June 19, 2024

Few Clues to Regulatory Goals of Fed Rivals

Mr. Summers and Ms. Yellen are now the leading candidates to head the Federal Reserve, and the winner is likely to spend far more time on financial regulation than previous Fed chairmen. Congress has greatly expanded the Fed’s regulatory purview; moreover, the central bank’s basic responsibility to try to keep the economy on an even keel, experts say, will require a much greater focus on ensuring the stability of the financial system.

The two candidates share similar views on many regulatory issues, according to a review of their public statements and interviews with friends and colleagues. Both forged academic careers as members of the economics counterculture that attacked the dogma of efficient markets. Both say they believe that markets require regulation to prevent abuses, ensure fair competition and prevent disruptions of economic growth.

But those meetings 15 years ago highlight a basic difficulty in predicting what kind of regulators they would be. Ms. Yellen, during her two decades in prominent public roles, has left few footprints on the era’s debates about the government’s role in the markets. Mr. Summers, in helping to shape the regulatory policies of two administrations, has taken positions that critics say amounted to not following his own advice.

For supporters of stronger regulation, it comes down to a choice between someone they do not know and someone they do not trust.

The overhaul of financial regulation that Congress passed in 2010 — known as the Dodd-Frank law after its two principal authors, Senator Christopher J. Dodd and Representative Barney Frank (both since retired from Congress) — amounted to an instruction manual for the creation of a new system. The construction process remains substantially incomplete.

The next head of the Fed faces controversial decisions, in particular, about what safeguards to impose on the largest financial institutions to make it credible that if they falter, they will be allowed to fail.

“There’s a huge plate of unfinished business where the Fed has lead — if not sole — authority and the next chairman could derail a lot of that, or water it down,” said Sheila Bair, who was chairwoman of the Federal Deposit Insurance Corporation during the financial crisis. “That’s why it’s important for the next Fed chairman to have a good focus on regulation.”

President Obama has said that he intends to nominate a successor this fall for the current Fed chairman, Ben S. Bernanke. The White House has said he is also considering a third candidate, Donald L. Kohn, who was Ms. Yellen’s predecessor as Fed vice chairman. While past Fed chairmen have been selected almost exclusively for their views on monetary policy, this time the White House is focused on the fact that it is picking a financial regulator, too.

Mr. Summers and Ms. Yellen declined to comment for this article. Both, however, have spoken in recent months about the need for stronger regulation. Ms. Yellen, in a June speech, detailed areas where she believed stronger regulation was required. Mr. Summers, in an April interview, made a similar point, although he did not discuss specific proposals.

“The world is moving in the right direction,” he told Maclean’s, a Canadian newsmagazine. “Whether it is moving rapidly enough, and aggressively enough, is a judgment we will have to make in the next several years.”

Mr. Summers and Ms. Yellen were academic stars before entering public service. Menzie Chinn, an economist and professor of public affairs at the University of Wisconsin, said that both were “at the forefront” of research undermining the idea that markets were self-correcting. By contrast, the former Fed chairman Alan Greenspan frequently argued that government regulation did more harm than good.

Article source: http://www.nytimes.com/2013/08/14/business/economy/careers-of-2-fed-contenders-reveal-little-on-regulatory-approach.html?partner=rss&emc=rss

Today’s Economist: Inflationphobia, Part III


Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of the forthcoming book “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

Today’s Economist

Perspectives from expert contributors.

When the most recent recession began in December 2007, there was no reason at first to believe that it was any different from those that have taken place about every six years in the postwar era. But it soon became apparent that this economic downturn was having an unusually negative effect on the financial sector that threatened to implode in a wave of bankruptcies. The Federal Reserve reacted by doing exactly what it was created to do — be a lender of last resort and prevent systemic bank failures of the sort that caused the Great Depression and made it so long and severe.

As the Fed lent freely to banks and other financial institutions, its balance sheet grew very rapidly. The reserves of the banking system grew concomitantly; reserves are funds that banks have available for immediate lending that theoretically should lead to credit expansion and new investment by businesses, durable goods purchases by households and so on.

Federal Reserve Bank of St. Louis

During the inflation of the 1970s, most economists became convinced that if the Fed adds too much money and credit to the financial system it will inevitably cause prices to rise. Since the increase in the money supply in 2008 and 2009 was unprecedented, many economists reacted fearfully to the Fed’s actions.

Given the order of magnitude of the increase in bank reserves, from virtually nothing to more than $1 trillion almost overnight and now to more than $2 trillion, it was not unreasonable to be concerned about the potential for Zimbabwe-style hyperinflation.

But inflation fell rather than rising. In the five and a half years since the start of the recession, the consumer price index has risen a total of 10.2 percent. In the five and a half years previously, it rose 17.7 percent. That is, the rate of inflation fell by almost half.

Now, I don’t expect all the people who filled The Wall Street Journal’s editorial page in 2008 and 2009 predicting an imminent rise in inflation to offer a mea culpa, but at some point I think the inflationphobes should at least stop saying that hyperinflation is right around the corner.

