Fed's Letter to Deutsche Bank

"In reviewing your earnings per annum,
We're less than impressed, and we pan 'em.
The bank may have gains,
But this letter pertains
To the haphazard way that you ran 'em."

The Wall Street Journal reports that the Federal Reserve Bank of New York has vented its frustration with the sloppy reporting of Deutsche Bank's US branches and subsidiaries.  In a December 2013 letter to the bank, senior Fed supervisor Daniel Muccia complained  that the bank's reports "are of low quality, inaccurate and unreliable. The size and breadth of errors strongly suggest that the firm's entire U.S. regulatory reporting structure requires wide-ranging remedial action."  It's a problem long in the making, wrote Mr. Muccia: "Since 2002, the FRBNY has highlighted significant weaknesses in the firm's regulatory reporting framework that have remained outstanding for a decade."

Of course, it's not only the Fed that should be concerned.  Investors too rely on firms' financial reports to value their securities and decide when to buy, sell or hold.  Lest we forget, the feeling that "you can't trust the numbers" was a factor in the global financial meltdown of not so long ago.

Regulatory Oversight

If the SEC chairwoman-candidate
Has both tried the Street and defended it,
One may sensibly ask
If she'll make of her task
To have reined in the Street or befriended it.

According to the New York Times' Dealbook, there's a "signal to Wall Street in Obama's pick for regulators."  So, one may ask, what is the signal?  In announcing his nomination of Mary Jo White to run the Securities & Exchange Commission, President Obama said: "It’s not enough to change the law; we also need cops on the beat to enforce the law," adding: "You don’t want to mess with Mary Jo." Indeed, Ms. White made a name for herself as the United States Attorney in Manhattan in the '90s, prosecuting the 1993 World Trade Center bombers and John Gotti, among others. The current US Attorney in Manhattan, Preet Bharara, who put inside trader Raj Rajaratnam in jail, is among the generation of prosecutors trained by Ms. White.

This is all well and good, but her appointment sends other signals as well.  As a recent, must-watch PBS Frontline documentary points out, no Wall Street or financial industry figures have been prosecuted for the frauds that contributed to the financial crisis.  As chair of the litigation department at Debevoise & Plimpton for the last ten years, Ms. White made it her business to keep the industry's leaders "untouchable".  The "revolving door" between Wall Street and Washington has long served to take the teeth out of regulation; it remains to be seen which way the door is turning in the case of Mary Jo White.

No Security in Book Value

Said a banker: "The Crisis revealed,
In investments we carried for yield,
How extreme fluctuations
Affect valuations,
So better to keep them concealed."

Said investors: "It's better to trust
In the price you could fetch if you must,
And the equity value
Which, hopefully, now you'll,
Accordingly, have to adjust."

Bankers, regulators, lobbyists and the US Congress have all turned their attention to the US implementation of the Basel III regulatory framework, which appears to have very few friends in high places. One always-controversial element of Basel III is the requirement to mark to market those securities that a bank has as "available for sale." Bankers hate this idea because it increases the reported volatility of earnings and capital. At a Senate Banking Committee last week, Michael S. Gibson, director of the Division of Banking Supervision and Regulation at the Fed, appeared prepared to give a little in the face of industry pushback, saying that regulators are "considering changes to the treatment" of such securities.

However, if bankers hate mark-to-market, investors should love and defend it. As the Journal's Heard on the Street columnist David Reilly writes: "the only thing worse than a loss at a big bank is pretending it doesn't exist." Reilly points out that available-for-sale securities comprised $2.6 trillion, or 19% of bank assets, on June 30, up from 14% in 2008. Like it or not, such investments do fluctuate in value, and pretending that they could be disposed of at cost only leads to investor distrust during financially difficult times. Unlike bank loans, liquid securities are not reserved against, so marking them to market is the only way to assure that, at least in this one respect, investors can place some credibility in the reported book value of financial institutions.

WSJ: No Security in Book Value

Here is my latest post for the Journal's Total Return blog, on the fight over banks' having to mark to market their securities held for sale. Please enjoy, and leave a comment!

Regulatory Overlap

If three regulators, who serve you,
Have the same foreign bank in their purview,
Then one of that lot
May find the bank's not
So compliant, in his or in her view.

The one who would fulminate justly
To enforce all the statutes robustly,
Will doubtless surprise
The other two guys,
Who are only as tough as they must be.

