low-cost funds — to which insured depositories have access — to subsidize high-risk activity.”
Banks managed to wrangle limited exceptions to the rule that would allow them to continue some investing and trading activity. The agreement limits banks’ investments in hedge funds or private equity funds to no more than 3 percent of a fund’s capital; those investments could also total no more than 3 percent of a bank’s tangible equity.
Many Wall Street firms, including Goldman Sachs, Morgan Stanley and others, have long engaged in significant amounts of trading for their own accounts, a practice that commercial banks and their parent companies were traditionally less inclined to adopt.
The Wall Street institutions might not have been subject to the new rules except for their decisions during the 2008 financial crisis to convert themselves into bank holding companies in order to gain access to the emergency lending authority of the Federal Reserve.
Most of the first 12 hours of Thursday’s meeting by the committee was spent in recess, as senators and House members huddled with staff members, consulted with Treasury Department officials, were buttonholed by lobbyists, traveled to their respective chambers for votes and waited for proposals and counter-offers to be printed and collated.
After seven hours of additional debate, the conferees approved revisions to the derivatives legislation that would require banks and their parent companies to segregate much of the derivatives trading businesses.
The final restrictions were not as tight, however, as originally approved by Senator Blanche Lincoln, the Arkansas Democrat who is chairwoman of the Senate Agriculture Committee, which oversees the Commodity Futures Trading Commission, the chief regulator of derivatives.
Mrs. Lincoln’s proposal that banks be banned from all derivatives activity drew opposition from both sides of the aisle almost since it was introduced this spring. But the provision remained in the Senate bill in part because Mrs. Lincoln was facing a tough primary battle in her home state and portrayed herself as a tough critic of Wall Street.
Mrs. Lincoln won that primary in a runoff, a development that again made legislators somewhat reluctant to oppose her derivatives proposals with the general election looming. Only in recent days did a group of centrist House Democrats threaten to withhold their approval of the entire package unless Mrs. Lincoln loosened her derivatives restrictions.
The group, known as the New Democrat Coalition, includes several House members from New York State, who voiced opposition to provisions that they felt would threaten business and jobs on Wall Street.
Outside of the conference committee chambers, discussions took place through much of the afternoon between Mrs. Lincoln’s staff and groups that have been seeking to produce a compromise derivatives proposal, including other Senate negotiators, Treasury and White House officials, and a group of House members led by Representative Melissa Bean, an Illinois Democrat.
Representatives from the New Democrats met on Thursday with White House officials, according to a House aide, and later presented a proposal to Mrs. Lincoln. At 9:10 p.m., Mrs. Lincoln returned to the conference committee room after a long absence and huddled with Mr. Dodd, who had voiced fears that the derivatives measure would make it more difficult to retain the 60 votes needed to pass the revised bill through the Senate.
The conference committee also reached substantial agreement on a provision that would exempt auto dealers from the authority of the Consumer Financial Protection Bureau, a major victory for one of the most active lobbying groups on the financial bill in recent weeks and an equally disappointing defeat for the Obama administration.
The White House and the Pentagon had both pushed aggressively for restrictions on companies that offered and promoted auto loans, which military officials said were the cause of numerous complaints of consumer fraud by members of the military and their families.
Republican members of the committee in recent days repeatedly offered amendments that were rejected on party line votes and raised issues that Democrats were little interested in entertaining. Republicans repeatedly faulted the majority for not including an overhaul of the mortgage firms Fannie Mae and Freddy Mac in the financial bill; they also raised objections to the bill’s provisions for unwinding failing financial firms, saying that the bill would not rule out future taxpayer-financed bailouts.
Earlier Thursday, Mr. Frank pushed numerous minor provisions of the 1,500-page financial bill toward agreement.
Among the provisions approved by representatives of both the House and the Senate was one that would give the Securities and Exchange Commission the authority to require stockbrokers to protect their clients’ interest when recommending investments, potentially subjecting brokers to the same fiduciary duty as financial advisers.
Members of the committee from both houses of Congress adopted a proposal that would require the S.E.C. to complete a study within six months of the financial bill’s enactment to evaluate the effectiveness of current rules governing those who give financial advice to or sell securities to consumers.
Under current law, financial advisers are required to act in the best interests of their clients, while brokers are held to a looser standard, under which they are required only to consider whether an investment is “suitable” given the time horizon, goals and appetite for risk of a client.
The compromise calls for the S.E.C. to take the results of the study into account when making any rule, but it also gives the commission the authority to impose a fiduciary standard on stock and insurance brokers. The commission may also require brokers to disclose that they are offering only proprietary products and to reveal how much they are being paid for particular products.
By the end of its work on Friday morning, the House and Senate negotiators had substantially completed work on all of the bill’s 15 titles. Minor work remained on technical amendments that would not substantially change the bill’s provisions.
The Congressional Budget Office estimated that the financial regulatory bill would cost roughly $20 billion over 10 years. The conference committee agreed to pay for the bill by imposing an assessment on large financial institutions; the assessments would be made according to a “risk matrix” that charges higher amounts to riskier institutions.
Mr. Frank said that the assessments — which Republicans called a tax — were an acceptable solution for “the collective errors of many in the financial institutions that caused this set of problems.”
http://www.nytimes.com/2010/06/26/us/politics/26regulate.html?hp=&pagewanted=print
Fed Not Likely to Sell Assets Soon
May 25, 2010, 6:16 am
The U.S. Federal Reserve does not expect to sell any of the billions of dollars worth of assets it bought to boost the economy in 2009 until it has started raising interest rates in a strong recovery, it said in its 2009 annual report released on Monday.
“The Federal Reserve currently does not anticipate that it will sell any of its securities holdings in the near term, at least until after policy tightening has gotten under way and the economy is clearly in a sustainable recovery,” the Fed said. The annual report recapped comments about asset sales the Fed has made in reports after meetings and in speeches by policymakers, Reuters said.
After the Fed cut interest rates to near zero in December 2008, it started buying mortgage-related debt to provide additional stimulus to the flagging economy. In so doing, the Fed more than doubled the size of credit it has made available to the economy to about $2.3 trillion from about $900 billion.
Most Fed officials agree they should return the Fed’s balance sheet to precrisis size and eventually sell the $1.4 trillion in mortgage-finance agency debt and mortgage-backed securities that the U.S. central bank bought, minutes from its April meeting released last week showed.
http://dealbook.blogs.nytimes.com/2010/05/25/fed-not-likely-to-sell-assets-soon/
Senate Backs One-Time Audit of Fed’s Bailout Role
May 11, 2010, 2:09 pm
The Senate on Tuesday voted unanimously to require a one-time audit of the Federal Reserve’s emergency actions during and after the 2008 financial crisis as part of broad legislation overhauling the nation’s financial regulatory system, The New York Times’s David M. Herszenhorn reports from Washington.
The amendment, proposed by Senator Bernard Sanders, independent of Vermont, above, would require the Government Accountability Office to scrutinize some $2 trillion in emergency lending that the Fed provided to the nation’s biggest banks. The vote was 96 to 0.
“At a time when the Federal Reserve has provided the largest taxpayer bailout in the history of the world, the largest financial institutions in this country, trillion-dollar institutions,” Mr. Sanders said in a floor speech, “the Sanders amendment makes it clear that the Fed can no longer operate in the kind of secrecy that it has operated in forever.”
He added, “For the first time the American people will know exactly who received over $2 trillion in zero or virtually zero-interest loans from the Fed, and they will know the exact terms of those financial arrangements.”
Mr. Sanders, a professed socialist, has long demanded greater transparency at the central bank, and his original plan could have subjected the Fed to continuing audits of some routine operations. But he agreed to scale back the proposal in the face of opposition by the White House, the Fed, the Treasury and some Senate colleagues.
The critics said that more aggressive audits would impede the Fed’s independence and potentially interfere with its ability to set monetary policy. Mr. Sanders and other proponents of fuller audits of the Fed rejected those assertions and said they were providing adequate safeguards to protect the central bank’s integrity.
While the Senate provision would require an audit of the Fed’s emergency operations beginning on Dec. 1, 2007, the House approved an even tougher audit requirement in its version of the financial regulatory legislation.
Senator David Vitter, Republican of Louisiana, put forward an amendment that would have mirrored the tougher House language, but it was rejected. The vote was 37 to 62.
Before the vote, Mr. Vitter appealed for support, saying the proposal by Mr. Sanders did not go far enough. “I urge all of my colleagues, Democrats and Republicans, to support both amendments to have full openness and accountability and transparency with all the protections that are included against politicizing individual Fed decisions,” he said.
The House bill, which was approved in December, included a proposal sponsored by one of the most conservative lawmakers, Representative Ron Paul, Republican of Texas, and one of the most liberal, Representative Alan Grayson, Democrat of Florida.
The Paul-Grayson proposal would allow audits by the Government Accountability Office of every item on the Fed’s balance sheet, including all credit facilities and all securities purchase programs, but would allow an exemption for unreleased transcripts and minutes of closed-door meetings. It also would establish a 180-day time lag before details of the Fed’s market actions could be released.
It also included specific language stating that it was not intended to interfere with monetary policy or to involve Congress in decisions regarding monetary policy.
Mr. Paul had said that the audits would serve as a counterbalance to a broad expansion of the Fed’s regulatory authority in the financial system and, like Mr. Sanders, he had long demanded greater transparency. But in recent days, Mr. Paul has reacted angrily to the compromise proposal accepted by Mr. Sanders.
“While it is better than no audit at all, it guts the spirit of a truly meaningful audit of the most crucial transactions of the Fed,” Mr. Paul wrote on his Web site. “In fact, rather than still calling the Sanders Amendment an audit, maybe it should instead be called more of a disclosure at this point.”
“The new language of the Sanders amendment requires a one-time disclosure from the Fed,” Mr. Paul continued. “Basically, their sins of the past would be revealed and Americans would know more about who got bailed out by the Fed and under what terms. This would be good, but it’s not nearly enough.”
http://dealbook.blogs.nytimes.com/2010/05/11/senate-backs-one-time-audit-of-feds-bailout-role/#more-224287
Bank Agrees to Forfeit $500 Million to US
By THE ASSOCIATED PRESS
Filed at 6:21 p.m. ET
May 10, 2010
WASHINGTON (AP) -- A bank formerly known as ABN Amro Bank N.V. agreed on Monday to pay the government $500 million for facilitating the movement of illegal funds through the U.S. financial system, the Justice Department announced.
The financial institution -- now named the Royal Bank of Scotland N.V. -- helped governments and banks of Iran, Libya, the Sudan and Cuba evade U.S. laws, according to papers filed in the case. Those governments were under U.S. economic sanctions for supporting international terrorism.
Court papers say ABN Amro engaged in a conspiracy to defraud the government, with some of its offices systematically circumventing economic sanctions by advising banks in the sanctioned countries how to evade filters at financial institutions in the United States.
The Justice Department says ABN Amro will be under a deferred prosecution agreement. The U.S. government will recommend dismissal of the charges against the bank in one year if the financial institution cooperates with U.S. investigators.
In 2005, ABN Amro paid penalties in the case to various regulatory bodies and to the board of governors of the Federal Reserve System.
http://www.nytimes.com/aponline/2010/05/10/us/politics/AP-US-Bank-Fraud.html?_r=2&ref=politics&pagewanted=print
The Federal Reserve by act of Congress has the ability to lend under section 13-3 of the Federal Reserve Act.
3. Discounts for Individuals, Partnerships, and Corporations
In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, by the affirmative vote of not less than five members, may authorize any Federal reserve bank, during such periods as the said board may determine, at rates established in accordance with the provisions of section 14, subdivision (d), of this Act, to discount for any individual, partnership, or corporation, notes, drafts, and bills of exchange when such notes, drafts, and bills of exchange are indorsed or otherwise secured to the satisfaction of the Federal Reserve bank: Provided, That before discounting any such note, draft, or bill of exchange for an individual, partnership, or corporation the Federal reserve bank shall obtain evidence that such individual, partnership, or corporation is unable to secure adequate credit accommodations from other banking institutions. All such discounts for individuals, partnerships, or corporations shall be subject to such limitations, restrictions, and regulations as the Board of Governors of the Federal Reserve System may prescribe.
