To regulators, naysayers and haters, the hedge fund industry has had one trump card to play for years: hey, we didn’t cause the financial crisis.
Cause the crisis? Maybe not. But a staff report lands from the New York Fed which suggests hedge funds did at least make it worse, adding to disruption in the credit markets that helped to seize up funding for US companies after Lehman Brothers collapsed. Read more
Not surprisingly, and as Financial Policy Committee external member Martin Taylor predicted, his comments on the housing market have got plenty of attention.
Reading his speech from Monday though, we think there was another comment in there worth keeping an eye on.
It’s clear that the safety of the banking system is an absolutely central objective, and one which the FPC has already worked on and will continue to address. But is that enough?
What you don’t hear very often (and we are as guilty of this as anyone) is that the Fed data of “corporate securities held by primary dealers” is tainted with some assets that don’t look very much like corporate bonds. Those would be private-label residential mortgage-backed securities (RMBS), commercial MBS (CMBS) and commercial paper (CP).
The Fed, perhaps in an effort to better examine the inventory issue, began breaking out the data by security type in the spring of this year. Read more
Received wisdom has it that the implementation of new financial regulation in the wake of the crisis has been held back, or watered down, by furious behind-the-scenes lobbying by the investment industry.
But it’s pretty clear, in Europe at least, that the technocrats, be they in Paris or Brussels, have their own particular ways of making sure that nothing much actually gets done. Read more
Now here’s a sign of the times…
The Network aims to promote collaboration in international financial matters to help facilitate cost-effective resolution of disputes and avoidance of duplicative and inconsistent adjudication of the same matters in different jurisdictions, thus increasing the likelihood of resolving financial disputes in a way that all market participants will find to be substantively and procedurally fair… Read more
We suggest watching this story…
It looks like EU competition regulators paid some unannounced visits to oil company offices around Europe on Tuesday — note the reason: Read more
From the London Stock Exchange on Monday…
As part of a reorganisation of London Stock Exchange Group’s (“LSEG”) Italian legal entities earlier this year, a valuation report was prepared for the specific purposes of the reorganisation and was filed with the Companies Register of the Milan Chamber of Commerce and has recently been made public. This report included a LSEG revenue projection for the year ending 31st March 2016 of €1.4Bn with 12% annual LSEG revenue growth from the start of FY14. It also included 5 year (FY14 to FY18) financial projections for the Italian legal entities together with historic information for such entities for the 9 months to 31 December 2012.
Yes yes, the FSA had trouble passing the Wall Street Journal around the office in mid-2008.
They all come from this Stefan Ingves speech given on Thursday — in which the Basel Committee chair addresses “some concerns… that banks are not calculating risk weighted assets” – the denominator in a bank’s regulatory capital ratio – “consistently”.
Basel is about to release results of a probe into banking and trading books… Read more
On Friday, the FSA has published its feedback and responses to a review of the Financial Services Compensation Scheme funding model issued back in July. It’s long. Lucky for us then that we were looking for one thing and one thing only — the stance on “pre-funding”.
The revised Liquidity Coverage Ratio of course! Read more
The Basel Committee on Banking Supervision has finalised rules for bank liquidity. Some of the changes had been anticipated in recent weeks, particularly after the US banks ramped up their lobbying efforts. That said, they’re still quite a big departure from the 2010 draft rules, especially on what qualifies as a high quality liquid asset.
The complete set of changes is on the BIS website, but here are some highlights. Read more
“A judgmental structure of supervision that emphasises the big issues has to be matched by proper transparency . . . or it won’t work.” Andrew Bailey, head of prudential regulation at the Financial Services Authority, told that to parliamentarians on Monday.
Too bad there’s seemingly no tradition of transparent supervision in the UK, especially when it comes to banks. Read more
We’re developing a soft spot for that Keith Horowitz at Citi. Ne’er did a man express so much joy at an interest rate sensitivity disclosure. That’s our kinda cute.
This time Horowitz has gone to meet Matt Zames, JPMorgan’s new co-chief operating officer and operating committee member. They talked pendulums: Read more
No doubt the California buyside was up early this morning… checking whether they had any disclosures to make under the new short-selling regulation which affects them.
That would be the European one. Read more
What do you get when you reveal two new regulatory investigations as part of your slightly disappointing quarterly results? Answer: a 4.4 per cent drop in share price, as Barclays is finding out on Wednesday morning.
From the FT (our emphasis):
Barclays has warned investors that it is facing another fine in the US, this time over its conduct in power trading.
It has also disclosed that it is under investigation by the US Department of Justice and the US Securities and Exchange Commission over whether its relationships with certain third parties breached corruption rules.
UPDATE: A Treasury official got in touch with us after reading this post to explain a little more clearly what happens next.