In a case of awkward regulatory overlap, New York state's new financial regulator reached a high-profile settlement of Iranian money laundering allegations while federal authorities are still conducting their own, quieter investigation. British bank Standard Chartered has paid $340 million to the New York State Department of Financial Services to settle charges that it laundered money for Iran and lied about it to regulators. New York's chief banking regulator Benjamin Lawsky spoke of $250 billion in illicit transactions over a ten-year period, though the Fed, Treasury and the Justice Department consider the scope of the violations to be far smaller. For its part, Standard Chartered would only admit to about $14 million of money transfers in violation of federal law. Mr. Lawsky's noisy threats to revoke the bank's state charter roiled the waters with federal regulators, who accuse him of overstepping his bounds, and their British counterparts, who object to the tarnishing of their banks' reputations.

The Business of Money

If those who manage and gather it
Were not so quick to slather it
On those who watch and legislate it,
Less so for to regulate it,
Likely there'd be risk in it,
But less than now exists in it,
Regaining public trust in it
When rules are more robust in it.

Last night, Dr. Goose attended a stimulating panel discussion at the Museum of the City of New York entitled: "Can Wall Street Reinvent Itself?" The short answer is that nobody knows, but you can provoke some necessary clear thinking and soul-searching when smart, knowledgable and conscientious people tackle the question. Moderated by NYU financial law professor and retired Lehman investment banker Ronald Filler, the panel included -

• Josh Brown, financial advisor at Fusion Analytics and former broker, author of Backstage Wall Street, blogger at Reformed Broker;
• Heidi N. Moore, New York bureau chief of Marketplace radio and former Wall Street Journal reporter;
• Bill Miller, partner at the Herskovits law firm, providing legal counsel to securities-industry firms, registered persons, whistleblowers and defrauded investors; Forbes contributor, blogger at Broke and Broker.

If there was consensus among the panel, it was that the public's trust is damaged and can only be regained by by an industry structure that rewards working in the client's interest, with simple, strong rules to enforce such behavior.

Banking Bair

Sheila Bair, no longer at leisure,
Said: "The banks have collective amnesia,
As they're not really fit
For the capital hit
That would come with the next global seizure."

Former FDIC head Sheila Bair has come out of semi-retirement to head a new watchdog group, the Systemic Risk Council. Backed by the Pew Charitable Trusts, the Council will monitor and encourage financial regulatory reform. In an interview with Kai Ryssdal of Marketplace, Ms. Bair voices concern that the major banks have forgotten the lessons of the financial crisis, and spend more time trying to water down reforms than strengthening themselves for the next crash. In a related piece, Marketplace's Heidi Moore explains that the major US banks alone require $500 billion of additional capital to withstand a major shock. In this, America is just the tip of the iceberg, as the greatest global systemic risk lies with banks in Europe and Japan.

Money, Power & Wall Street - The Limericks

The tale of financial collapse
Is ever-enthralling, perhaps
Because of the way
The reckoning day
Has evaded those gluttonous chaps.

Thus, a crisis with hardly an equal
Has an ending that doesn't quite speak well,
Like a Hollywood thriller
Whose psychopath killer
Escapes to return in the sequel.

On Monday evening it seemed as though the whole of the financial Twittersphere was glued to, and tweeting about, the PBS Frontline documentary "Money, Power & Wall Street". Although we all know the story by heart, it seems that we cannot tear ourselves away; perhaps because, four years later, so little has changed in the financial landscape and no-one has been brought to justice for wrecking the global economy. It's really as if "the killer is still free." Some of the evening's most memorable tweets reflected this foreboding sentiment, from the earnest:

Truly, how can people watch this and still say we should repeal financial regulation and go back to the old status quo? #frontline

— Austan Goolsbee (@Austan_Goolsbee) April 25, 2012

To the angry:

Derivatives STILL remain exempt from Insurance regulations, have no reserve requirements $AIG $BAC $C $LEH $BSCwashingtonpost.com/business/credi… $$

— Barry Ritholtz (@ritholtz) April 25, 2012

To the snarky:

Obama: "I'm gonna change everything on Wall Street, right after I take this meeting with Robert Rubin..." #frontline

— Downtown Josh Brown (@ReformedBroker) April 25, 2012

What's your take on the crisis and the documentary?

Unrepentant

The enablers of fraudulent crises,
Reluctant to give up their vices,
Periodically line up
For pols who will sign up
To learn what their fiscal advice is.