[12 USC 343. As added by act of July 21, 1932 (47 Stat. 715); and amended by acts of Aug. 23, 1935 (49 Stat. 714) and Dec. 19, 1991 (105 Stat. 2386.]
http://www.federalreserve.gov/aboutthefed/section13.htm
Douglas J. Elliott, a former investment banker and now a fellow at the Brookings Institution, said the proposal appeared to “represent a major improvement to the status quo, but political compromises significantly diminish its effectiveness compared to an ideal set of reforms.”
Both parties seem to enjoy the cash pouring in from Wall Street. This isn't reform it's catering.
Reform would be re-enacting Glass Steagall. Apparently that senile old idiot from CT is clueless.
And Shelby is a joke as well. Where the hell is his bill?
Both of these idiots were in Congress when glass Steagall was repealed. Now all of a sudden they got clueless.
There was no banking crisis in this country since Glass Steagall was enacted until Congress started to unwind regulations that had stood in effect for decades.
March 15, 2010
An Appeal Across the Aisle on Financial Overhaul
By SEWELL CHAN
WASHINGTON — The 1,336-page bill to overhaul financial regulation that Senate Democrats put forward on Monday with the backing of the Obama administration calls for Washington to play a more active role in policing Wall Street.
The plan would create a nine-member council, led by the Treasury secretary, to watch for systemic risks, and direct the Federal Reserve to supervise the nation’s largest and most interconnected financial institutions, not just banks.
But the bill, which would amount to the most sweeping change in financial rules since the Depression, would preserve much of the existing regulatory architecture, which has been criticized for being too fragmented. And it would rely on a new mechanism for seizing and liquidating a huge financial company on the verge of failure, one that would diminish, but not eliminate, the likelihood of future bailouts.
The proposal, which was put forward by Christopher J. Dodd, the chairman of the Senate Banking Committee, included significant concessions to Republicans, compared with an initial draft Mr. Dodd released in November. It also contained provisions urged by President Obama to restrict banks’ ability to engage in certain forms of speculative trading.
“This proposal provides a strong foundation to build a safer financial system,” Mr. Obama said, adding, “As the bill moves forward, I will take every opportunity to work with Chairman Dodd and his colleagues to strengthen the bill, and will fight against efforts to weaken it.”
Senate Republicans were muted in their response, saying they would introduce amendments to press their case on areas of disagreement, including the powers of a new Consumer Financial Protection Bureau that would set up inside the Fed.
But whether the legislation could pass in an election year, with a rancorous debate on health care looming over the Capitol, remained uncertain. Assuming all Democrats and independents in the Senate voted for it, at least one Republican would have to back it as well to avoid a filibuster.
“The stakes are far too high, and the American people have suffered far too greatly, for us to fail in this effort,” Mr. Dodd said. “This legislation will not stop the next crisis from coming. No legislation can, of course. But by creating a 21st-century regulatory structure for our 21st-century economy, we can equip coming generations with the tools to deal with that crisis and to avoid the kind of suffering we have seen in this country.”
Richard C. Shelby of Alabama, the top Republican on the Banking Committee, warned against trying to rush the bill through committee next week, as Mr. Dodd has said he intends to do. “Given the magnitude, complexity and importance of this task, it is critical that we have sufficient time for a thorough review,” he said.
Any Senate bill would have to be reconciled with the House’s version. Representative Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said, “There are some differences between the House-passed bill and Senator Dodd’s version, but they are more alike than they are different.”
A nine-member Financial Stability Oversight Council would subject to Fed oversight any nonbank financial companies that “pose risks to the financial stability of the United States in the event of their material financial distress or failure.”
The council would also direct regulators to raise capital requirements. It would rely on the work of a new Office of Financial Research, within the Treasury, to serve as an early warning system for systemic risk.
Just as the central bank’s creation in 1913 was partly a response to the Panic of 1907, the bill specifies that the Fed “shall identify, measure, monitor and mitigate risks to the financial stability of the United States.”
The Fed would have two vice chairmen, one of them dedicated to supervision. The president of the Federal Reserve Bank of New York, who is now chosen by the bank’s board and serves as the central bank’s eyes and ears on Wall Street, would be appointed by the president of the United States for a five-year term. Banks regulated by the Fed could no longer have their executives sit on the boards of the Fed’s 12 district banks or help select the district banks’ presidents.
The Fed would continue to supervise bank holding companies with assets of at least $50 billion; there are about 35, including Bank of America, JPMorgan Chase and Citigroup.
Smaller bank holding companies would be supervised by the Office of the Comptroller of the Currency, which oversees national banks. The Fed’s state-chartered member banks would be supervised by the Federal Deposit Insurance Corporation.
Mr. Dodd had initially proposed stripping the Fed of all bank supervision duties. Though he has backed away from that stance, Richard Spillenkothen, former director of banking supervision and regulation at the Fed, said the removal of more than 5,800 smaller and midsize banks from the Fed’s purview would be a mistake.
“A central bank benefits from knowing what sort of credit issues and pressures are building up in banks of all sizes,” he said.
The new consumer bureau would write rules banning abusive and unfair terms for mortgages and other financial products. Its director, appointed by the president for a five-year term, would set its budget, and the Fed would pay for it.
In a concession to Republicans, a consumer rule could be set aside if the council decided, by a two-thirds vote, that it put the banking system’s safety and stability at risk.
The bill would also create a $50 billion fund, paid for by the largest financial companies, for the orderly liquidation of a company that is collapsing and whose failure would have “serious adverse effects on financial stability in the United States.”
The provision for orderly liquidation would be invoked only as a last resort, if a company’s financial ties were too complex to be resolved through normal bankruptcy proceedings.
Such a liquidation would require approval of the Treasury secretary and a two-thirds vote of the boards of both the Fed and the F.D.I.C.
Cyrus Sanati contributed reporting from New York, and Edward Wyatt from Los Angeles.
http://www.nytimes.com/2010/03/16/business/16regulate.html?dbk=&pagewanted=print
Fed's No. 2 to depart
WASHINGTON (Reuters) - Federal Reserve Vice Chairman Donald Kohn, a 40-year veteran of the U.S. central bank, will step down in late June, giving President Barack Obama more scope to reshape the institution.
In a letter to Obama released on Monday, Kohn, who has served as the Fed's No. 2 since June 2006, said he will depart when his four-year term as vice chairman expires on June 23.
Kohn's departure gives Obama the opportunity to fill a top slot at the U.S. central bank in addition to two long-vacant governor positions, at a time when the central bank faces two big challenges: communicating how it will exit from its extraordinary easy money policies and defending its role in overseeing banks.
"Communication-wise, he's second to none," said Zach Pandl, an economist at Nomura Securities in New York. "In a time when the Fed has some very difficult communications tasks ahead of it, having Kohn off the committee is going to be a tangible loss."
Obama's selections could influence how quickly the Fed raises interest rates and how aggressively it takes on its post-crisis regulatory responsibilities.
Kohn's announcement comes just over a month after the U.S. Senate approved Ben Bernanke to a second term as Fed chairman after a series of contentious hearings. His decision to step down was "his own," an administration official said.
The White House said Obama would move quickly to name a vice chairman to ensure a successor can win the needed Senate backing by the end of Kohn's term.
"He'll seek to nominate somebody quickly and hopes that they can be quickly confirmed," White House spokesman Robert Gibbs said.
Kohn, 67, began his career at the Kansas City Federal Reserve Bank in 1970 and rose through the ranks to become one of the more influential vice chairmen in the central bank's history. Before becoming a member of the Fed's board in 2002, he served as a top adviser to then-Fed chief Alan Greenspan.
Many observers had expected him to step down when his vice chairmanship expired.
Among possible replacements, Obama could turn to Christina Romer, the head of the White House Council of Economic Advisers.
He might also consider elevating Fed Governor Daniel Tarullo, which would still leave a board seat empty and to be filled. An Obama appointee, the former Clinton administration official is a lawyer and regulatory expert who has been playing a big role in revamping the Fed's approach to bank regulation.
Tarullo, however, is said to prefer to focus on supervision responsibilities at the Fed.
San Francisco Federal Reserve Bank President Janet Yellen, a former Fed board member and chair of the White House Council of Economic Advisers, is also seen as a leading candidate.
"What is important here is who the new appointees are, what their specialization is, how exceptional they are," said former Fed Governor Laurence Meyer. "We are very short now on, specifically, people who come from a background of macroeconomics and forecasting."
OBAMA'S STAMP
Kohn's departure will leave three seats vacant on the normally seven-person Fed board, giving Obama broad latitude to shape the central bank at a time lawmakers are considering lessening its power after the most damaging financial crisis in generations.
When all the vacancies are eventually filled, Obama will have named the majority of the board at an unusually early stage in his presidency. While the chairman and vice chairman serve four-year terms, they also serve concurrent 14-year terms as members of the Fed's Board of Governors.
Kohn's board term was not scheduled to expire until 2016.
Whoever Obama nominates could face political headwinds in the confirmation process. Many lawmakers, who have one eye on mid-term elections in November, have criticized the Fed for failing to prevent a housing bubble from building and then for bailing out Wall Street firms when crisis struck.
That ire had threatened to scuttle Bernanke's bid for a second term as Fed chief. He ended up winning confirmation in January by the slimmest margin in the nearly 32 years the U.S. Senate has been voting on the position.
"This is an extremely contentious environment, so I think anybody he's going to nominate certainly one would expect to skew toward the more dovish side, more emphasis on the employment situation," said former Fed economist Julia Coronado, now with BNP Paribas.
(With additional reporting by Patricia Zengerle and Emily Flitter and Kristina Cooke in New York; Editing by Andrea Ricci, Leslie Adler and Diane Craft)
http://www.reuters.com/article/idUSTRE6202WN20100302?feedType=nl&feedName=usbeforethebell
At F.D.I.C. , Bracing for a Wave of Failures
By ERIC DASH
February 24, 2010
The Federal Deposit Insurance Corporation is bracing for a new wave of bank failures that could cost the agency many billions of dollars and further strain its finances.
With bank failures running at their highest level in nearly two decades, the F.D.I.C. is racing to keep up with rising losses to its insurance fund, which safeguards savers’ deposits. On Tuesday, the agency announced that it had placed 702 lenders on its list of “problem” banks, the highest number since 1993.
Not all of those banks are destined to founder, and F.D.I.C. officials said Tuesday that they expected failures to peak this year. But they also warned that the fund might have to cover $20 billion in additional losses by 2013 — a bill that could be even greater if the economy worsens.
F.D.I.C. officials say the fund has ample resources to cope with its projected losses.
“We think that we have the cash we need,” Sheila C. Bair, the F.D.I.C. chairwoman, said in an interview on Tuesday. She said it was unlikely the F.D.I.C. would need to tap its emergency credit line with the Treasury Department, although she did not rule out such an action.
Despite resurgent profits and pay at the giants of American finance, many of the nation’s 8,000 banks remain under stress, according to a quarterly report the F.D.I.C. released Tuesday.
About 140 banks failed in 2009, and Ms. Bair said she expected even more than that to go under this year. The F.D.I.C. does not disclose which banks it considers at risk.
Bad credit card, mortgage and corporate loans escalated in the final months of 2009 — the 12th consecutive quarterly increase — albeit at a slower pace. During the fourth quarter, the banking industry as a whole turned a mere $914 million profit. "We’ve gone from the eye of the hurricane to cleaning up after the hurricane,” said Frederick Cannon, a banking analyst at Keefe, Bruyette & Woods in New York.
