Financial equivalent of a four-alarm fire

Bets by some of the same banks that helped Greece shroud its mounting debts may actually now be pushing the nation closer to the brink of financial ruin. Echoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers.


These contracts, known as credit-default swaps, effectively let banks and hedge funds wager on the financial equivalent of a four-alarm fire: a default by a company or, in the case of Greece, an entire country. If Greece reneges on its debts, traders who own these swaps stand to profit.


“It’s like buying fire insurance on your neighbor’s house — you create an incentive to burn down the house,” said Philip Gisdakis, head of credit strategy at UniCredit in Munich.

And reform is dead in the US Senate; a repeal of the laws allowing banks to use their own capital for investment banking will not pass. What will it take for reform to pass? The US economy almost fell off the edge. Greece is teetering, and if it falls the repercussions in Europe will be awful.

Banking fees

February 23, 2010
Banks Apply Pressure to Keep Fees Rolling In
By ANDREW MARTIN and RON LIEBER

For many households trying to improve their finances, tossing out pitches from the bank has become almost automatic. But in recent weeks, Chase has been fanning special letters out to consumers with an offer that it urges them not to refuse.

“Your debit card may not work the same way anymore, even if you just made a deposit. Unless we hear from you,” the message, emblazoned in large red type, warns. “If you don’t contact us, your everyday debit card transactions that overdraw your account will not be authorized after August 15, 2010 — even in an emergency,” with “even in an emergency” underlined for emphasis.

As the government cracks down on the way banks charge fees for overspending on debit cards, the industry is mounting an aggressive campaign aimed at keeping billions of dollars in penalty income flowing into its coffers. Chase and other banks are preparing a full-court marketing blitz, which is likely to include filling mailboxes with various aggressive and persuasive letters, calling account holders directly, and sending a steady stream of e-mail to urge consumers to keep their overdraft service turned on.

Starting this summer, banks must get consumers to agree, or “opt in,” to a service covering purchases on a debit card when there is not enough money in their account. The Federal Reserve has ordered the same restriction for banks that want to let people withdraw more than their balance at an automated teller machine. Many banks now automatically provide such coverage for fees of up to $35 or more.

So many people now dip their balance below zero that banks generated an estimated $20 billion from overdraft fees on debit purchases and A.T.M. transactions in 2009, according to Michael Moebs, an economist who advises banks and credit unions. All of this revenue is potentially at risk, since these are the two areas that the new Federal Reserve regulations cover. (Banks generate an extra $12 billion by covering checks and recurring bills; under the new rules, they can still cover those and charge fees without customers’ consent.)

Over the last decade, these fees have become an increasingly important source of income for banks as consumers have turned to debit cards to pay for a wide variety of their purchases, whether monthly bills or a pack of gum. (Many banks also offer less controversial overdraft programs in which consumers sign up to cover shortfalls in their checking account by pulling money out of a savings account or a credit card.)

The persuasion campaigns, which are just getting under way, come at a precarious time for many banks and credit unions as they scramble to find new revenue streams amid an economic downturn and new laws and regulations that threaten profitability. For instance, new credit card laws that went into effect Monday limit banks’ ability to raise interest rates on existing balances.

Given the billions at stake, consultants are urging banks and credit unions to hire them to help. “Your fee income will take a substantial ‘hit’ if you don’t start getting consumers to ‘opt-in’ for POS/ATM overdrafts NOW!” Mike Sobba, president of Strunk & Associates, a financial institution advisory service, warned banks in a pitch on the company’s Web site.

Some are even lobbying banks to focus their pitch on the minority of customers who are responsible for the vast majority of overdraft fees. According to a Federal Deposit Insurance Corporation study in 2008, 93 percent of overdraft fees come from the 14 percent of people who exceed their balances five times or more in a year.

