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DealBook: Rising Bank Profits Tempt a Push for Tougher Rules

April 17, 2013 by Leave a Comment

I hope the regulators move forward with tougher regulations, said Sheila Bair, an ex-chairwoman of the F.D.I.C.Alex Wong/Getty Images“I hope the regulators move forward with tougher regulations,” said Sheila Bair, an ex-chairwoman of the F.D.I.C.

Banks have been reporting steady growth in earnings since soon after the financial crisis. With the latest reports rolling in, analysts think the banks’ first-quarter profits will be their best ever.

But as welcome as such profits are to the banks, they may also become a source of discomfort. The ballooning bottom lines could embolden the lawmakers and regulators who want to introduce additional measures to overhaul the banking system.

After the financial crisis, many officials involved in the regulatory revamp feared that tougher rules, like caps on bank assets, could destabilize the financial system and harm economic growth. It is a view that prominent bankers and lobbyists have also voiced.

Despite industry opposition to new rules, the buoyant bank profits could add to the ammunition that influential figures in Washington are using to advocate for more radical ideas to overhaul the banks.

“I hope the regulators move forward with tougher regulations,” said Sheila C. Bair, a former chairwoman of the Federal Deposit Insurance Corporation, a primary bank regulator, and now a senior adviser at the Pew Charitable Trusts. “This wouldn’t endanger the economic recovery.”

Much has been done to strengthen banks since the financial crisis. The Dodd-Frank legislation, which Congress passed in 2010, and international banking standards known as the Basel III rules are forcing banks to hold safer assets, curtail trading activities and set aside more capital to absorb potential losses.

Even so, there is bipartisan support to do more. Most recently, Senator Sherrod Brown, Democrat of Ohio, and Senator David Vitter, Republican of Louisiana, said that they planned to introduce a bill that would require banks to hold considerably more capital. If passed, such a requirement is likely to prompt the largest banks to shrink in size. While a draft of the legislation does not stipulate a maximum size for banks, it requires financial firms with more than $400 billion of assets to hold additional capital. Big banks like Citigroup and Bank of America well exceed that amount, as do Wall Street firms like Morgan Stanley, but regional lenders would fall under that threshold.

The restlessness over the big banks extends beyond Congress.

Daniel K. Tarullo, the Federal Reserve governor who oversees regulation, floated an idea last year for limiting bank size. And Thomas M. Hoenig, vice chairman at the F.D.I.C., has been pushing the overhaul of large, complex banks as well as more rigorous capital standards.

The banking industry might be able to bear more regulations, given how it has fared under earlier measures. In some ways, the banks have thrived despite the added costs of all the new rules and demands since 2008.

Dick Bove, a bank analyst at Rafferty Capital Markets, estimates that F.D.I.C.-insured banks will earn $39 billion in the first quarter of this year, which would be a record quarterly showing. “No one can argue that banks were hurt from a profit standpoint by regulation,” he said.

The financial overhauls of the last four years don’t appear to have held banks back from indulging in activities that facilitate economic growth. Helped by Wall Street financial firms, American companies have raised huge amounts in capital markets since the crisis. Last year, corporations issued $940 billion of bonds, a record amount, according to Dealogic, a data provider. This has happened even as investment banks scaled back their operations to get ready for regulations they vocally oppose, like the so-called Volcker Rule.

The overhaul doesn’t appear to have hurt the housing market, either. Large lenders like Wells Fargo have profited well from the recent boom in mortgage refinancing. That activity has also helped consumers, through sharply lower borrowing rates for millions of homeowners.

Banks are also making significantly more loans to companies, which bolsters the economy and job growth in many parts of the country. There is even evidence that the overhaul may have helped the banks become better run. Citigroup, which was subject to much regulatory pressure, is more streamlined and reported strong first-quarter earnings this week.

Little of this might have been expected after hearing past warnings from bankers. In 2011, Jamie Dimon, chief executive of JPMorgan Chase, said that the proposed rules to overhaul derivatives, a commonly used financial instrument, “would damage America.” He also said that the Basel rules were “anti-American.” Comment letters filed by lobbyists with regulators used sophisticated-looking models to show how rules could hold back the economy.

“As far as the banks are concerned, there is never a good time to raise capital or increase regulation,” Ms. Bair said. “When times are bad, they say it could hurt things, and when times are good, they say they don’t need it.”

Some analysts, however, caution against reading too much into the banks’ strong profits.

Though banks have been preparing for new rules for months, many of them have not been fully executed, which means the true costs of the measures will not be known until later.