Still, with so many banks failing, the federal deposit insurance fund has been severely depleted. At the end of 2009, it carried a negative balance of $20.9 billion.
The insurance fund is in better shape than such numbers might suggest, however. Officials estimate that bank failures would drain about $100 billion from the fund from 2009 through 2013. But of that amount, a total of roughly $80 billion in losses were recognized last year or projected for 2010. By that math, the agency is expecting an additional $20 billion of losses over the next three years.
After slipping into the red last fall, the F.D.I.C. moved swiftly to refill its coffers. The agency imposed a special assessment on banks that gave it an immediate $5.6 billion cash infusion. That assessment was in addition to the ordinary payments that banks make to the F.D.I.C. fund.
In September, the F.D.I.C. ordered banks to prepay quarterly assessments that would have otherwise been due through 2012. That provided an additional $46 billion to restore the fund to normal. For accounting purposes, the agency will add that money to the fund in small doses over the next 13 quarters, which explains the current negative balance.
Together, these moves buy time for the agency to determine its next steps in the event its losses worsen. In such a case, banks might be called on to chip in more money, either through new special assessments, prepaid fees or premium increases. F.D.I.C. officials said no such plans were in the works.
“The good news is that the industry will power through this,” said Bert Ely, a longtime banking industry consultant in Washington. The fund has “taken a lot of hits along the way, but I still don’t expect the taxpayer to ride to the rescue.”
To protect the fund, the F.D.I.C. also has found creative ways to bring in more money. On Tuesday, Ms. Bair said that the agency would soon issue bonds backed by the assets of failed banks and guaranteed by the government. The program aims to attract nontraditional buyers of bank assets, like insurance companies, pension funds and mutual funds.
“We would like to test the market to see if we can get better pricing,” Ms. Bair said. “We may or may not succeed, but we thought we should try it.”
The F.D.I.C. has also tried to entice private equity firms and other investment groups to bid for insolvent banks, with mixed success. The agency is betting that more potential buyers will ultimately result in higher prices.
http://www.nytimes.com/2010/02/24/business/24fdic.html?ref=business&pagewanted=print
At F.D.I.C. , Bracing for a Wave of Failures
By ERIC DASH
February 24, 2010
The Federal Deposit Insurance Corporation is bracing for a new wave of bank failures that could cost the agency many billions of dollars and further strain its finances.
With bank failures running at their highest level in nearly two decades, the F.D.I.C. is racing to keep up with rising losses to its insurance fund, which safeguards savers’ deposits. On Tuesday, the agency announced that it had placed 702 lenders on its list of “problem” banks, the highest number since 1993.
Not all of those banks are destined to founder, and F.D.I.C. officials said Tuesday that they expected failures to peak this year. But they also warned that the fund might have to cover $20 billion in additional losses by 2013 — a bill that could be even greater if the economy worsens.
F.D.I.C. officials say the fund has ample resources to cope with its projected losses.
“We think that we have the cash we need,” Sheila C. Bair, the F.D.I.C. chairwoman, said in an interview on Tuesday. She said it was unlikely the F.D.I.C. would need to tap its emergency credit line with the Treasury Department, although she did not rule out such an action.
Despite resurgent profits and pay at the giants of American finance, many of the nation’s 8,000 banks remain under stress, according to a quarterly report the F.D.I.C. released Tuesday.
About 140 banks failed in 2009, and Ms. Bair said she expected even more than that to go under this year. The F.D.I.C. does not disclose which banks it considers at risk.
Bad credit card, mortgage and corporate loans escalated in the final months of 2009 — the 12th consecutive quarterly increase — albeit at a slower pace. During the fourth quarter, the banking industry as a whole turned a mere $914 million profit. "We’ve gone from the eye of the hurricane to cleaning up after the hurricane,” said Frederick Cannon, a banking analyst at Keefe, Bruyette & Woods in New York.
Still, with so many banks failing, the federal deposit insurance fund has been severely depleted. At the end of 2009, it carried a negative balance of $20.9 billion.
The insurance fund is in better shape than such numbers might suggest, however. Officials estimate that bank failures would drain about $100 billion from the fund from 2009 through 2013. But of that amount, a total of roughly $80 billion in losses were recognized last year or projected for 2010. By that math, the agency is expecting an additional $20 billion of losses over the next three years.
After slipping into the red last fall, the F.D.I.C. moved swiftly to refill its coffers. The agency imposed a special assessment on banks that gave it an immediate $5.6 billion cash infusion. That assessment was in addition to the ordinary payments that banks make to the F.D.I.C. fund.
In September, the F.D.I.C. ordered banks to prepay quarterly assessments that would have otherwise been due through 2012. That provided an additional $46 billion to restore the fund to normal. For accounting purposes, the agency will add that money to the fund in small doses over the next 13 quarters, which explains the current negative balance.
Together, these moves buy time for the agency to determine its next steps in the event its losses worsen. In such a case, banks might be called on to chip in more money, either through new special assessments, prepaid fees or premium increases. F.D.I.C. officials said no such plans were in the works.
“The good news is that the industry will power through this,” said Bert Ely, a longtime banking industry consultant in Washington. The fund has “taken a lot of hits along the way, but I still don’t expect the taxpayer to ride to the rescue.”
To protect the fund, the F.D.I.C. also has found creative ways to bring in more money. On Tuesday, Ms. Bair said that the agency would soon issue bonds backed by the assets of failed banks and guaranteed by the government. The program aims to attract nontraditional buyers of bank assets, like insurance companies, pension funds and mutual funds.
“We would like to test the market to see if we can get better pricing,” Ms. Bair said. “We may or may not succeed, but we thought we should try it.”
The F.D.I.C. has also tried to entice private equity firms and other investment groups to bid for insolvent banks, with mixed success. The agency is betting that more potential buyers will ultimately result in higher prices.
http://www.nytimes.com/2010/02/24/business/24fdic.html?ref=business&pagewanted=print
Fed Rate Move Rattles Stocks and Sends Dollar Higher
By SEWELL CHAN
February 20, 2010
WASHINGTON — The Federal Reserve’s decision to raise the interest rate it charges on short-term loans to banks reverberated in the financial markets Friday, sending overseas stock indexes lower and giving fresh momentum to a recent rise in the dollar.
The Fed took the move to normalize lending after holding interest rates to extraordinary lows for more than a year to prop up the financial system. But the decision, announced after the close of equities markets in New York, sent Asian shares lower, with the Nikkei 225 index in Tokyo dropping nearly 2 percent, and both the Kospi index in Seoul and the Hong Kong’s Hang Seng indexes showing similar declines.
The reaction in Europe, however, was much more muted, with the major indexes in Frankfurt, London and Paris regaining lost ground in afternoon trading. The CAC-40 in Paris, which earlier had declined about 1 percent, was down 0.41 percent. Wall Street, which is more than 2 percent for the week, is also expected to open lower.
The move also helped propel the dollar’s recent rise even further, reaching $1.35 to the Euro, its strongest level against that currency in nine months.
While the central bank had signaled its intentions to take such a step, the timing was a surprise. The announcement was made in a carefully worded statement that emphasized that the Fed was not yet ready to begin a broad tightening of credit that would affect businesses and consumers as they struggle to recover from the economic crisis.
But while the move will not directly affect home mortgage, credit card or auto loan rates, it was a clear sign to the markets, politicians in Washington and the country as a whole that the era of extraordinarily cheap money necessitated by the crisis was drawing gradually to a close.
The Fed’s board of governors raised the discount rate on loans made directly to banks by a quarter of a percentage point, to 0.75 percent from 0.50 percent, effective Friday.
It also took two steps to begin unwinding its efforts to keep the banking system functioning after the real estate bubble inflicted huge losses that were amplified by sophisticated bets made by Wall Street.
Given the slow and uneven nature of the recovery, an unemployment rate close to 10 percent and fears of a new wave of mortgage defaults, particularly in commercial real estate, few economists expect the Fed to begin a campaign of broader interest rate increases quickly or sharply. The central bank reaffirmed last month that the key short-term interest rate it controls would remain “exceptionally low” for an “extended period,” language it has used since March.
While borrowing by banks from the Fed’s discount window has already fallen to more historically normal levels from its peak in October 2008, many small and medium-size businesses still find it difficult to obtain loans, a major concern of the Obama administration and Congress.
Randall S. Kroszner, an economist at the Booth School of Business at the University of Chicago and a former Fed governor, said after the announcement: “This is a technical change that makes sense as a precondition for other changes, but is not a precursor of short-term change.”
Having taken a baby step toward a return to normalcy, the Fed’s chairman, Ben S. Bernanke, now faces a delicate dance in the months ahead.
The central bank will try to drain from the financial system some of the money it created to keep banks and the economy afloat over the last two years. And at some point it will begin putting upward pressure on interest rates by raising its benchmark fed funds rate, the rate at which banks lend to each other overnight.
Uncertainty surrounds the timing and sequence of those steps. Mr. Bernanke is scheduled to present the Fed’s semiannual monetary policy report to the House on Wednesday and the Senate on Thursday — testimony the markets will watch closely.
As part of the changes disclosed Thursday, the Fed announced that the typical maximum maturity for primary credit loans, in which banks borrow from the discount window, would be shortened to overnight, from 28 days, starting March 18.
The Fed also raised the minimum bid rate for its term auction facility — a temporary program started in December 2007 to ease short-term lending — to 0.50 percent from 0.25 percent.
The central bank took pains to reiterate that it was not moving in a sudden new direction.
“The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy,” the Fed said in its statement.
Despite that attempt at reassurance, there were some early signs after the announcement that investors were already beginning to anticipate broader interest rate increases. Stock futures fell in after-hours trading; yields on 10-year Treasury notes rose about seven basis points, or seven-hundredths of a percentage point, to 3.8 percent.
The discount rate applies to loans the Fed makes for very short terms, to sound depository institutions, as a backup source of financing.
The Fed’s action represents a widening of the spread between the discount rate and the upper end of the target fed funds rate. The two rates typically move in lockstep, and were a percentage point apart before the crisis.
In an effort to encourage banks to come to it for funds to maintain their stability during the crisis, the Fed sought to make borrowing from the discount window more attractive than usual — and to reduce the stigma associated with borrowing from the Fed. As the fed funds rate went as low as it could go, the Fed reduced the spread between the two rates to half a percentage point in August 2007 and then to a quarter point in March 2008.
When the target range for the fed funds rate was lowered to zero to 0.25 percent in December 2008, the discount rate dropped to 0.50 percent, its lowest level since World War II.
In testimony Mr. Bernanke submitted to Congress on Feb. 10, he said that “before long, we expect to consider a modest increase in the spread” between the two rates.
And on Wednesday, the Fed released minutes from the discussion of its main policy-making arm, the Federal Open Market Committee, at its last meeting, on Jan. 26-27. Those minutes showed a consensus that it would “soon be appropriate” to begin widening the spread.
Laurence H. Meyer, a former Fed governor who runs a consulting firm, Macroeconomic Advisers, said the Fed had done its best to send clear signals.
“If the markets respond to this on Friday, it will reflect a total lack of comprehension of what the chairman said,” Mr. Meyer said. “Don’t they understand the meaning of soon?”
The Fed said banks should use the discount window “only as a backup source of funds.”
And it left open the possibility of widening the spread further in the future, saying it “will assess over time whether further increases in the spread are appropriate in view of experience” with the new half-point spread.
While liquidity for banks has been nursed back to health, many other sectors remain in a parlous state.
Dennis P. Lockhart, president of the Federal Reserve Bank of Atlanta, said after the announcement that along with the increase in the discount rate and the phasing out of special loan programs, the Fed would complete its purchase of $1.25 trillion in mortgage-backed securities by the end of March.
“All of this is happening because stress in the financial system has abated,” he told the Augusta Metro Chamber of Commerce in Georgia.