“Doesn’t it make sense to try and protect this revenue stream and encourage these customers to opt-in?” said Eric Wittekiend, strategic adviser at Raddon Financial Group, in a report aimed at banks and credit unions. “Right now I’m favoring an aggressive opt-in strategy to protect as much revenue as possible,” he said.

Another consultancy, Pinnacle Financial Strategies, advises an “Opt-in Total Solution” program for banks and credit unions trying to stem losses in overdraft fees. Pinnacle’s briefing paper urges an “account holder identification process” to zero in on consumers who pay such charges repeatedly and persuade them to keep the status quo.

The banks’ marketing campaigns range from subtle to alarming. In recent weeks, Chase has tested several direct-mail pitches to see whether an assertive or alluring tone will drive people into a branch to sign up for overdraft coverage. “Watch your mailbox so you can say ‘Yes’ to continue Chase debit card overdraft coverage,” read one note, a toned-down version of an alternate letter warning consumers that their debit card might not cover unexpected emergencies, like a highway tow.

A spokesman for Chase said: “We have begun to reach out to customers and are encouraging them to sit down with a branch banker to make sure they understand overdraft services, which can be confusing. We want them to make an informed decision.”

When consumers get to the bank, another pitch awaits. Mark Sorenson went into a Dallas branch of Bank of America to turn off the overdraft function on his debit card recently and got a distressing response.

Beware, his banker cautioned. If Mr. Sorenson used the card to buy gas, the station might place a hold on his account and he might not be able to fill up at all, even if he had enough money in the bank to cover a full tank.

“My impression was that it was something he’d been briefed on,” said Mr. Sorenson, an architect who said he had tired of paying multiple fees when the bank automatically covered shortfalls on his debit card. “He was trying it out on me.”

A Bank of America spokeswoman said that its efforts, including giving consumers a document called “Opting Out of Overdraft Coverage,” were not meant to encourage customers to remain in overdraft services but to make sure they understood the complexity of the issue.

Rebecca Borné, policy counsel for the Center for Responsible Lending, said banks still had “tremendous incentive to get as many consumers to opt in as possible.” That is because new Federal Reserve regulations taking effect this summer would still allow banks to charge high fees for overdraft, with no limit on the number of times they impose the penalty.

Twinned with the blitz is a lobbying campaign in Washington by community banks and credit unions against several Congressional measures that would impose tough limits on overdrafts. They argue that their overdraft fees tend to be less than the large banks, and that overdraft provides a valuable service to customers, helping them overcome short-term money woes and saving them from the embarrassment of having a card rejected.

Several members of Congress have proposed legislation that would allow banks to charge just one overdraft fee a month, and six a year, and prohibit the reordering of transactions from largest to smallest to maximize fees. But while Democratic leaders insist overdraft legislation remains a priority, the bills have languished as lobbyists have pushed for delay and Congress focused on other financial issues.

“The ultimate strategy was not delay for delay’s sake,” said Steve Verdier, director of congressional affairs at the Independent Community Bankers Association. “The strategy was to ask Congress for enough time to explain the complexity.”

Amid a growing public outcry over these fees, several large banks announced changes to their overdraft policies last year. Bank of America said it would not charge a fee when customers exceeded their balance by $10 or less per day and would limit overdraft fees to four per day. At the end of March, Chase is eliminating overdrafts for customers whose accounts are overdrawn by $5 or less and has already limited overdrafts to three per day.

But even with those changes, customers could still incur more than $100 in fees a day if they opt to take overdraft coverage.

At least one credit union is using the new Fed rules to try to differentiate itself from its competitors. On its Web site, the UW Credit Union in Madison, Wis., says, “While we expect some financial institutions may aggressively market the idea of a consumer ‘opt in’ within the boundaries of this regulation, we have no such plans.”

Bank, or banana?

Banks May Get Help to Escape Risk Limits
By LOUISE STORY and ERIC DASH


Only a year after the government stepped in to aid Goldman Sachs and Morgan Stanley by granting them access to the federal safety net, policy makers are developing an exit path that would allow them and others to escape limits on banks being proposed by the Obama administration.