Mr. Bove says that, while bank profits have hardly suffered from new regulation, their customers have. Lenders have simply passed on many of the costs, mostly in the form of new fees, he said. “The government aimed a Stinger missile at the banking industry and missed and hit the consumer instead,” said Mr. Bove, who also notes that loans to small business are still weak.

In addition, bank profits may not be as strong as they look, say some analysts. Earnings appear less impressive when taking into account the new capital that banks have to hold. This can be seen when applying a metric called return on equity, which reflects the extra capital.

Financial companies in the Standard Poor’s 500-stock index had a 7.9 percent return on equity last year, according to data from S. P. That’s below the 10 percent return for utilities last year, also a regulated industry. And the banks’ return is down from the 16 percent return that they achieved in 2006.

That is why some analysts argue that it would be a mistake to force banks to hold even more capital than they already will under Dodd-Frank and Basel III. They argue that it would depress returns on equity and therefore prompt banks to exit certain businesses, reducing credit in the economy. In a research note last week, a Goldman Sachs bank analyst estimated a Brown-Vitter bill could remove $3.8 trillion of credit from the United States banking system.

But considering that past dire forecasts haven’t materialized, advocates for tougher rules may be tempted to press on.

Phillip L. Swagel, a professor at the University of Maryland School of Public Policy, sees risks in adopting higher capital reserves, but he says he thinks the industry’s gloominess can be overdone.

“I do understand the frustration of the bank critics when they see pieces like the one from Goldman Sachs saying that the world will end under Brown-Vitter,” said Professor Swagel, who served as assistant secretary for economic policy under Treasury Secretary Henry M. Paulson Jr.

Despite the sharp debate, he says he thinks there is growing agreement among policy makers, and even banks, that more capital might be needed. “I see consensus on the top-line issue of more capital,” he said.

Article source: http://dealbook.nytimes.com/2013/04/17/rising-bank-profits-tempt-a-push-for-tougher-rules/?partner=rss&emc=rss

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DealBook: A Year After MF Global’s Collapse, Brokerage Firms Feel Less Pressure for Change

November 1, 2012 by Leave a Comment

Jon S. Corzine, the former chief of MF Global, at a House panel in 2011.Alex Wong/Getty ImagesJon S. Corzine, the former chief of MF Global, at a House panel in 2011.

When MF Global toppled a year ago, chaos engulfed a Chicago trading floor. Customers were locked out of their accounts, later discovering that about $1 billion of their money had disappeared.

The debacle, which played out on the evening of Halloween, prompted federal authorities to immediately bear down on the brokerage firm and the broader futures trading industry.

But a year after a federal grand jury issued subpoenas and regulators vowed reforms, the largest bankruptcy since the financial crisis has begun to fade from Wall Street’s memory.

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Federal authorities have all but cleared MF Global’s top executives of criminal wrongdoing, people briefed on the matter say. The government has yet to usher in a wider overhaul of futures trading rules, save for certain piecemeal policy changes. And the profit-making exchanges that rely on brokerage firms for business still police the futures industry, presenting potential conflicts of interest.

The slowing momentum for change has provided relief for the brokerage firms that dominate the futures trading industry. The Chicago companies, which largely dodged the humbling losses that scarred Wall Street in 2008, continue to cast MF Global as a fleeting distraction rather than a permanent black eye for their business.

“We haven’t seen a dramatic change,” said Terrence A. Duffy, executive chairman of the CME Group, the giant exchange that oversaw MF Global.

But the aftermath, Mr. Duffy noted, has left some customers wary.

Farmers and ranchers traded futures contracts through MF Global to protect themselves from the price swings of their crops. While the clients have received 82 percent of their missing money, they are still owed millions of dollars.

With the prospect of a full recovery unlikely, some traders are sitting on the sidelines. Others who continue to trade are seeking added assurances that the brokerages will follow the law.

“Every conversation with clients is about safety and sanctity of customer funds,” said Mike O’Callaghan, a managing director of business development at Knight Capital’s futures business.

Futures customers — and the integrity of the industry — were dealt a further blow this summer when another firm collapsed after misusing customer money. The chief executive of the firm, the Peregrine Financial Group, attempted suicide before eventually pleading guilty to carrying out a nearly 20-year scheme to raid customers’ accounts.

The problems have taken their toll on customer confidence.

“The general tenor is fear,” said James L. Koutoulas, chief executive of Typhon Capital Management, a hedge fund client of MF Global and the head of the Commodities Customer Coalition, a group of customers fighting for the return of their missing money.