He added: “My point is that the public and markets should not misinterpret today’s move. Monetary policy, as evidenced by the fed funds rate target, remains accommodative. This stance is necessary to support a recovery that is in an early stage and, in my view, still fragile.”
Bettina Wassener contributed reporting from Hong Kong.
http://www.nytimes.com/2010/02/20/business/20fed.html?ref=business&pagewanted=print
Obama's 'Volcker Rule' shifts power away from Geithner
By David Cho and Binyamin Appelbaum
Washington Post Staff Writer
Friday, January 22, 2010; A01
For much of last year, Paul Volcker wandered the country arguing for tougher restraints on big banks while the Obama administration pursued a more moderate regulatory agenda driven by Treasury Secretary Timothy F. Geithner.
Thursday morning at the White House, it seemed as if the two men had swapped places. A beaming Volcker stood at Obama's right as the president endorsed his proposal and branded it the "Volcker Rule." Geithner stood farther away, compelled to accommodate a stance he once considered less effective than his own.
The moment was the product of Volcker's persistence and a desire by the White House to impose sharper checks on the financial industry than Geithner had been advocating, according to some government sources and political analysts. It was Obama's most visible break yet from the reform philosophy that Geithner and his allies had been promoting earlier.
Senior administration officials say there is now broad consensus within the White House and the Treasury for the plan advanced by Volcker, who leads an outside economic advisory group for the president. At its heart, Volcker's plan restricts banks from making speculative investments that do not benefit their customers. He has argued that such speculative activity played a key role in the financial crisis. The administration also wants to limit the ability of the largest banks to use borrowed money to fund expansion plans.
The proposals, which require congressional approval, are the most explicit restrictions the administration has tried to impose on the banking industry. It will help to have Volcker, a legendary former Federal Reserve chairman who garners respect on both sides of the aisle, on Obama's side as the White House makes a final push for a financial reform bill on Capitol Hill, a senior official noted.
Advocates of Volcker's ideas were delighted. "This is a complete change of policy that was announced today. It's a fundamental shift," said Simon Johnson, a professor at MIT's Sloan School of Management. "This is coming from the political side. There are classic signs of major policy changes under pressure . . . but in a new and much more sensible direction."
Industry officials, however, said they were startled and disheartened that Geithner was overruled, in part because they supported the more moderate approach Geithner proposed last year.
"His influence may have slipped," said a senior industry official who spoke on the condition of anonymity to preserve his relationship with the administration. "But you could also argue that it wasn't Geithner who lost power. It's just that the president needed Volcker politically" to look tough on big banks.
Geithner agreed with Volcker that banks' risk-taking needed to be constrained.
But through much of the past year, Geithner said the best approach to limiting it is to require banks to hold more capital in reserve to cover losses, reducing their potential profits. Geithner said blanket prohibitions on specific activities would be less effective, in part because such bans would eliminate some legitimate activity unnecessarily.
The shift toward Volcker's thinking began last fall, according to government officials who spoke on the condition of anonymity because the deliberations were private.
Volcker had been arguing that banks, which are sheltered by the government because lending is important to the economy, should be prevented from taking advantage of that safety net to make speculative investments.
To make his case, he met with lawmakers on Capitol Hill and gave numerous speeches on the subject, traveling to at least nine cities on several continents to warn that banks had developed "unmanageable conflicts of interest" as they made investments for clients and themselves simultaneously.
"We ought to have some very large institutions whose primary purpose is a kind of fiduciary responsibility to service consumers, individuals, businesses and governments by providing outlets for their money and by providing credit," he said during one speech in Toronto. "They ought to be the core of the credit and financial system. Those institutions should not engage in highly risky entrepreneurial activity."
Gradually, Volcker picked up allies. John Reed, the former chairman of Citigroup, expressed his public support. So did Mervyn King, governor of the Bank of England.
His ideas began gaining traction within the administration in late October, when the president convened a meeting of his senior economic advisers in the Oval Office to hear a detailed presentation by the former Fed chairman.
There was no immediate change of course. But after the House passed a regulatory reform bill on Dec. 11 that was largely based on the Geithner's vision, the administration began to warm to Volcker's ideas, which had the political value of seeming tough on Wall Street, said sources in contact with the Treasury and White House.
At the time, administration officials were growing concerned that government guarantees designed to spur lending by letting banks borrow cheaply were instead funding banks' speculative investments and fueling soaring profits, said Austan Goolsbee, a member of the president's Council of Economic Advisers.
"We started coming out of the rescue and you saw some of the biggest financial institutions . . . who had access to cheap financing . . . use that money without lending or anything, just doing their own investments," he said. "That clearly started putting [the issue] on the radar screen for us."
Goolsbee said that Vice President Biden became a particular advocate for Volcker's approach.
In mid-December, the president formally endorsed Volcker's approach and asked Geithner and Lawrence H. Summers, the director of the National Economic Council, to work closely with the former Fed chairman to develop proposals that could be sent to Capitol Hill. The three men had long discussions about the idea, including a lengthy one-on-one lunch between Geithner and Volcker on Christmas Eve.
Summers and Geithner had been reluctant to take on battles that weren't at the heart of the problem that fueled the crisis. But ultimately, an administration official said, the two men concluded that reform needs to be about more than just fighting the last war -- it needs to address sources of future risk as well.
http://www.washingtonpost.com/wp-dyn/content/article/2010/01/21/AR2010012104935_pf.html
Yearning for Glass-Steagall on Capitol Hill
January 22, 2010, 3:17 pm
President Obama’s plan to rein in big banks and their ability to make risky bets may seem to hark back to the days when commercial banking and investment banking were separated by the Depression-era Glass-Steagall Act. But the so-called Volcker Rule, as Mr. Obama’s proposal is known, does not go as far as Glass-Steagall in that it would allow commercial banks to retain some investment banking activities, like underwriting securities and trading on behalf of clients.
Nevertheless, some lawmakers in Washington want to alter the president’s proposal to look more like Glass-Steagall, a move that if successful would have a profound impact on the face of Wall Street. But they are likely to run into resistance from Democratic leaders and other lawmakers.
The repeal of the Glass-Steagall Act 10 years ago was seen at the time as a way to help American banks grow larger and compete better around the world. But now, the end of Glass-Steagall has been blamed by some people for many of the problems that led to the financial crisis.
While a majority of problems that occurred centered mostly on the pure-play investment banks like Lehman Brothers, the huge banks born out of the revocation of Glass-Steagall, especially Citigroup, and the insurance companies that were allowed to deal in securities, like the American International Group, might not have run into so much trouble had the law still been in place.
In December, Senator John McCain, Republican of Arizona, and Senator Maria Cantwell, Democrat of Washington, jointly introduced a bill that would bring back Glass-Steagall and force commercial banks to split off their lucrative, but risky, investment banking operations from their government-insured depository banking business. The bill was gaining traction in the Senate, racking up several co-sponsors. Still, it had yet to be attached to the larger financial regulatory bill set to be debated in the coming months.
But the Volcker Rule seems to have usurped attempts to bring back Glass-Steagall. The president’s proposal, announced Thursday, would ban bank holding companies from owning, investing in or sponsoring hedge funds or private equity funds and from engaging in proprietary trading, or trading on their own accounts, as opposed to the money of their customers.
Mr. Obama has called the ban the Volcker Rule, in recognition of his outside adviser, Paul A. Volcker, the former Federal Reserve chairman, who has championed the proposal.
In light of Mr. Obama’s proposal, Ms. Cantwell applauded the president for his efforts, but she stood by her bill.
“I still support our legislation because I think it is a cleaner, simpler way to get at the problem, so that would be my preference,” Ms. Cantwell told DealBook. “We’ll see what the president’s language is in specific, because I think the details matter here.”
Under the Volcker Rule, for example, Bank of America would still be able to keep Merrill Lynch’s brokerage services and investment banking units. But if Glass-Steagall were to return, Bank of America would need to sell virtually all of Merrill Lynch and return to being just a retail bank.
That major change is too much for some lawmakers to swallow, especially after the government helped orchestrate Bank of America’s acquisition of Merrill Lynch in the first place in 2009 — not to mention JPMorgan Chase’s takeover of Bear Stearns earlier in the year.
“I think introducing Glass-Steagall now across the board in a weak economy would be counterproductive because you would force sales and the like,” said Representative Barney Frank of Massachusetts, the Democratic chairman of the House Financial Services Committee and a supporter of the president’s plan. “And I think people have exaggerated the importance of Glass-Steagall in this crisis as it wasn’t the main source of problems for Lehman Brothers or A.I.G.”
Mr. Frank told DealBook that the current financial regulatory bill he introduced in the House already had a provision that would give regulators the power to break up banks along the lines of Glass-Steagall if they thought institutions were a major risk to the financial system. The provision was introduced in a contentious amendment submitted by Representative Paul E. Kanjorski, Democrat of Pennsylvania. It was attached to the bill after passing a party-line vote in the House Financial Services Committee, with all the Republicans voting against the provision.
The Volcker Rule, Mr. Frank said, goes beyond the Kanjorski amendment by splitting off parts of the banks so that “other administrations couldn’t undue” the separation without passing a new law. Mr. Frank says he and his counterpart in the Senate, Christopher J. Dodd of Connecticut, the Democratic chairman of the Senate Banking Committee, both support the Volcker Rule and would be introducing it in both of their versions of the financial regulatory overhaul bill.
Several senators and representatives on both sides of the aisle are calling for hearings on the president’s proposal before it is attached to either versions of the bill, including Senator Richard C. Shelby, the ranking Republican on the Senate Banking Committee, and Senator Tim Johnson, Democrat of South Dakota, who said in a statement that he hoped “the banking committee is able to examine the issue soon.”
But debate in the House and Senate committees could water down the bill’s impact on the banks, but it could also toughen the bill up to look a bit more like Glass-Steagall. Senator Byron Dorgan, Democrat of North Dakota, praised the president’s proposal but said that it doesn’t go far enough in addressing the problem of banks too big to fail.
“The Volcker Rule is important to do, but that is not the end point at all,” Mr. Dorgan said, “Should we do more? Absolutely. The other piece of this is that we have to recognize that putting F.D.I.C.-insured banks with investment banks in big holding companies was the wrong thing to do.”
Meanwhile, Senator Ted Kaufman, Democrat of Delaware and one of the co-sponsors of the McCain-Cantwell bill, told DealBook that the Volcker Rule and reinstating Glass-Steagall were “two sides of the same coin.”
“We simply must ensure taxpayers never again bail out major banks engaged in risky trading activities, and we must deal with the ‘too big to fail’ problem,” Mr. Kaufman said. “Both ideas share those objectives.”
How those objectives will be attained is the multibillion-dollar question. The Democrats control both the House and Senate committees and could pass through a tougher Volcker Rule if they wish.
While the Democrats may have lost their super-majority of 60 in the Senate this week, the Republicans would need to filibuster the entire financial regulatory reform bill to prevent the Volcker Rule from going into effect. While such a feat could be attained in the debate over health care, it could prove far more difficult to justify given the bipartisan populist anger at Wall Street, especially in an election year.
– Cyrus Sanati
http://dealbook.blogs.nytimes.com/2010/01/22/yearning-for-glass-steagall-on-capitol-hill/
Obama to Propose Limits on Risks Taken by Banks
By JACKIE CALMES and LOUIS UCHITELLE
January 21, 2010
WASHINGTON — President Obama on Thursday will publicly propose giving bank regulators the power to limit the size of the nation’s largest banks and the scope of their risk-taking activities, an administration official said late Wednesday.
The president, for the first time, will throw his weight behind an approach long championed by Paul A. Volcker, former chairman of the Federal Reserve and an adviser to the Obama administration. The proposal will put limits on bank size and prohibit commercial banks from trading for their own accounts — known as proprietary trading.