President Obama wants to limit the scope of risk-taking by barring banks with federally insured deposits from trading securities for their own accounts and from owning hedge funds and private equity funds. The plan, policy makers said on Friday, would effectively require bank holding companies — which Goldman and Morgan became at the height of the financial crisis — to divest themselves of these lucrative operations.


But Treasury Department officials are also seeking to give banks that do not like the proposed rules the option of dropping their status as holding companies to keep their trading and other investment businesses.

Don't like the rules? We'll change 'em fer ya. No probelma.


The move is likely to turn the spotlight on Goldman, which could be one of the biggest potential beneficiaries because it makes sizable profits from proprietary trading and runs many private equity and hedge funds. Goldman traders are known for taking large trading positions, even as they manage trades for clients. It is less clear that Morgan Stanley would consider such a step, because it has aggressively raised deposits and reduced trading operations since its big losses during the crisis. Officials from each bank declined to comment on Friday.

Allowing Goldman, or other institutions, to abandon their bank charters carries risks. Such a plan could create a two-tier system, where Goldman could pursue business activities different from its bailed-out peers like JPMorgan Chase. Goldman would lose access to the Federal Reserve’s overnight lending program, which provides emergency financing. But investors may still assume that the government would bail out Goldman if it had trouble, elevating the risk of moral hazard.


Simon Johnson, a former chief economist at the International Monetary Fund, said allowing either bank to revert to a securities firm would do little to address the underlying problem. They are so large and interconnected that a collapse would imperil the global financial system, he said. “You can call them an investment bank, a hedge fund, or a banana, but they are still too big to fail,” Mr. Johnson said.

Who could put it better?


Andrew Williams, a Treasury spokesman, confirmed that the proposal would allow the banks to reverse their decision to become bank holding companies. But he said the Fed would still closely regulate companies like Goldman because they would still be systemically important. “There is no escape hatch,” he said. “There is nowhere to hide. Large, interconnected, highly leveraged financial firms must be regulated on a comprehensive, consolidated basis, the same as those for big firms who run banks.”

How?


While bank holding company status is generally permanent, investors have speculated for months that Goldman might seek a way to unshackle itself from some of the additional government regulation that goes with it. Goldman officials have said privately it would like to shed its holding company status, although they have stated publicly that they do not plan to change the company’s charter. On Thursday, David A. Viniar, the bank’s chief financial officer, said the topic was not under discussion. “I just think it’s unrealistic,” Mr. Viniar said in a call with reporters. “I think we’re living in a world where basically every major financial institution is going to be regulated by the Fed.”


But Goldman could change its tune if the Treasury created guidelines for banks to shed their holding company status. The first step for Goldman would be to dispose of its debt, which is backed by the government, or wait until it expires in about two years, the person with knowledge of the plan said.

In addition to the federal bailout, the government agreed that the Federal Deposit Insurance Corporation would back some bank debt issued when the markets were frozen and banks could not otherwise raise money. Goldman has issued $21 billion of the debt.

The Treasury will include the exit strategy in the legislative proposal it is preparing to send to Congress, Mr. Williams said. Lawmakers could make significant changes to the proposal. The plan does not now clarify what proprietary trading activities would be limited. Officials said banks would not be permitted to use their own capital for “trading unrelated to serving customers.” They also said that the rules would require banks that own hedge funds and private equity funds to dispose of them over several years.

Mr. Obama called the ban on trading “the Volcker Rule,” in recognition of the former Fed chairman, Paul A. Volcker, who has championed the proposal to prohibit bank holding companies from owning, investing in or sponsoring hedge funds or private equity funds and from engaging in proprietary trading. Big losses by banks in the trading of financial securities helped fuel the credit crisis in 2008.