Mr. Koutoulas and other customers are eager for a reckoning. They have questioned why authorities have not taken a harder line with Jon S. Corzine, the former chief executive of MF Global. Criminal investigators have largely concluded that chaos and porous risk controls at the firm, rather than fraud, led to the disappearance of the money.

“You can’t raid customer accounts and get a slap on the wrists,” Mr. Duffy said. “There needs to be stiffer penalties.”

MF Global executives might still face legal repercussions. The Commodity Futures Trading Commission, the industry’s federal regulator, could level an enforcement action against Mr. Corzine, even though such an action would be weeks or months away.

“It must be frustrating to people not to have a final outcome for what may appear to be malfeasance,” said Bart Chilton, a commissioner at the agency. “But investigations take time and we need to ensure that we’ve done a thorough review.”

As authorities continue to build a regulatory case, a Congressional investigation into MF Global’s collapse is drawing to a close. The chairman of the House Financial Services Committee’s oversight panel announced Wednesday that he would release an investigative report about MF Global in the next “few weeks.” Randy Neugebauer, Republican of Texas, said the report would serve as an “autopsy of how MF Global came to its ultimate demise and what policy changes need to be made to prevent similar customer losses in the future.”

MF Global was also a topic of conversation Wednesday at an annual industry conference in Chicago. Futures firms there planned to discuss new ways to protect customer cash and restore confidence in their industry.

A regulatory effort, while incomplete, has generated new measures that aim to protect customer funds.

The CME Group, which has started a $100 million protection fund for farmer and ranchers, has stepped up its surprise audits of brokerage firms. The CME and the National Futures Association, another self-regulatory group, also championed the so-called Corzine rule, which forces top executives to approve any transfer of more than 25 percent of the funds sitting in a customer account. And last week, the trading commission voted unanimously to propose new customer protections aimed at closing loopholes.

For their part, many MF Global employees remain chastened by their firm’s collapse. Lawmakers hauled Mr. Corzine, a former senator from New Jersey, to Washington three times to testify before Congressional committees. Some MF Global employees remain unemployed while others took major pay cuts to work for the trustee unwinding the firm’s assets.

Several MF Global employees planned to gather on Thursday for drinks at a Midtown Manhattan bar, just blocks from their old firm, to commiserate on their trying year. They canceled the event after another disaster, Hurricane Sandy, left some people stranded without power.

Article source: http://dealbook.nytimes.com/2012/10/31/a-year-after-mf-globals-collapse-brokerage-firms-feel-less-pressure-for-change/?partner=rss&emc=rss

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DealBook: Court Ruling Offers Path to Challenge Dodd-Frank

August 18, 2011 by Leave a Comment

Mary L. Schapiro, the S.E.C. chairwoman.Alex Wong/Getty ImagesMary L. Schapiro, the S.E.C. chairwoman, said the agency spent 21,000 staff hours drafting the proxy rule over two years.

A new front has opened in the behind-the-scenes battle over financial regulation.

Industry groups have been examining legal challenges to the Securities and Exchange Commission’s new corporate whistle-blower program and a provision surrounding the extraction of oil and natural gas from foreign countries, people briefed on the talks said. The Commodity Futures Trading Commission’s plan to curb speculative trading is also under fire.

The catalyst has been a federal appeals court decision in July striking down an S.E.C. rule that would have made it easier for shareholders to nominate company directors. The so-called proxy access rule stemmed from the Dodd-Frank act, the sweeping regulatory overhaul enacted in the wake of the financial crisis.

In recent weeks, lawyers and Wall Street trade groups have gathered in Washington to ponder the next big case. Lawyers branded one meeting, held by the United States Chamber of Commerce, as “Dodd-Frank Excesses,” according to two people who were notified of the meeting.

Until now, Wall Street relied largely on an army of lobbyists to chisel away at 300 new rules flowing from the S.E.C. and the Commodity Futures Trading Commission, among other agencies. But while lobbying might yield the occasional loophole, judicial rulings can halt new rules altogether.

“I would hope the agencies are taking to heart the potential consequences for Dodd-Frank rules,” said Eugene Scalia, the lawyer who won the proxy case on behalf of the Chamber of Commerce.

Hal S. Scott, a professor at Harvard Law School and a director of the Committee on Capital Markets Regulation, a research group that has been a critic of Dodd-Frank, said, “I do see lots of challenges coming down the pike.”