The White House intends to work closely with the House and Senate to include these proposals in whatever bill dealing with financial regulation finally emerges from Congress.
Mr. Volcker flew to Washington for the announcement on Thursday. His chief goal has been to prohibit proprietary trading of financial securities, including mortgage-backed securities, by commercial banks using deposits in their commercial banking sectors. Big losses in the trading of those securities precipitated the credit crisis in 2008 and the federal bailout.
The president will speak at an appearance on Thursday at the White House with Treasury Secretary Timothy F. Geithner, an administration official said, speaking on the condition of anonymity because the talks were private. It will come after a meeting with Mr. Volcker.
A similar discussion is percolating in Europe, led by Mervyn King, head of the Bank of England.
The president’s announcement comes as his popularity in public opinion polls is falling because of stubborn unemployment and the stagnant economy, and just days after he suffered a stinging loss when the Republicans won the Senate seat from Massachusetts.
It will be the third time in just a week that he has waded into the battle heating up in Congress over tightening regulation of financial institutions to avoid the sort of abuses that contributed to the near collapse on Wall Street. Last week he proposed a new tax on some 50 of the largest banks to raise enough money to recover the losses from the financial bailout, which ultimately could cost up to $117 billion, the Treasury estimates.
And this week, he served notice to senior lawmakers that he wants an independent agency to protect consumers as part of any financial overhaul legislation.
Only a handful of large banks would be the targets of the proposal, among them Citigroup, Bank of America, JPMorgan Chase and Wells Fargo. Goldman Sachs, the Wall Street trading house, became a commercial bank during this latest crisis, and it would presumably have to give up that status.
“The heart of my argument,” Mr. Volcker said, “is who we are going to save and who we are not going to save. And I don’t want to save what is not at the heart of commercial banking.”
Mr. Volcker has been trying for weeks to drum up support — on Wall Street and in Washington — for restrictions similar to those passed in the Glass-Steagall Act in 1933. That law separated commercial banking and investment banking, so that the investment arm could no longer use a depositor’s money to purchase stocks, sometimes drawing money from a savings account, for example, without the depositor’s knowledge.
The 1929 stock market crash and subsequent Depression made a shambles of that practice. But Glass-Steagall was watered down over the years and revoked in 1999.
Now the concern is a new type of activity in which financial giants like Citigroup, Bank of America and JPMorgan Chase engage. They now operate on two fronts. On the one hand, they are commercial banks, taking deposits, making standard loans and managing the nation’s payment system. On the other hand, they trade securities for their own accounts, a hugely profitable endeavor. This proprietary trading, mainly in risky mortgage-backed securities, precipitated the credit crisis in 2008 and the federal bailout.
Mr. Volcker, chairman of the president’s Economic Recovery Advisory Board, a panel of outside advisers set up at the start of the Obama administration, has gradually lined up big-name support for restrictions on such trading.
But the Obama administration until now focused on regulating the activities of the existing financial institutions, not breaking them up or limiting their activities. Under the new approach, commercial banks would no longer be allowed to engage in proprietary trading, using customers’ deposits and borrowed money to carry out these trades.
“Major institutions with a deposit facility should not be allowed to invest in subprime obligations under any conditions,” said Henry Kaufman, an economist and money manager, and one of a dozen prominent Wall Street figures who have told Mr. Volcker that they support his proposal, in principle if not in detail.
Others include William H. Donaldson, former chairman of the Securities and Exchange Commission; Roger C. Altman, chairman of Evercore and a Treasury official in the Clinton administration, and John S. Reed, a former chairman of Citigroup.
“When I was running Citi,” Mr. Reed said of his tenure in the 1980s and 1990s, “we simply did not trade for our own account.”
Jackie Calmes reported from Washington, and Louis Uchitelle from New York.
http://www.nytimes.com/2010/01/21/business/21volcker.html?hp=&pagewanted=print
Fed Paid Treasury Record $46.1 Billion in 2009
January 13, 2010, 6:25 am
The Federal Reserve paid a record $46.1 billion to the U.S. Treasury last year as aggressive bond purchases and lending to fight the financial crisis swelled its net income by 46.8 percent.
The Fed’s payment represents an increase of $14.4 billion over its 2008 contribution and was the largest since the U.S. central bank was launched in 1914. Its 2009 net income of $52.1 billion also was a record, Reuters reported.
“This is a silver lining in that big cloud of the Fed having to intervene massively and expand its balance sheet. The good news is, there’s a little extra money,” Nariman Behravesh, chief economist of Global Insight in Lexington, Massachusetts, told Reuters.
The 12 Fed regional banks are required to transfer their profits to the Treasury after paying dividends to member banks and retaining some of their surplus.
Fed Chairman Ben Bernanke and the Fed Board in Washington took unprecedented actions to prop up the financial system in 2008 and 2009, bailing out major financial institutions and launching a massive array of emergency lending facilities, and drawing withering criticism from lawmakers in the process.
Mr. Bernanke is fighting legislative efforts to limit the Fed’s regulatory authority and to open its policy making up to more political scrutiny. His nomination to a second four-year term as Fed chief also faces an unusual amount of opposition, although he is expected to win the Senate’s needed backing.
While the record profits may aid the Fed’s case and could ease some pressure on U.S. budget deficits, the central bank still holds billions of dollars’ worth of risky assets from bailouts and needs to start unwinding its balance sheet that has risen to more than $2 trillion as recovery gains steam.
Bonds that rose when the Fed was buying could lose value when it starts to unload them.
The largest previous payment to the Treasury was $34.6 billion in 2007. From its total 2009 net income, the Fed paid dividends to member banks of $1.4 billion and kept $4.6 billion of earnings as paid-in capital.
The Fed said much of its income, $46.1 billion, came from its open-market buying of U.S. Treasury debt, debt of mortgage finance sources Fannie Mae and Freddie Mac, and mortgage bonds and other securities. The program was aimed at holding down interest rates to spark an economic recovery.
The Fed also earned a net $5.5 billion from limited liability companies created in response to the financial crisis to make loans and take over assets from financial rescues of big institutions such as Bear Stearns and insurer American International Group.
Three “Maiden Lane” portfolios hold a variety of assets from Bear Stearns and residential mortgage-backed securities and collateralized debt obligations from A.I.G. Those assets are worth $68.3 billion.
Those holdings are being managed with a view to holding them over time and selling them off in a way that maximizes the value of the underlying portfolio, a Fed official told reporters in a conference call.
The Fed earned $2.9 billion from earnings on loans to banks, primary dealers and other institutions.
Currency swap arrangements created with 14 central banks during the crisis, along with foreign currency investments, netted profits of $2.6 billion in 2009, the Fed said.
It said net operating expenses of the 12 reserve banks totaled $3.4 billion in 2009 and they paid interest to banks on reserve balances totaling $2.2 billion. Banks were assessed for Fed Board expenses, including the cost of new currency, of about $900 million.
http://dealbook.blogs.nytimes.com/2010/01/13/fed-paid-record-461-billion-to-treasury-in-2009/
F.D.I.C. Closes 3 Failed Banks
December 13, 2009, 12:17 am
Regulators on Friday shut down banks in Florida, Arizona and Kansas, bringing to 133 the number of United States banks that have failed to hold up this year against the struggling economy and a cascade of loan defaults.
The Federal Deposit Insurance Corporation took over Republic Federal Bank in Miami, with $433 million in assets and $352.7 million in deposits, The Associated Press reported.
The F.D.I.C. also took over Valley Capital Bank of Mesa, Ariz., with $40.3 million in assets and $41.3 million in deposits; and SolutionsBank in Overland Park, Kan., with $511.1 million in assets and $421.3 million in deposits.
The F.D.I.C. estimates the failure of Republic Federal will cost the deposit insurance fund $122.6 million, the failure of Valley Capital an estimated $7.4 million, and the failure of SolutionsBank an estimated $122.1 million.
The 133 bank failures are the most in a year since 1992. They have cost the federal deposit insurance fund more than $28 billion so far this year.
The Washington establishment suffers a serious defeat
By Glenn Greenwald
Something quite amazing happened yesterday in Congress: the House Finance Committee -- in a truly bipartisan and even trans-ideological vote -- defied the banking industry, the Federal Reserve, the Democratic leadership, and mainstream Beltway opinion in order to pass an amendment, sponsored by GOP Rep. Ron Paul and Democratic Rep. Alan Grayson, mandating a genuine and probing audit of the Fed. The Huffington Post's Ryan Grim has the best account of what took place, noting:
In an unprecedented defeat for the Federal Reserve, an amendment to audit the multi-trillion dollar institution was approved by the House Finance Committee with an overwhelming and bipartisan 43-26 vote on Thursday afternoon despite harried last-minute lobbying from top Fed officials and the surprise opposition of Chairman Barney Frank (D-Mass.), who had previously been a supporter.
Grim details how key Committee Democrats such as Frank -- who spent the year claiming to support an audit of the Fed in the face of rising anger over its secret and bank-subservient policies -- suddenly introduced their own amendment (sponsored by Democratic Rep. Melvin Watt) that would have essentially gutted the Paul/Grayson provisions. Banking industry and Fed officials, as well as the Democratic leadership, then got behind that alternative provision as a means of pretending to support transparency while protecting the Fed from any genuine examination. Notwithstanding the pressure exerted on Committee Democrats to support that watered-down "audit" bill, Grayson convinced 15 of his colleagues to join with Republicans to provide overwhelming support for the Paul/Grayson amendment. As Grim notes:
[Frank] urged a no vote, yet 15 Democrats bucked him, voting with Paul. Key to winning Democratic support was a letter posted early Thursday from labor leaders and progressive economists. The letter, organized by the liberal blog FireDogLake.com, called for a rejection of the Watt substitute and support for Paul.
Grayson was able to show Democratic colleagues that the liberal base was behind them.
"Today was Waterloo for Fed secrecy," a victorious Grayson said afterwards.
The bill still faces substantial hurdles in becoming law, of course, but yesterday's vote has made that outcome quite possible, and it's worth nothing several important points highlighted by what happened here:
(1) Our leading media outlets are capable of understanding political debates only by stuffing them into melodramatic, trite and often distracting "right v. left" storylines. While some debates fit comfortably into that framework, many do not. Anger over the Wall Street bailouts, the control by the banking industry of Congress, and the impenetrable secrecy with which the Fed conducts itself resonates across the political spectrum, as the truly bipartisan and trans-ideological vote yesterday reflects. Populist anger over elite-favoring economic policies has long been brewing on both the Right and Left (and in between), but neither political party can capitalize on it because they're both dependent upon and subservient to the same elite interests which benefit from those policies.
For that reason, many of the most consequential political conflicts are shaped far more by an "insider v. outsider" dichotomy than by a "GOP v. Democrat" or "Left v. Right" split. The pillaging of America's economic security by financial elites, with the eager assistance of the government officials who they own and who serve them, is the prime example of such a conflict. The political system as a whole -- both parties' leadership -- is owned and controlled by a handful of key industry interests, and anger over the fact is found across the political spectrum. Yesterday's vote is a very rare example where the true nature of political power was expressed and the petty distractions and artificial fault lines overcome.
(2) As Grim expertly describes, the effort to defeat the Paul/Grayson amendment came from all of the typical Washington power centers using all of the establishment's typical manipulative tools:
The playbook in Washington often goes like this: When a measure that threatens the establishment builds enough momentum that it must be dealt with, it is labeled as "unserious." The Washington Post editorial board, true to the script, called Paul's measure "an unserious answer to a serious question."
And it particularly rankles the center that a pair of "wingnuts " [Paul and Grayson] are behind a successful effort to challenge the prevailing order.
Step Two is for a "serious" compromise to be offered. In this case, it was Watt's amendment. But by the time the vote was called Thursday afternoon, committee members had seen through his measure, recognizing that it was not a compromise effort to bring real transparency to the Fed but an attempt to further shut the doors.