First a bit of background. Dodd-Frank section 120 authorises the FSOC “to provide for more stringent regulation of a financial activity by issuing recommendations to the primary financial regulatory agencies to apply new or heightened standards and safeguards… if the Council determines that the conduct, scope, nature, size, scale, concentration, or interconnectedness of such activity or practice could create or increase the risk of significant liquidity, credit, or other problems spreading among bank holding companies and nonbank financial companies, financial markets of the United States.” Read more
SEC slams NYSE for sending market data to proprietary customer feeds before the one for the wider public (“the disparities ranged from single-digit milliseconds to, on occasion, multiple seconds”).
And it does a diagram. Read more
Via Marc Ostwald at Monument Securities on Friday, credit factoid du jour (if not de l’année):
Total dealer positions in corporate bonds fell to $58.5b as of Aug 29 vs $60b the previous week. It was the lowest level since $55.1b March 13, 2002. Read more
It’s no secret that we’re big fans of Andy Haldane on this blog.
Exhibit A — a paper given to this year’s Jackson Hole conference by the Bank of England’s executive director for financial stability, and Vasileios Madouros (also of the Bank). Read more
Peter Eavis over at Dealbook notes an underrated aspect of the big M&T/Hudson City regional banking deal — regulatory capital:
To do well in annual Federal Reserve stress tests, M&T Bank may want to increase its Tier 1 common ratio substantially. Read more
Click to enlarge:
It’s the product of all those Select Committee hearings, including appearances by Messrs. Diamond and Tucker. It is only a preliminary report. But it does not have kind words for the authorities who failed to stop the attempted manipulation of Libor before and during the financial crisis. (Barclays management is of course completely coruscated.) As jaded as we’ve all become by the Libor scandal, it’s pretty damning. Read more
European retail lending as a dying bank business model walking — charts via McKinsey, in this new report by the consultants:
HSBC came in for a kicking in the Senate Subcommittee on Investigations into anti-money laundering and exposure of the US financial system to drug and terrorism financing.
Some of this is old news; as the FT notes, HSBC has not been formally accused of wrongdoing in connection with the most recent investigation, but it has twice been ordered by US regulators to take action on deficient anti-money laundering practices. However investigation by the US Department of Justice, the US Treasury and the Manhattan district attorney, is under way into many of the allegations raised in the Senate report, and some analysts expect fines of up to $1bn to result. Read more
It’s been a little while since we had a nice Libor risk estimate so we were delighted when Morgan Stanley’s attempt dropped into our inbox. MS take the Libor risk in three chunks:
1) Regulatory fines (an estimated median 7 to 12 per cent hit to 2012 EPS). From MS (all with our emphasis): Read more
What’s a bank to do when it has to sit on exposures that it doesn’t like?
Sell them of course! Especially if those exposures are expensive to hedge and costly in terms of regulatory capital charges. Read more
Click for Goldman’s ‘living will ‘ for regulators, listing how it would try to resolve by selling parts of its business under bankruptcy:
The WSJ reported on Thursday that JPMorgan’s regulators will conduct a thorough review of the bank’s models, according to “people close to the situation”.
Thanks to a letter from the the Office of the Comptroller of the Currency to Senator Sherrod Brown, we know that one particular model — the VaR model that JPMorgan’s Chief Investment Office switched to in January 2012, and which failed to alert management to outsized risks the division was taking — did not require regulatory approval before being used. Read more
As I watched the intricate social ballet that occurred as cars and bikes slowed to enter the circle (pedestrians were meant to cross at crosswalks placed a bit before the intersection) Monderman performed a favorite trick. He walked, backward and with his eyes closed, into the Laweiplein. The traffic made its way around him. No one honked, he wasn’t struck .Instead of a binary, mechanistic process – stop, go – the movement of traffic and pedestrians in the circle felt human and organic.”
The above quote is from the ever-readable Dylan Grice’s latest missive in which he argues that regulation acts much like traffic-lights, in that it lulls market participants into a false sense of security. Read more
It’s a commonly-held belief that the bailout of Spain’s banks won’t be sufficient to solve the country’s problems. It will increase the government’s borrowing, and may not be large enough anyway.
The real solution is
fiscal banking political some kind of union. See if you can spot one of the barriers to moving forward with that: Read more
The full story of why JPMorgan entered into the trades that cost it so much money may never become public. However, thanks to Jamie Dimon’s testimony on Wednesday, we can conjecture a little more about the motivations behind the synthetic credit trades entered into by the bank’s Chief Investment Office.
The story begins with surplus deposits. JPMorgan was perceived as safe thanks to its size and relatively good record during the 2008 crisis, so it attracted significant deposit inflows. Much of this money was lent out, but not all of it was, giving rise to the problem of what to invest it in. With government bonds paying record low rates, the bank decided, understandably, to invest some of the funds in corporate and asset-backed securities. The CIO bought over $380bn of these bonds, a very substantial position. Read more