Regulators, reluctant to give in to industry pressure, are rushing to safeguard their rules from legal action. The commodity commission, having already delayed several Dodd-Frank rules for six months, is now studying the proxy case and considering adjustments to some proposed regulations, according to a person close to the agency. Earlier this month, the agency dispatched several staff members to meet with S.E.C. officials about the recent court decision.

For its part, the S.E.C. is weighing an appeal of the proxy ruling. The S.E.C. is also adding economists, planning to hire eight over the next two years, after the appeals court rebuked the agency for not fully evaluating the proxy rule’s economic effects.

The legal challenges are rooted in a 1996 law that requires the S.E.C. to promote “efficiency, competition and capital formation.” The law enabled the financial industry to build lawsuits around the economic costs of a rule, regardless of its merits.

In 2005, the Chamber of Commerce was the first business group to invoke the law, using it to successfully challenge certain S.E.C. rules for the mutual fund industry. The chamber later gained momentum with a string of similar victories in the United States Court of Appeals for the District of Columbia Circuit. Altogether, the appeals court has tossed out three financial regulations in the last six years, including the proxy rule.

Mr. Scalia, a partner at the law firm Gibson Dunn and the son of Supreme Court Justice Antonin Scalia, was on the winning end of each case.

Banks and corporations, rather than challenging the rules directly at the risk of alienating regulators, turn to seasoned litigators like Mr. Scalia and influential trade groups like the Chamber of Commerce to lead the fight. For more than 30 years, the chamber has had a separate litigation center, which operates as its own law firm in Washington.

“It is usually not in the interest of a single business to mount a claim,” said Brian G. Cartwright, the S.E.C.’s former general counsel who now works at the law firm Latham Watkins. “You need some cut-out man or organization that speaks for broad groups.”

The industry has shied from mounting a broader challenge to Dodd-Frank itself, finding it cheaper and easier to gradually chip away at the law’s fiercest provisions. Lawyers say a single lawsuit contesting the constitutionality of Dodd-Frank could take years — and millions of dollars — to wind through the courts, with little chance of succeeding.

“Dodd-Frank is not one thing but many,” said Margaret E. Tahyar, a partner at the law firm Davis Polk. “There is no reasonable constitutional or statutory challenge on the whole — only on the bits and pieces.”

By some measures, the proxy rule was an unlikely choice to challenge on economic grounds. The S.E.C. produced 60 pages on a cost-benefit analysis of the rule and spent 21,000 staff hours drafting it over two years, Mary L. Schapiro, the agency’s chairwoman, said in a recent letter to Congress.

That the proxy regulation still did not pass muster does not bode well for several other Dodd-Frank rules that received considerably less explication, sometimes only 25 pages, on their economic effects.

“The proxy case makes all the rules open target to challenge,” Mr. Scott of Harvard said.

Financial trade groups, according to several lawyers, are now considering suits against the S.E.C.’s corporate whistle-blower office, which opened last week. The chamber, at least, argues that the whistle-blower program allows tipsters to undermine internal compliance departments.

Industry groups are also looking at claims against a few more obscure Dodd-Frank provisions. One S.E.C. regulation requires companies to disclose whether they manufacture goods using so-called conflict minerals like gold from Congo.

Tiffany Company argued in a letter to the S.E.C. that the proposed rules “would violate the First Amendment,” laying the groundwork for business groups to mount a constitutional challenge.

Some letters are even blunter, as groups invoke the proxy case as a cautionary tale.

Royal Dutch Shell wrote the S.E.C. this month about “our expected costs” stemming from a proposal about oil extraction. Shell filed the letter, it said, “in light of the recent decision by the U.S. Court of Appeals.”

The commodity commission has received a barrage of hostile letters, too, some foreshadowing legal action. In March, the Futures Industry Association urged the commission to scrap its plan for reining in speculative commodities trading, saying it “may be legally infirm.”

Bart Chilton, a Democratic commissioner at the agency who has championed tough position limits on oil, corn and the like, sought feedback on the plan from the CME Group, the nation’s largest futures exchange. But at CME’s Chicago headquarters last fall, executives declined to discuss the proposal with Mr. Chilton, saying the Commodity Futures Trading Commission lacked the legal authority to impose trading limits.

With the industry firing such warning shots, regulators have spent months shielding their rules from litigation.

In May, the Commodity Futures Trading Commission’s general counsel and chief economist issued a memo spelling out guidelines for cost-benefit analyses. The memo and other efforts to slow down the Dodd-Frank rules later drew rare praise from the agency’s internal watchdog, which said the commission “has taken proactive steps to address concerns.”