One can count on one hand the number of times that establishment attacks like this fail, but this time -- at least for now -- it did. And it reveals a winning formula: where there is a strong and principled leader in Congress willing to defy the Party's leadership and the Washington establishment (Grayson), combined with leading experts lending their name to the effort (economists Dean Baker and James Galbraith), organizations standing behind it (labor groups), and a shrewd and driven organizer putting it all together (FDL's Jane Hamsher), even the most powerful forces and opinion-enforcers can be defeated, as they were here. Those progressive advocates' refusal to be distracted by trite partisan considerations, and their reliance on substantial GOP support to pass the bill (as hypocritical as the GOP's position might have been), was particularly crucial -- and smart.
(3) Beyond the specifics, a genuine audit of the Fed would be a major blow to the way Washington typically works. The Fed is one of those permanent power centers in this country that exert great power with very little accountability and almost no transparency (like much of the intelligence and defense community). The power they exert has exploded within the last year as a result of the financial crisis, yet they continue to operate in a completely opaque manner and with virtually no limits. Its officials have been trained to view their unfettered power as an innate entitlement, and they express contempt for any efforts to limit or even monitor what they do.
In other words, the Fed is a typical Washington institution that operates un-democratically and in virtually total secrecy, and a Congressionally-mandated audit that they (and much of the DC establishment) desperately oppose would be a serious step towards changing the dynamic of how things function. At the very least, it would provide an important template for defeating the interests which, in Washington, almost never lose. At least yesterday, those interests did lose -- resoundingly -- and the importance of that should not be overlooked.
http://www.salon.com/news/opinion/glenn_greenwald/
What Geithner Got Right
By DAVID BROOKS
November 20, 2009
Op-Ed Columnist
It’s amazing to go back and read what people were saying about Timothy Geithner in the spring. Many people said he looked terrified as the Treasury secretary, like Bambi in the headlights. The New Republic ran an essay called “The Geithner Disaster.” Portfolio magazine ran a brutal, zeitgeist-capturing profile that concluded by comparing Geithner to Robert Redford’s hollow man character in “The Candidate.”
The criticism of his plan to stabilize the financial system came from all directions. House Republicans called it radical. Many liberal economists thought the plan was the product of hapless, zombie thinking and argued that only full bank nationalization would end the crisis. The Wall Street Journal asked 49 economists to grade Geithner. They gave him an F.
Well, the evidence of the past eight months suggests that Geithner was mostly right and his critics were mostly wrong. The financial sector is in much better shape than it was then. TARP money is being repaid, and the debate now is what to do with the billions that were never needed. It now seems clear that nationalization would have been an unnecessary mistake — potentially expensive and dangerously disruptive.
The course of events has vindicated the administration’s handling of its first big challenge. Obama could have flinched when the torrent of criticism was at its peak. But the president’s support for Geithner never wavered. Geithner never lost confidence in his policy. Rahm Emanuel mobilized to improve the presentation of the policy. The political team worked hard to deflect criticism from Geithner onto themselves.
In retrospect, their performance during this trial was impressive.
Events also vindicate Geithner’s basic policy instincts. The criticism back then was that Geithner was neither bold nor visionary. He was too cautious, too much the insider and bureaucrat.
But this prudence was the key to his effectiveness. In interviews and testimony, Geithner uses the word “balance” a lot. He talks about finding the right balance point between competing priorities. He also talks like a historian who sees common tendencies in certain contexts, not a philosopher who seeks clear general principles that apply across contexts.
This mentality makes it hard for him to project bold conviction, but it makes him flexible in the face of specific problems. When financial confidence is cratering, Geithner concluded, government should generally be as aggressive as possible, as early as possible. At the same time, it should try not to do things that the market does better, like set prices or run companies.
Geithner’s path was a middling one, but it helped the country muddle toward recovery.
If you wanted to step back and define Geithner’s philosophy, you’d probably say that he starts with a set of fairly conservative instincts about the role of government, which put him on the centrist edge of the Democratic Party.
In an interview on Wednesday, for example, I asked Geithner what government could do to help promote innovation. Usually when I ask leaders that, they reel off some cool technologies that government should promote — windmills, nanotechnology, etc. Often they sound like children trying to play at being entrepreneurs. Geithner didn’t do that. He said that government’s limited job was to get the underlying incentives right so the market could figure out what innovations work best. That suggests a pretty constrained view of government’s role.
On the other hand, you would also have to say that Geithner, like many top members of the Obama economic team, is extremely context-sensitive. He’s less defined by any preset political doctrine than by the situation he happens to find himself in.
In the next few months, Geithner will be confronted with a cross-cutting set of pressures. First, the need to reduce the deficits, which is uppermost on his mind. Second, the rising populism in Congress, which has to be battled sometimes and appeased sometimes by an administration that hopes to get things passed. Third, intense public cynicism about government, which means that every debate is washed in negativity.
Most important, there’s the jobs situation. If job growth returns, that will be a sign that the recovery is normal and Geithner and the administration can return to a more moderate path. If employment does not rebound or the economy double dips, that will be a sign of systemic problems. Geithner and his colleagues will probably adopt a much more activist posture and have to throw their lot in with the left.
I hate to rely on the most overused categories in punditry, but they really do apply here. Some administrations are staffed by hedgehogs, who are guided by a few core principles. But this one is staffed by foxes, who respond flexibly to situations. In the administration’s first big test, that sort of pragmatism paid off.
http://www.nytimes.com/2009/11/20/opinion/20brooks.html?_r=1&hp=&adxnnl=1&adxnnlx=1258719180-hKGMoMTeKhG4Z8YUlIlXwA&pagewanted=print
Fed takes aim at overdraft penalties
Regulation would ban many fees unless customers opt in
By Ylan Q. Mui
Friday, November 13, 2009
The Federal Reserve will begin banning banks from charging many overdraft fees unless customers sign up for the service, an unprecedented move that comes as a wave of consumer reform sweeps Washington.
The new regulations, announced Thursday, cover overdrafts from ATM withdrawals and debit card purchases, which account for roughly half of overdrawn transactions, and help to address widespread complaints that consumers who were unaware they had insufficient funds were being charged exorbitant fees for purchasing a cup of coffee, for example. The rules, which take effect July 1, 2010, come as banks have drawn increasing scrutiny in the wake of the financial crisis for charging high fees and interest rates at a time when consumers are financially strapped.
Banks will be required to send customers a notice explaining their overdraft protection services and fees before they are asked if they want to sign up. But the regulations do not cover payments made by check or recurring debit card charges, such as automatic bill payments. They also give banks wide latitude over the structure of overdraft fees once customers opt in, though Fed officials said the regulations allow consumers to drop the service at any time. Two bills targeting the fees are under consideration by Congress and would place tougher restrictions on the industry.
Since the financial crisis began, the Fed has been under pressure to demonstrate its concern for protecting consumers and has imposed new limits on mortgage and credit card lenders. The recent spurt of rulemaking follows a decade of inaction during which the Fed ignored mounting evidence of abuses and repeated pleas from consumer advocates. As a result, the Obama administration wants to strip the Fed of some of its responsibilities and create a new agency devoted to protecting consumers. Fed Chairman Ben S. Bernanke has declined to take a public position on the proposal, but he has highlighted the Fed's recent actions as evidence that the institution is aware of its past shortcomings and working to improve.
Fed officials said Thursday that they had been working for several years to refine their regulations on overdraft charges, which infuriate consumers but are a significant revenue stream for banks. Fees from overdrawn U.S. accounts will reach $38.5 billion this year, up from $36.7 billion in 2008, according to research firm Moebs Services in Lake Bluff, Ill. A survey of smaller banks released by the Federal Deposit Insurance Corp. last year showed that about a quarter of accounts had been overdrawn at least once in 2006, the year the study was performed.
Revenue could suffer
Edward L. Yingling, chief executive of the American Bankers Association, a trade group, said the regulations strike a balance between consumer concerns and industry needs. But the group also said its members will be hard-pressed to find replacements for that revenue, especially as the recent wave of financial reforms has limited their ability to charge riskier customers higher fees and higher interest rates for loans. That could mean banks will begin considering charging for popular services that they had provided for free, such as checking and no-minimum-balance accounts.
"There are additional risks and costs that the final rule creates, and they'll have to make adjustments," said Nessa Feddis, ABA senior counsel.
But several consumer groups said the Fed's regulations do not go far enough and have called for all forms of payments -- checks and debit cards -- to fall under the regulations. Fed officials said those forms of payments are typically used for bills, and their research shows that consumers would rather pay the overdraft fee than have such payments denied. According to the FDIC report, about 30 percent of overdraft transactions stem from checks. About 41 percent occur from debit cards, while 7.8 percent are attributed to ATMs.
In addition, consumer groups have criticized banks not only for automatically enrolling customers in potentially costly overdraft protection programs, but also for the size of the fees and the number of overdrafts allowed per month, among other things. That means consumers could still wind up paying $40 for a cup of coffee if they enroll in the service.
The Fed "hasn't solved the bigger problem that once people opt in, it's still an unfair product that perpetuates debt," said Ed Mierzwinski, program director for consumer advocacy group U.S. PIRG.
Congress may weigh in
Two bills -- from Rep. Carolyn B. Maloney (D-N.Y.) and Sen. Christopher J. Dodd (D-Conn.) -- would more aggressively curtail overdraft fees. Both limit overdraft charges at one per month and six per year and require fees to be proportional to the amount of the overdraft. They also prevent banks from debiting the most expensive purchases from accounts first, which could increase the number of overdrawn transactions. Maloney's bill covers checks in the opt-in requirement, but Dodd's does not.
Both lawmakers praised the Fed's action on Thursday but said they plan to move forward with their bills. A hearing for Dodd's legislation is scheduled for Tuesday.
"This is a long-overdue announcement for American consumers," Dodd said in a statement. But, he added, "we need to do far more to protect customers from abusive bank products.
Some banks have already begun making changes to their overdraft programs. J.P. Morgan announced last month that it would begin requiring customers to opt-in to overdraft protection in the first quarter of next year. It also said it would not charge a fee if the account is in the red by less than $5. Bank of America said it would allow customers to opt out of its program and restrict fees to overdrafts of more than $10.
http://www.washingtonpost.com/wp-dyn/content/article/2009/11/12/AR2009111208541_pf.html
Pandit ‘Near Death’ Hoard Signals Lower Bank Profits (Update1)
By Bradley Keoun
Nov. 2 (Bloomberg) -- Citigroup Inc. and JPMorgan Chase & Co. are hoarding cash as if another crisis were on the way.
Citigroup has almost doubled its cash to $244.2 billion in the year since Lehman Brothers Holdings Inc. filed for bankruptcy, the biggest such stockpile of any U.S. bank. The lender, which last year came so close to a funding shortfall it had to get a $45 billion government infusion, is under pressure from the Treasury Department and regulators to keep more money on hand for emergencies, even as markets improve.
The caution, which may help restore confidence in the financial system, offers little comfort to shareholders, who can expect to see shrinking returns as banks put money into liquid investments that yield one-twelfth the interest rates of loans.
“It’s a smart longer-term move, but it will take down the rates of returns these companies can generate,” said Eric Hovde, chief executive officer of Washington-based Hovde Capital Advisors LLC, a hedge fund with $1 billion of financial-industry and real estate investments. “If you start to see more economic stabilization, then liquidity levels would start dropping, but they’ll never go back to the insane level they were pre- crisis.”
Regulators say banks got too aggressive in the years leading up to last year’s credit-market seizure, operating with too little equity capital and putting too much money into illiquid investments such as loans and complex, hard-to-trade securities and derivatives.
‘Core Principles’
A lack of funds “can contribute as much or more to the firm’s failure as insufficient capital,” the Treasury Department said in a Sept. 3 statement of “core principles” on financial regulation. Lehman, the New York-based securities firm that declared bankruptcy on Sept. 15, 2008, after losing access to its funding, had said in a statement five days earlier that it had a “strong capital base.”