YOUR fault, not ours

Pencil in this one -- hell, ink it -- in the stupidity column. This story appeared in today's Wall Street Journal, in the Money & Investing section.

U.K. Bank Group Lashes Out at 'Irresponsible' Reforms


LONDON -- The U.K.'s leading banking association ended 2009 with a bang on Wednesday, accusing authorities of impulsive reforms that could undermine the U.K. as a top financial center and crimp future economic growth.

In an outspoken end-of-year statement on Wednesday, Angela Knight, Chief Executive of the British Bankers' Association, lashed out at the sector's critics, saying U.K. banks were being unfairly blamed for causing most of the country's economic woes.

Now, let's see: the financial calamity and economic crisis arose from the actions of banks and investment banks, the taking of extreme risks for the potential large rewards, and only the rescue of the government saved the banks and the financial system from disaster -- so, what isn't fair?


U.K. banks know "they have few - if any - friends. They understand they are held responsible for the whole problem - even when this is manifestly not the case," she said.

Friends? Manifestly? What universe are these people living in?

Ms. Knight offered blunt criticism of U.K. authorities, which include the treasury, the Bank of England and the Financial Services Authority, saying they had rushed ahead with "irresponsible" reforms on remuneration and capital requirements that go beyond what others have done.

She criticized everyone, except herself and her industry, for, it must be assumed she thinks, they are wholly blameless.

"There are literally tens, if not thousands of British jobs directly and indirectly related to banking - bringing billions of pounds in tax income," she said. "Some of this is now at risk and, although many are well aware of it, decision makers increasingly either wish to ignore it or - even more dangerously - choose not to believe it."

Depends what one wants to believe.

The U.K. banking system has recovered some of its strength this year, with several leading institutions reporting large profits in recent months. However, there is still broad public anger over the financial crisis, which saw the U.K. government inject tens of billions of pounds worth of taxpayer money into major banks, like Royal Bank of Scotland and Lloyds Banking Group and offer hundreds of billions of pounds worth of debt guarantees, loss insurance and liquidity support.

And the government is to blame for everything bad, even for the weather.

The banks have faced a particular outcry over bonus payments, with Chancellor of the Exchequer Alistair Darling imposing a 50% tax on bankers' bonuses above £25,000 earlier this month and other U.K. officials accusing bankers of having "tin ears" to significant reform. Nor have the opposition Conservatives offered much support for the sector with a general election due over the next six months.

Even the Tories realize that to defend bankers is a sure way to lose votes, and Tories need and want votes.


Meanwhile, FSA Chief Adair Turner has said U.K. authorities should consider whether some financial activities are socially useless and should be banned and questioned whether the banking system has simply grown too big.

Socially useless. Has quite a ring to it.

However in Wednesday's statement, Ms. Knight said authorities' demands that banks increase capital and liquidity reserves "have the potential to drastically reduce economic growth and restrict lending." Meanwhile she attacked as "stupid" the calls by some, including Bank of England Governor Mervyn King, for larger, more complex banks to be split up.

Have the potential to reduce lending? Is there enough lending being done? Stupid? It was stupid and irresponsible to allow such behemoths to come into being in the first place.


Ms. Knight said financial centers overseas "are waiting ready to pick up the business from the wreckage we will leave if we are stupid enough to discard a banking model which has served us well."


And she argued that many of the reforms needed in the U.K. banking system have already taken places, with new measures to prevent irresponsible lending, new regulations to clamp down on derivatives trading and a more aggressive approach from bank boards.


Enough change. Now, leave us alone (until the next time we need to be rescued).

Curbing size of bog firms

President Franklin D. Roosevelt signed the Glass-Steagall Act, passed in 1933, separating commercial and investment banking.

And Bill Clinton signed the bill that repealed the Act.

