Thursday, July 5, 2012
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Receiving Wide Coverage ...
Regulators Made Us Do It: While we were grilling hot dogs and cracking open cold ones yesterday, our cousins across the Atlantic watched a committee of the U.K. Parliament grill former Barclays CEO Bob Diamond. He made an allegation the Journal calls “explosive” — that during the 2008 crisis the bank’s regulator had (perhaps inadvertently) encouraged it to submit lower quotes to the survey that produces the London Interbank Offered Rate. About a month after Lehman Brothers failed, Diamond told lawmakers, Paul Tucker, a top official at the Bank of England (and a leading candidate to become the central bank’s next governor), phoned him to express concern about the high numbers Barclays was reporting to the survey, which asks banks to estimate what it would cost them to borrow money from other banks. Diamond said he didn’t interpret the call as an order to lower Barclays’ hypothetical Libor rate, but that the subordinates to whom he relayed the information misconstrued it as such. Rolling Stone’s Matt Taibbi, true to form, calls the claim “an awesome piece of political jungle defense by Diamond, tossing a hand-grenade into the seat of Her Majesty's government minutes before he's supposed to be grilled by parliament.” But the FT says the testimony could have been worse for Tucker, since “people close to Mr. Diamond had suggested before his resignation that he would suggest the call was an implicit sanction for the bank to pretend it could fund itself at cheaper rates than reality.” The former CEO also told the skeptical panel he was unaware of Libor manipulation until last month, and he pointed the finger at other banks which, according to the Post, Diamond claimed “were routinely underreporting the rates at which they were borrowing, afraid that revealing how high their costs had soared would spark an investor panic or government nationalizations. He seemed to suggest that regulators were content to see misreporting of interbank lending during times of crisis.” Overall it was a testy hearing, with exchanges like this one recounted in the Journal:
Member of Parliament: "Either you were complicit, grossly negligent or incompetent."
Diamond: "Is there a question?"
You can find basic coverage of the event in the Wall Street Journal, Financial Times, New York Times and Washington Post. There are also “unanswered questions” sidebars in the Journal and FT. The Journal’s “Heard on the Street” column considers the practical obstacles to reforming Libor, not least of them the risk that “overhauls to make Libor more reflective of reality could lead to higher rates,” which would hurt borrowers who are paying floating rates tied to the index. But assuming that an accurate Libor is desirable (which it is at least for the parties paying fixed rates in interest rate swaps), this comment thread has some interesting, constructive suggestions for making it so from Journal readers. The Journal also has a short explainer on how Libor affects borrowing rates that you can give your summer interns to read (on their lunch hour, that is — what do you think is, kid, some kinda college class? Now back to work). Finally, the natural question for bank shareholders, as an analyst tells Bloomberg News, is “who’s next?” According to the wire service, there has been “minimal disclosure” about potential Libor liability from the more than a dozen banks being probed by international regulators for possible manipulation of the index.
Living Wills Unveiled: Regulators released details of nine large banks’ resolution plans under Dodd-Frank on Tuesday, which was the perfect time for such an important disclosure, since so many people were likely to be in their offices and monitoring the financial news on the day before…uh, scratch that. The Journal has a short story covering the basics and a “Heard on the Street” column that questions the living wills’ value as a preventative cure for too-big-to-fail. The column quotes this “bold” assertion from Citigroup’s living will: “It is unlikely that the resolution of Citi will ever be required." Bold, indeed. No doubt Citi has come a long way in the last four years, but if Jamie “Tempest in a Teapot” Dimon and Bob “Time for Bankers to Stop Apologizing” Diamond have taught us anything, it’s this: don’t tempt fate.
Wall Street Journal
A front-page story says some California cities are considering using the power of eminent domain in a “highly unorthodox” way — to acquire and restructure troubled home mortgages. An MBS investor calls the idea “appalling.”
“Wells Fargo spends more on lobbying from its Washington office than any rival, paying millions of dollars to influence mortgage rules” such as the definition of a Qualified Residential Mortgage under Dodd-Frank. The article notes that the bank wanted a 30% minimum down payment for QRMs, a suggestion that irked smaller competitors like New York Community Bank. A final definition of QRMs — the only type of home loans that lenders will be allowed to sell or securitize without retaining a piece of the credit risk — may not arrive until next year at the earliest. Such rules will “sway the profitability of the business in which Wells is now a clear leader,” the FT says. Shades of George Stigler.