Banks should “hold a pool of unencumbered, liquid assets sufficient to cover likely funding shortfalls in the event of an acute liquidity stress scenario,” the Treasury said. Such a scenario might occur when depositors rush to pull their money, companies suddenly draw down credit lines or trading partners unexpectedly demand additional collateral, the department said.
Worldwide, financial companies have raised $1.4 trillion of capital since the start of the credit crisis in mid-2007, diluting shareholders’ stakes while shoring up the buffer that insulates depositors in the event of a failure.
Increasing Liquidity
The four largest U.S. banks by assets -- Bank of America Corp., JPMorgan, Citigroup and Wells Fargo & Co. -- have increased their combined liquidity by 67 percent to $1.53 trillion as of Sept. 30 from $914.2 billion in June 2008, before Lehman’s collapse, according to the companies’ third-quarter reports. The amount equals 21 percent of the banks’ total assets, up from 15 percent.
Liquidity includes cash, deposits at other banks and debt securities that can be pledged as collateral in exchange for overnight borrowings from the Federal Reserve or other banks.
Citigroup’s total liquidity as of Sept. 30 was $450.3 billion, or 24 percent of assets, up from 16 percent in June 2008. The shift was reflected in the bank’s third-quarter results, when interest income fell by $1.4 billion from a year earlier and pushed New York-based Citigroup, headed by CEO Vikram S. Pandit, to an operating loss of $750 million.
‘No Choice’
The $244.4 billion Citigroup holds in cash and deposits is $131.4 billion more than it had as of June 30, 2008. That’s five times as much as the $47.1 billion cash hoard Warren Buffett’s Berkshire Hathaway Inc. had at its peak in the third quarter of 2007. Financial firms typically keep more liquid assets than other companies to comply with regulatory requirements.
“In my 44 years in the business, I have never seen a company with remotely as much cash as this,” said Richard X. Bove, an analyst at Rochdale Securities in Lutz, Florida.
If Citigroup’s cash and deposits, which earn 0.63 percent, had been put into loans, which fetch 7.2 percent, the bank would be getting at least $8.65 billion more in annual interest revenue. The risk is that some of those loans go bad, and the bank ends up losing more than the incremental revenue.
In the third quarter, the four biggest U.S. banks posted a combined 2.1 percent decline from the previous quarter in net interest revenue -- what they earn on loans and investments minus what they pay out on deposits and borrowings.
“Even though it makes no sense for a bank to have $245 billion in cash, Pandit has no choice,” said Bove, who rates Citigroup “buy.” “I don’t think it’s something to either praise him for or criticize him for. That’s simply the fact. You either keep that cash or you’re dead.”
JPMorgan Cash
JPMorgan CEO Jamie Dimon said last week at a securities- industry conference that “the chance of Armageddon is over.” The view hasn’t stopped him from tripling JPMorgan’s pile of cash and debt securities that can be used as collateral over the past year. The New York-based bank’s total liquidity was $453.6 billion as of Sept. 30, including $80.7 billion in cash and deposits at other banks. The larger figure is 22 percent of its total assets, up from 9.5 percent before Lehman’s bankruptcy.
“JPMorgan has talked incessantly about the concept of the fortress balance sheet, and as long as Jamie’s running the company, they’re not going to wind up in the position where they’re forced into a corner because of access to funding,” said Jordan Posner, senior portfolio manager at New York-based Matrix Asset Advisors, which owns about 793,000 JPMorgan shares.
‘Adverse Conditions’
The bank said in an Aug. 10 regulatory filing that its strategy is “to ensure liquidity and diversity of funding sources to meet actual and contingent liabilities through both stable and adverse conditions.” Spokeswoman Jennifer Zuccarelli declined to comment.
Bank of America, which also got a $45 billion U.S. bailout, has increased its holdings of cash, time deposits and debt securities to $422.6 billion, or 19 percent of overall assets, from 17 percent in June 2008, according to company reports. Mark Linsz, treasurer of the Charlotte, North Carolina-based bank, didn’t return a call for comment.
At San Francisco-based Wells Fargo, which got $25 billion of bailout funds last year, the ratio of cash and debt securities to total assets dropped to 16 percent as of Sept. 30 from 17 percent before Lehman’s bankruptcy. The bank’s total liquidity is $201 billion.
Wells Fargo needs fewer liquid assets because it gets a majority of its funding from customer deposits, which are “much more stable in times of economic and market stress” than the short-term borrowings rivals rely on, bank spokeswoman Mary Eshet said. The bank acquired Wachovia Corp. last December.
“We have seen unprecedented growth in our deposit base over the last 18 months,” Eshet said.
Customer Deposits
Customer deposits, long-term debt and shareholder equity represent a combined 92 percent of overall assets, according to Wells Fargo’s financial statements. That compares with 75 percent at Bank of America, 72 percent at Citigroup and 63 percent at JPMorgan.
Rochdale’s Bove predicted in an Oct. 23 report that Wells Fargo’s net interest revenue, which accounted for 52 percent of the bank’s third-quarter total, will fall “for the next few quarters,” partly because of government pressure to increase the bank’s holdings of lower-yielding liquid assets.
“The bank simply is not as liquid as its peers,” wrote Bove, who rates Wells Fargo a “sell.”
Basel Guidelines
The Basel Committee on Banking Supervision, a 35-year-old panel that sets international capital guidelines, plans to propose a “new minimum global liquidity standard” by the end of this year, according to a Sept. 15 statement from the Financial Stability Board, which is coordinating financial regulatory reform on behalf of the Group of 20 nations.
Bondholders may benefit from an explicit threshold, said Baylor Lancaster, an analyst at CreditSights Inc. in New York. “From a credit perspective, it’s a positive,” she said. The market rate to insure $10 million of Citigroup bonds for five years has tumbled to $180,000 a year, from a record $667,000 in April.
Last November, when Pandit had to seek emergency aid from the Treasury, Federal Deposit Insurance Corp. and Federal Reserve, a run on the bank’s then-$780.3 billion of deposits was only one of his worries. He also faced soaring interest costs on $29 billion of short-term commercial paper, the threat of $400.7 billion of corporate loan commitments getting tapped and the possibility that Citigroup might have to provide funding to more than $400 billion of off-balance-sheet financing vehicles.
‘Near-Death Experience’
The government’s assurance of support, along with the promise of FDIC debt guarantees and at least $1.86 trillion of federal programs set up to ease the U.S. banking industry’s funding demands, helped stave off Citigroup’s collapse.
“When you go through a near-death experience, it focuses the mind, and none of these people want to ever go through it again,” said Charles Bobrinskoy, a former Citigroup investment banker who’s now director of research at Chicago-based Ariel Investments LLC, which oversees about $4 billion.
Citigroup has increased its deposits by $52.3 billion and reduced its commercial paper outstanding to $10 billion as of Sept. 30. The bank has sold about $65 billion of FDIC-backed debt while letting its loan portfolio decline by $95 billion to $622.2 billion.
‘Deliberately Liquid’
The bank has a “deliberately liquid and flexible balance sheet,” Citigroup Treasurer Eric Aboaf said on an Oct. 16 investor conference call. The bank plans to refinance only $15 billion of about $45 billion of debt coming due next year and may use some of its cash to meet the payments, he said. Citigroup spokesman Stephen Cohen declined to comment.
Pandit probably can’t use his cash to pay back the $20 billion Citigroup still owes the U.S. government since that would reduce its capital, which regulators want the bank to maintain until the financial crisis has passed, said Chris Kotowski, an analyst at Oppenheimer & Co. in New York who rates the shares “market perform.” Treasury in February converted $25 billion of its bailout money into Citigroup common shares. That conversion led to a one-time $851 million after-tax gain that gave Citigroup a net third-quarter profit of $101 million.
Citigroup’s shares have quadrupled since falling to a record low of $1.02 in the week after the conversion. They dropped 3 cents to $4.06 as of 10:30 a.m. today in New York Stock Exchange composite trading.
U.S. banks are nowhere near as liquid as they were in the mid-1940s, when cash and securities accounted for 83 percent of total assets, according to CreditSights, citing FDIC data.
‘Shell-Shocked’
The failure of about 9,000 banks during the Depression “shell-shocked” the survivors, which then bolstered their reserves to “sleep better at night,” said Richard Sylla, a financial historian and economics professor at New York University’s Stern School of Business. In the late 1930s the U.S. government doubled reserve requirements and in the ‘40s pressured banks to buy war bonds, he said.
The liquidity ratio stayed above 40 percent until the early 1970s, and above 20 percent until a few years ago, according to CreditSights.
“Gradually the banks ran down their liquidity levels and got back into the business of making loans, but it didn’t happen overnight,” Sylla said.
To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net.
Last Updated: November 2, 2009 11:13 EST
http://www.bloomberg.com/apps/news?pid=20670001&sid=a6jjnmaeHrRQ
Nine U.S. banks seized in largest one-day haul
By Sam Mircovich and Edwin Chan Sam Mircovich And Edwin Chan
Sat Oct 31, 12:11 am ET
LOS ANGELES (Reuters) – U.S. authorities seized nine failed banks on Friday, the most in a single day since the financial crisis began and the latest stark sign that substantial parts of the nation's banking industry are being crippled by bad loans.
The move brought the total number of failed banks in 2009 to 115 -- their highest annual level since 1992 -- with analysts expecting more to come. Among the lenders seized Friday was Los Angeles-based California National Bank, in what was the fourth-largest U.S. bank failure this year.
The largest institution to fail in the current financial crisis was Washington Mutual, which boasted $307 billion in assets when it was shuttered in September 2008.
U.S. Bancorp on Friday acquired the nine banks that had been held by FBOP Corp, picking up $18.4 billion in assets and $15.4 billion of deposits.
Visibly worried employees lined up to file into Cal National's head offices in the heart of a deserted downtown Los Angeles on a chilly Friday evening, where they had their employers' fate explained to them, regulators said.
"We're getting ready to turn everything over to U.S. Bank," said Roberta Valdez, a spokeswoman for the Federal Deposit Insurance Corp, which helped supervise the transfer of FBOP's assets. "They will continue to operate as normal in the interim," she added, referring to lenders acquired from FBOP.
U.S. Bancorp -- which has been buying up distressed assets this year -- is picking up the lenders once owned by FBOP, a private Illinois group with over $18 billion in assets that owned banks in Texas, Illinois, Arizona and California.
Cal National is FBOP's largest bank by branches. Others that will now go under the U.S. Bancorp umbrella included BankUSA, Citizens National Bank, Madisonville State Bank, North Houston Bank, Pacific National Bank, Park National Bank, San Diego National Bank, and the Community Bank of Lemont.
"This transaction is consistent with the growth strategy that we have outlined many times in the past, which includes enhancing our existing franchise through low-risk, in-market acquisitions," said Rick Hartnack, vice chairman of consumer banking for U.S. Bancorp.
"This transaction adds scale to our current California, Illinois and Arizona footprints."
NEXT BIG HEADACHE
In the "near future," all nine lenders' branches will be re-branded U.S. Bank, which is the California-focused unit of U.S. Bancorp's that operates a network of more than 770 branches across Illinois, Arizona and California.
U.S. Bancorp did not specify what would happen to the new employees it inherits.
Cal National operates 68 branches across Southern California with more than $7 billion in assets. As of June 30, the lender maintained five times as much foreclosed property on its books and twice as many non-current loans as it had a year earlier, according to the Los Angeles Times, which first reported news of its evening takeover on Friday.
Cal National lost about $500 million on heavy investments in Fannie Mae and Freddie Mac preferred shares, the newspaper added, referring to securities rendered nearly worthless by the government takeover of the mortgage firms last year.