In a scathing guest post in the Big Picture blog, financial fraud expert Bill Black despairs that so many economic advisors with track records of enabling "green slime" in the banking sector are unrepentantly pushing the same policy prescriptions. "Romney's lead economist urges policies that will cause the next financial crisis" is Mr. Black's headline. He singles out Mitt Romney's lead economic advisor (and George W. Bush's erstwhile lead economic advisor), Greg Mankiw, for special criticism. Prof. Mankiw's latest New York Times column extolls the virtues of governmental competition in the regulatory sphere, when there is ample history to show that such competition devolves to a "race to the bottom" leading to a lax regulatory environment that invites criminality. The most famous example is of course the savings & loan crisis of the 80's.

Full disclosure: Prof. Mankiw and his famous graduate student Jodi Beggs gave Dr. Goose his first big break in economic show business.

A Strategic Withdrawal

The L.A. town council, climactic'ly,
Ruled that porn stars must act prophylactic'ly.
"To mandate a condom
Is really beyond 'em,"
Said producers; "We're pulling out tactic'ly."

In a case of regulatory overreach made for limericks, the Los Angeles City Council passed an ordinance that actors in pornographic productions must wear condoms as a condition of obtaining a film permit. Some immediately decried this unwarranted government penetration into business affairs, sensing a backdoor attempt to regulate the industry's license. Porn moguls fear that this law could lead to flaccid sales in a business that has never developed a pulsating market for safe sex films. The city responded that the filmmakers are being too thin-skinned about condoms, the use of which is really a public health issue. Taking a cue from their on-screen birth control practices, movie producers threatened withdrawal from a domain of which they are evidently not master. Industry observers (also known as voyeurs) cautioned against premature evacuation, as the business is too entrenched in Los Angeles. It is estimated that 80% of US pornographic films are produced within the San Fernando Valley.

AT&T's Lessons on Lobbying

"Since the need's too uncertain to time it,
One must keep at the pump so to prime it;
Thus largesse we have spread
To the Blue and the Red
For an easier anti-trust climate."    

AT&T's announced $39 billion acquisition of rival T-Mobile USA would combine the second- and fourth-largest US mobile providers, setting the stage for a potential confrontation with the regulators who would have to approve the transaction.  Fortunately for AT&T, as the top contributor to members of Congress for the last generation, they may find a receptive audience.  So, for example, their $15 million in annual contributions to Republicans and Democrats may weigh against the fact that the proposed merger would leave 3 out of 4 US mobile users in the hands of two carriers.

Analogies Écon V: Put a Ring On It

The economy, not unlike sex,
Full of forces untamed and complex,
Must, to bring forth no bastard,
By cov'nant be mastered,
That channels, constrains and protects.

Analogies Économiques I

Like the fields of the footballing fray,  
The economy functions okay  
When the rules form a framework
That makes the whole game work
By fostering sportsmanlike play.  

III for Basel III

The Basel III Capital Directive,
A liquidity crisis corrective,
Gives eight years for compliance
To banks and their clients
'Til new rules are fully effective.  

The Directive has caused a commotion
'mongst the banks on both sides of the ocean;
In percentage it leavens
From four up to seven
The equity capital quotient.  

The minimum equity score,
Now seven percent 'stead of four,
Will, the bankers all fear,
Make interest rates dear
When comparing with rates heretofore.

Chris Dodd Enthuses

"At long last," the Senator said,
"My banking reform's put to bed;
It'll hammer a nail
Into 'Too Big to Fail' -
At the brokers, the banks - and the Fed."

Overheard at the Senate Banking Committee

"When panic and fear were the norm,
We sought regulatory reform,
But in 2010
Banks look solvent again,
So to rock the boat seems like bad form."

Ben's Close Call

It's confirmed, though many were doubting:
The Fed Chair gets one more four-year outing -
Though the thought of Bernanke
Makes many so cranky,
Both socialists and Birchers are pouting.

The Volcker Rule

Paul Volcker, grimacing glumly,
Says, "You banks should behave yourselves humbly.
While taking TARP funding,
Please put aside plund'ring,
And paying your people so plumly."

A Congressional Inquiry

A Wall Street CEO delegation
Faced a government investigation;
The committee averred,
"If we take your own word,
You sold faulty pre-owned transportation."

Barney Triumphant

"Mark my words," bellowed Congressman Frank,
To each hedge fund, investor and bank,
"When my purview's systemic,
No more risk epidemic
There'll be, and you'll have me to thank."