Scott O’Malia, a Republican commissioner at the futures trading commission, also called for the agency to re-examine every cost-benefit analysis drawn up for Dodd-Frank. “The commission does not have the final word, as the S.E.C. has recently learned,” Mr. O’Malia warned this month.

Still, most regulators are hesitant to strike the panic button.

“We hear about potential lawsuits with some frequency,” Mr. Chilton said in an interview. “There’s an old saying in Washington that, if you’re not part of the solution, there’s plenty of money to be made being part of the problem.”

Article source: http://feeds.nytimes.com/click.phdo?i=a9650adca1ab011975296e5855ca0d3a

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DealBook: Rating Agencies Face Crackdown

May 18, 2011 by Leave a Comment

S.E.C. chairwoman Mary SchapiroAlex Wong/Getty ImagesMary Schapiro, the Securities and Exchange Commission chairman.

Securities regulators are out to tame the credit rating agencies, crucial Wall Street players at the center of the financial crisis.

The Securities and Exchange Commission proposed sweeping new rules on Wednesday to overhaul the rating business – regulations that would force tougher internal controls, potentially curb conflicts of interest and even mandate that the agencies periodically test the competence of their employees.

“These rules are intended to help investors and other users of credit ratings better understand and assess the ratings,” Mary L. Schapiro, chairman of the S.E.C., said at a public meeting on Wednesday. “It is a massive proposal,” she said of the plan, which spans more than 500 pages.

The S.E.C.’s five commissioners unanimously agreed to advance the proposals, which are now open for public comment for 60 days.

The agency’s Republican commissioners indicated, however, that they would push for some changes. The proposals “could be life threatening” to small rating agencies,” Kathleen L. Casey, a Republican commissioner, said at the public meeting.

A rating agency, for instance, would have to take on the costs of periodically administering performance exams that would “test its credit analysts on the credit rating procedures and methodologies it uses,” according to a summary of the proposal.

The proposals stem from the Dodd-Frank Act, the financial overhaul law enacted last year. The S.E.C. has already proposed new policies under Dodd-Frank that would strip references to credit ratings from rules that govern securities offerings.

The rating agencies in recent years became a target in Washington, as regulators and lawmakers blamed them for feeding the mortgage bubble by awarding top grades to bonds backed by subprime mortgages. The investments later soured, driving the economy to the brink.

A Congressional panel that chronicled the crisis called the largest rating agencies — Standard Poor’s, Moody’s Investors Service and Fitch Ratings — “essential cogs in the wheel of financial destruction.”

The problems, critics say, stem from an inherent conflict of interest plaguing the rating agencies’ business model.

Banks and corporations that issue debt must pay the rating agencies to assign their bonds a letter grade. In the lead up to the crisis, the rating agencies had a heavy hand in the mortgage bond business, as they advised big banks how to earn a top triple-A grade. In a quest for profits, the critics say, the agencies compromised the integrity of their ratings.

The S.E.C.’s proposal intends to mitigate some of those conflicts that have long hurt the industry’s reputation.

The plan would prohibit analysts from issuing a rating if they also marketed their rating agency’s products or services. Small rating agencies can apply for an exemption from this rule.

The proposal also takes aim at the revolving door between the rating agencies and Wall Street firms that seek the grades.

Under the plan, the rating agencies would have to examine whether their former analysts awarded overly rosy ratings to a firm that later hired that person. In such cases, the rating agencies would have to “promptly determine whether the credit rating must be revised.”

Ms. Casey warned that this proposal “threatened to cross the line” into dictating the substance of credit ratings. “I am concerned that this is such a slippery slope,” she said.

Still, the proposals do not go as far as some had expected.

In the final days of negotiations over Dodd-Frank, lawmakers stopped short of eliminating the so-called issuer pays model that causes potential conflicts of interest. Instead, lawmakers opted for a compromise. The S.E.C. must now study whether to create an independent body that will randomly assign ratings to different agencies.

The rating agencies fiercely oppose this plan, among other Dodd-Frank rules. Some rating agencies also may target an S.E.C. proposal that would require the industry to disclose how well their ratings have performed over time.

“One significant concern is whether the S.E.C. will follow up on this rule-making by actively pushing back at rating agencies if these attempts at mandating greater rating agency transparency turn out to produce opaque or formalistic disclosures in practice,” said Jeffrey Manns, a professor at George Washington University law school, who is an expert in credit rating agencies.

Article source: http://feeds.nytimes.com/click.phdo?i=432ae6d1927313586bdbd2fcdf5298c7

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