BoA Posts a Profit (so does Citi)

A Bank of America branch in New York. The bank's second quarter profit got a boost from big gains from its trading operations



July 18, 2009
Citigroup Reports Profit, Aided by Asset Sale
By REUTERS

Citigroup, a banking giant scrambling to survive the financial crisis, reported a $4.3 billion second-quarter profit thanks to gains on its Smith Barney deal, though its primary banking businesses continue to suffer from rising credit losses.

The bank, propped up with $45 billion of taxpayer money since markets imploded last fall, recorded a $6.7 billion gain from merging Smith Barney into a brokerage venture with Morgan Stanley. Under accounting rules, Citi gets to mark up its entire stake in the venture, of which Morgan owns 51 percent.

The gain boosted net income to $4.28 billion, or 49 cents a share, compared with a year-ago loss of $2.50 billion, or 55 cents a share.

Quarterly revenue rose 71 percent to $30.0 billion, with the rise due almost entirely to the Smith Barney gain as well as net write-ups.

Credit costs increased to $12.4 billion, including an addition of $3.9 billion to loan loss reserves. That brings the total allowance for loan losses to 5.6 percent of total loans.

Shares of Citigroup are down 94 percent since peaking in May 2007 and have fallen by half this year, but they have tripled since financial services stocks began rallying in March. They were up 2 percent in premarket trade.

The bank is expected to soon complete a swap that will convert the United States government’s investment into a 34 percent equity stake in Citigroup.


July 18, 2009
Bank of America Posts a Profit on Trading Gains
By GERRY SHIH

Bank of America and Citigroup, giants that have come to symbolize the troubles plaguing the nation’s banking industry, announced Friday that they were once again turning handsome profits.

Bank of America reported a $3.2 billion profit for the second quarter. Citigroup said it earned $4.3 billion during the period.

But behind the figures was a sober reality: Those happy results were driven by billions of dollars in one-time gains — in the case of Bank of America, by profits from the sale of a stake in a big Chinese bank and, in the case of Citigroup, by a bonanza from a new joint venture for its Smith Barney division.

Without those one-offs, the banks, despite two taxpayer-financed bailout dollars apiece, would have lost billions.

Like Goldman Sachs and JPMorgan Chase, which stunned Wall Street earlier this week with robust earnings reports, Bank of America and Citigroup got big boosts from their trading operations.

But the pain being felt by hard-pressed American consumers hurt these giants even more. Both set aside billions of dollars to cover looming losses on consumer loans and warned that, given the tough economy, the road ahead could be rocky.

Still, the results exceeded analysts’ expectations. Bank of America announced earnings of 33 cents per share, while Citigroup reported earnings of 49 cents per share. The results at Citigroup far outstripped the 18 cent per share loss that analysts had predicted.

But both banks — the last of the big lenders that have yet to pay back their emergency bailout money from the federal government — sold significant assets during the quarter, cushioning their bottom lines. Bank of America’s results were enhanced by the $5.3 billion pretax gain from the sale of shares in the China Construction Bank. Citigroup formed a joint venture with Morgan Stanley for Smith Barney, resulting in an $11.1 billion pretax gain for the quarter.

While the results provided another sign that American banking industry is stabilizing somewhat faster than many had expected, they nonetheless underscored how the sagging consumer economy is hurting banks big and small. For the moment, trading and other traditional Wall Street businesses, such as securities underwriting, are powering profits at many big institutions.

At Bank of America, record trading profits of $6.7 billion and a pickup in investment banking fees lifted net revenue to $33.1 billion, up from $20.7 billion a year ago.

Bank of America also reported that it increased its capital buffers by nearly $40 billion by issuing stock and selling assets in a sign that it is preparing to absorb losses in its commercial and consumer loan businesses. Federal officials told the bank in May to raise at least $33.9 billion following stress tests conducted by bank examiners. Citigroup was told to raise $5.5 billion.

Still, analysts said before the report that Bank of America might need to buttress its capital further. The bank said that its global card business lost $1.6 billion in the second quarter due to “weakening economies in the U.S., Europe and Canada.”