According to FDIC data, Cal National was the fourth biggest bank failure this year in terms of assets, just edging out Corus Bank, seized Sept 11 with a flat $7 billion of assets.
A bank official who answered the main number at Cal National's headquarters said they could not talk at the time.
Banks are still cleaning up their balance sheets from the recent credit boom that fueled banks' appetite to extend loans, many with poor underwriting and triggers that caused borrowers' payments to spike to unaffordable levels.
More lenders are expected to go under this year as the industry tries to get a handle on commercial real estate loans that will continue to worsen, as more strip malls go vacant and residential developments stall.
Banks held about $1.7 trillion in commercial real estate loans at the end of September, according to Federal Reserve data, or about 15 percent of their total assets. But to the extent these loans weaken, small banks are likely to be hit the hardest because larger banks were better diversified.
Banks that analysts say could risk big losses include Salt Lake City's Zions Bancorp, Columbus, Georgia's Synovus Financial Corp and Dallas-based Comerica Inc.
Before FBOP, U.S. Bancorp bought Downey Savings of Newport Beach and PFF Bank & Trust of Pomona when those thrifts failed last November, the newspaper said. Just this month, U.S. Bancorp bought 20 Nevada branches from BB&T Corp, which had acquired them as part of its deal to buy Colonial BancGroup Inc, it added.
(Additional reporting by Mary Milliken; Editing by Bernard Orr and Dean Yates)
http://news.yahoo.com/s/nm/20091031/bs_nm/us_usbancorp_5/print
October surprise from bank earnings?
Some experts worry results may be much more negative than investors expect
By Alistair Barr, MarketWatch
Oct. 10, 2009, 1:29 p.m. EDT
SAN FRANCISCO (MarketWatch) -- Bank stocks surged during the third quarter, but as companies prepare to report results from the period, several industry experts remain concerned.
"We are very early on in this credit cycle," Timothy Long, chief national bank examiner at the Office of the Comptroller of the Currency, said at a recent conference.
"That statement caught everyone by surprise," said Nancy Bush, a veteran bank analyst who attended the conference.
J.P. Morgan Chase kicks off the bank-reporting season on Wednesday.
The KBW Bank Index , which tracks shares of lenders, including Bank of America, Citigroup and Chase, jumped 30% in the third quarter, as investors bet that huge increases in bad loans from the mortgage meltdown and broader financial crisis were easing.
Thinking the worst is behind the industry, investors began looking to 2010 and 2011 when banks should be a lot healthier, according to Richard Bove, an analyst at Rochdale Securities. Third-quarter results will make that leap of faith harder to maintain, he said.
"Third-quarter earnings for most banks, particularly the regional lenders, will be extraordinarily negative," Bove said.
He estimates that about 60% of banks will report losses in the period as nonperforming assets continue to grow and charge-offs remain very high. Lenders will also have to increase reserves because they didn't bolster them enough during the second quarter, Bove added.
Loan growth will likely remain sluggish and net interest margins won't increase much, partly because funding costs have already dropped so much that they can't fall much further, the analyst explained.
"None of this bodes well for the third quarter," Bove said. "Once the market is faced with the reality of how bad the earnings are, it will be interesting to see whether investors will be able to hold on to these stocks at these price levels."
'Bogey-bear'
Bush is concerned that commercial real estate problems may begin to escalate, while consumer credit losses linger.
At the end of September, K.C. Conway, a real-estate expert at the Federal Reserve Bank of Atlanta, warned of big commercial real-estate losses and said banks will be slow to recognize the severity of those losses, according to a presentation to bank regulators reviewed by The Wall Street Journal.
More than half of the $3.4 trillion in outstanding commercial real-estate debt is held by banks and vacancy rates in the apartment, retail and warehouse sectors have already exceeded levels seen in the real-estate collapse of the early 1990's, the newspaper noted.
"That's the big bogey-bear staring us in the face," Bush said. "But when I ask banks about their commercial real-estate exposure, they all say the same thing -- that they don't have many major problems. Then you read the Fed report and it's completely different. I don't know which to believe."
Regional banks are particularly exposed to commercial real estate loans because they didn't sell them through securitization as much as larger rivals, according to Keefe, Bruyette & Woods analyst Julianna Balicka.
These types of loans make up more than 35% of regional banks' total loans, up from 25% in 2000, she said in a recent note to investors.
The California bank units of Zions Bancorp and Western Alliance had more than 40% of their loans in commercial real estate at the end of June.
At Center Financial , Hanmi Financial , Nara Bancorp and Wilshire Bancorp those types of loans accounted for more than 70% of total loans, according to KBW's Balicka.
But it's not only regional banks that are exposed. Commercial real-estate loans made up 12% of large banks' total loans at the end of June, up from 9% in 2000, the analyst noted.
J.P. Morgan Chase , which is due to report third-quarter results on Wednesday, recently gave up trying to sell One Chase Manhattan Plaza, a 60-story skyscraper in lower Manhattan, after bids came in too low, according to a person familiar with the situation. The landmark office tower was one of 23 U.S. office properties J.P. Morgan was trying to sell, according to Bloomberg News, which noted the remaining properties are still for sale.
At the end of June, the bank had almost $65 billion of wholesale loans extended for real-estate related purposes, according to its latest quarterly regulatory filing.
Consumer drag
However, J.P. Morgan is more exposed to consumers, holding over $85 billion in credit card loans at the end of June.
Consumer loan losses from the subprime mortgage crisis have begun to abate, but Bush is concerned that rising long-term unemployment in the U.S. will mean lingering consumer credit problems for banks.
"I'm not convinced consumer credit will improve a lot," she said.
Indeed, the OCC's Long said this past week that the severe threat from last year's financial crisis has been replaced by a more traditional unemployment-driven economic cycle, which may be in its early stages, according to Robert Garsson, a spokesman for the regulator.
J.P. Morgan Chase is expected to make 49 cents a share in the third quarter, according to the averaged estimate of 19 analysts in a Thomson Reuters survey.
Profit will come mainly from the bank's capital markets and investment banking businesses, while credit costs remain high, Matt O'Connor, an analyst at Deutsche Bank, wrote in a note to investors earlier this week.
Provisions for credit losses will likely come in at $8 billion during the third quarter, in line with the second quarter. Credit card losses could rise to 11.5% in the third quarter, from 10% in the second, the analyst estimated.
Still, J.P. Morgan has more capital than most of its peers, O'Connor noted. And those rivals likely struggled more in the third quarter.
Citigroup , which reports on Thursday, is expected to lose 21 cents a share in the third quarter, according to the average estimate of 17 analysts polled by Thomson Reuters.
Citigroup had more than $67 billion of credit card loans that weren't covered by a government guarantee at the end of June, according to KBW analyst David Konrad. Potential losses on these exposures could reach almost $18 billion through the current credit cycle, which Konrad expects will end in the fourth quarter of 2010.
Konrad reckons Citigroup faces total potential losses of more than $124 billion before the cycle ends. The bank has taken $5.7 billion in net charge-offs so far, the analyst pointed out in a note to investors on Oct. 2. He's forecasting annual losses for Citigroup through 2011.
Bank of America , which reports results on Oct. 16, is forecast to lose 6 cents a share, according to a Thomson Reuters poll of 22 analysts.
Deutsche Bank's O'Connor expects Bank of America to lose 42 cents a share. The bank had $13.4 billion in loan loss provisions during the second quarter and it could set aside the same amount or slightly less during the third quarter, the analyst said. Reserves could be bolstered by $3.5 billion, down from $3.7 billion in the second quarter, he added.
Bank of America's credit-card business could be one of the main drags this quarter. Losses in this area could reach 13.5% in the third quarter, up from 11.7% in the second, O'Connor forecast.
Wells Fargo , scheduled to report on Oct. 21, is expected to make 36 cents a share, according to the average forecast of 23 analysts surveyed by Thomson Reuters. That's down from 57 cents a share in the second quarter.
The bank's mortgage business will likely generate about $3 billion in revenue during the third quarter, up from $2.5 billion in the second, O'Connor forecast.
However, credit losses will continue to weigh on the San Francisco-based bank. O'Connor sees loan loss provisions rising to $6.2 billion in the third quarter, from $5.1 billion in the second.
Charge-offs may jump 15% to 20%, the analyst added. Although that would be down from a 35% surge during the second quarter.
http://www.marketwatch.com/story/story/print?guid=13E8E58D-A985-4B79-B190-B917EA2E6B6A
Two Irwin Union Bank failures bring 2009 total to 94
Sept. 18, 2009, 6:13 p.m. EDT ·
MarketWatch
SAN FRANCISCO (MarketWatch) -- Two Irwin Union Bank subsidiaries in Kentucky and Indiana were closed by regulators Friday, bringing the total number of U.S. bank failures this year to 94 and punching an $850 million hole in the federal deposit insurance fund.
The Federal Deposit Insurance Corp. said that Irwin Union Bank and Trust Co. in Columbus, Ind., and Irwin Union Bank F.S.B. in Louisville, Ky., were each closed.
Irwin Union Bank and Trust Co. had $2.7 billion in assets and $2.1 billion in deposits as of Aug. 31, the FDIC said. Irwin Union Bank F.S.B. had $493 million in assets and $441 million in deposits as of Aug. 31.
Hamilton, Ohio-based First Financial Bank /quotes/comstock/15*!ffbc/quotes/nls/ffbc (FFBC 8.31, -0.05, -0.60%) has agreed to assume the failed banks' deposits. First Financial Bank said in a statement that assumption of the Irwin Union Bank subsidiaries brings with it 27 banking centers in nine states.
The effect on the subsidiaries' parent, bank holding company Irwin Financial Corp. /quotes/comstock/13*!ifc/quotes/nls/ifc (IFC 0.48, -0.02, -4.00%) , was not immediately clear. An external spokeswoman for the company was unable to comment. Shares of Irwin Financial tumbled more than 50% to 22 cents a share in late trading.
Irwin Financial had disclosed in a regulatory filing on Wednesday that it was told by the Federal Reserve Bank of Chicago and the Indiana Department of Financial Institutions that they disagreed with its view of the timing and recognition of certain loan losses at Irwin Union Bank and Trust Co., requiring it to submit amended reports to the FDIC.
The failures marked the first this year both in Indiana and Kentucky. However, bank failures have become a regular occurrence since the economic calamity late last year the ensuing credit crunch.
The FDIC said the last bank closed in Indiana was seized in 1992, while last closure in Kentucky occurred in 1991.
John Letzing is a MarketWatch reporter based in San Francisco.
http://www.marketwatch.com/story/irwin-union-bank-failures-bring-2009-total-to-94-2009-09-18
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04/22/05
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Premium
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Moderator BullNBear52 | |||
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[chart]images.investorshub.advfn.com/images/uploads/2009/9/5/tzyuhfederal-reserve.jpg[/chart]
The late Edgar Fiedler, a former Conference Board economic counselor who is reputed to have invented the flippant first rule of forecasting, said something equally tongue-in-cheek about the pitfalls of predicting the future. ``He who lives by the crystal ball,' Fiedler said, ``soon learns to eat ground glass.'
Fed Links...
Consumer Price Index
http://www.bls.gov/news.release/cpi.nr0.htm
Consumer Credit Rates
http://www.federalreserve.gov/releases/g19/current/default.htm
Key Interest Rates
http://www.federalreserve.gov/releases/H15/update/
Foreign Exchange Rates
http://www.ny.frb.org/markets/fxrates/noon.cfm
Open Market Operations
http://www.newyorkfed.org/markets/omo/dmm/temp.cfm
Speeches of Federal Reserve Board
http://www.federalreserve.gov/boarddocs/speeches/2005/
The Beige Book
http://www.federalreserve.gov/fomc/beigebook/2005/20050420/default.htm
Economic Indicators Calendar
http://www.ny.frb.org/research/national_economy/i-aug05.html
Please remember the TOU will be strictly adhered to.
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