“I think they will need to build billions of dollars of loan loss reserves this quarter,” said Jeff Harte, a banking analyst at Sandler O’Neill before the report was released. “It’s going to cost them significantly.”

The bank’s chief executive, Kenneth H. Lewis, acknowledged in a statement that “difficult challenges lie ahead from continued weakness in the global economy.”

At Citigroup, the chief executive, Vikram S. Pandit, echoed that view. “Our most significant challenge now remains consumer credit,” Mr. Pandit said in a statement. “Losses in our consumer businesses have been growing for some time, but we see positive signs of moderation in those loss trends.”

Both executives are widely seen being under considerable pressure. Controversy continues to swirl over Mr. Lewis’s decision to buy Merrill Lynch last December, a move he has said he was urged to make at the behest of federal officials. Mr. Pandit, meantime, has worked to mend strained relationships with federal regulators.

Both banks are deeply entrenched in traditional services like consumer and commercial lending, and as unemployment and wage numbers continue to worsen and households fall behind on bills, loan and credit card losses are piling up. Small corporations are increasingly defaulting on loans as the business environment remains stagnant — as evidenced by the turmoil at the commercial lender CIT. The outlook is murkiest at Citigroup, long considered to be in the worst shape along the major banks.

Direct losses on loans totaled $8.4 billion during the second quarter as the total amount of loan losses in addition to the reserves set aside jumped by 81 percent, to $12.4 billion. And while Bank of America picked up strong investment banking fees, advisory and equity underwriting revenues at Citi’s plummeted by 50 percent and 30 percent, respectively, since the same period a year ago.

Further bumps are at the end of the month, when Citigroup is expected to convert preferred shares to common stock, raising the government’s stake in the bank to 34 percent. Existing shareholders will be heavily diluted.

Headlines

Sinopec Offers $7.22 Billion for Oil Firm - The takeover of Addax Petroleum would give the Chinese company access to oil fields in Iraq and West Africa.

Deep in Bedrock, Clean Energy and Quake Fears

O.E.C.D. Improves Outlook for Economy - The Organization for Economic Cooperation and Development has revised its forecasts for developed countries upward for the first time in two years.

DealBook Blog: KKR Revises Deal for Affiliate, Postpones NYSE Debut - The giant private equity firm said Wednesday that it is seeking to revise a merger with a publicly listed European affiliate that would give it an Amsterdam listing.

Citigroup Has a Plan to Fatten Salaries - The plan is a test for the Obama administration, which wants to limit compensation at companies that have received federal bailouts. These bozos simply refuse to understand what in damnation is going on.

Baucus Grabs Pacesetter Role on Health Bill

Speaking English?

Two items on the front page of today's Wall Street Journal caught my eye:

In the What's News column Business & Finance, this nugget: "PNC Financial cut its dividend 85% as the Pittsburgh bank vaguely pointed to shifting regulatory demands." Huh? Vaguely?

And in a story headlined Justice says CIA destroyed 92 tapes, the word memorandums is used. Well, it might be acceptable, but I'd say memoranda is better.

PNC Financial Services Group Inc. said Monday that shifting demands from the bank's government regulators, combined with withering economic conditions, had driven the Pittsburgh-based regional bank company to slash its quarterly dividend 85% to a dime.

During the conference call Monday, a couple analysts tried to ply more information from Rohr about how bank regulators are judging firms' financial health under the light of an almost unprecedented financial and economic conditions. But Rohr toed a careful line, and declined to say anything more than suggesting that oversight is growing more stringent.

Again, the grammar: a couple analysts? Oy vay, spare me.

WaMu Seized, Sold to J.P. Morgan

Largest Failure in U.S. Banking History
Morgan Chase took over Bear Stearns, and now takes over WaMu. What a behemoth! Chase was Chase Manhattan, and had swallowed Chemical Bank, itself having swallowed Manufacturers Hanover.