By 2010, the annual inflation rate was down to 1.5 percent, and the yield on the Treasury’s 10-year bond had fallen to 3.2 percent from 4.3 percent in 2007 – historically, long-term interest rates rise when inflationary expectations rise. In short, there was no evidence that Fed policy was causing inflation to rise.

Yet in November 2010, both Sarah Palin and Paul Ryan warned that inflation was imminent. As they are Republicans, one can assume they were just playing politics, pandering to their constituency. But a week later, a group of professional economists signed an open letter to the Fed chairman, Ben Bernanke, warning that continuation of an easy money policy risked “currency debasement and inflation.”

In 2011, there were still no signs of actual inflation, but the economist Allan Meltzer nevertheless asserted, “Inflation is coming.” He wisely chose not to say when. Writing in The New York Times, the former Fed chairman Paul Volcker made the time-honored slippery-slope argument: a little inflation always leads to higher inflation.

The inflationphobe Niall Ferguson at least acknowledged that official data showed no evidence of inflation but asserted that the data were wrong, that the consumer price index is “a bogus index.” He cited the authority of a Web site called ShadowStats, which, like the Unskewed Polls site that said all polls showing Mitt Romney losing were simply wrong, just arbitrarily adjusts the data to make it conform to its belief that inflation is high, not low.

In 2012, the consumer price index rose just 1.7 percent, but the inflationphobe Amity Shlaes feared that inflation could suddenly appear out of nowhere, apparently because there was hyperinflation in Germany in the 1920s. Representative Ron Paul, Republican of Texas, was so alarmed by the danger of inflation that he suspended his presidential campaign to lead a Congressional hearing on the subject in June.

In October 2012, Rick Santelli of CNBC said “printing money” caused the German hyperinflation and the same thing was happening in the United States. He, like other inflationphobes, saw the rising price of gold as an ominous sign of a takeoff of consumer prices.

Since Mr. Santelli made his prediction, the seasonally adjusted monthly inflation rate has been negative 0.2 percent in November 2012, zero in December and January 2013, 0.7 percent in February, negative 0.2 percent in March, negative 0.4 percent in April, 0.1 percent in May and 0.5 percent in June. Without seasonal adjustments, the annual inflation rate was 1.4 percent over that time.

Many conservatives, including the publisher Steve Forbes and Larry Kudlow of CNBC, always say that gold is the perfect forward indicator of inflationary expectations. I’ve often heard Mr. Forbes say that the price of gold is like a thermometer that continually gives us inflation’s temperature in real time.

Most economists think that’s ridiculous, but insofar as the gold price reflects inflationary expectations, its falling price is impossible to reconcile with Fed policy. The Fed has not decreased the money supply and continues its policy of “quantitative easing,” which means further increases in the money supply.

To inflationphobes, all increases in the money supply are inflationary; indeed, many define the word “inflation” to mean a money supply increase rather than a rise in the price level.

Hard-core inflationphobes like Peter Schiff simply ignore the reality of today’s economy and assert without evidence that it is exactly like the inflationary 1970s. Inflation is due any day now and gold is “on the verge of its biggest rally ever,” he said. On June 18, Mr. Paul said gold could go to “infinity.”

To be sure, some inflationphobes never believed their own rhetoric; they were just trying to score political cheap shots or con unsophisticated investors into buying gold – from which the inflationphobe reaped a commission. But many others were sincere in their belief that higher inflation was inevitable.

Intellectually honest inflationphobes need to explain why they were wrong and stop crying wolf or else it will be reasonable to assume they are simply cranks and crackpots.

Article source: http://economix.blogs.nytimes.com/2013/07/23/inflationphobia-part-iii/?partner=rss&emc=rss

Economix Blog: A Call to Battle on Bank Leverage


Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

On Tuesday, federal banking regulators opened an important new phase of the debate on how safe very large financial institutions should become. The next round of argument will be intense; the focus has shifted to the specific and high-stakes question of how much leverage big banks can have – i.e., how much of each dollar on their balance sheet they should be allowed to fund with debt rather than with equity.

Today’s Economist

Perspectives from expert contributors.

The people who run global megabanks would rather fund them with relatively more debt and less equity. Equity absorbs losses, but these very large companies are seen as too big to fail – so they benefit from implicit government guarantees. A higher degree of leverage – meaning more debt and less equity – means more upside for the people who run banks, while the greater downside risks are someone else’s problem (the central bank, the taxpayer or, more broadly, you).

A key regulator on this issue is the Federal Deposit Insurance Corporation, which was created in 1933 to insure banking deposits – and hence serves as a crucial underpinning for public confidence in the financial system. The F.D.I.C. has a responsibility to financial institutions that pay insurance premiums; the goal is to avoid using federal tax dollars, so any losses are absorbed by the insurance fund.

Small banks have been pointing out for some time that while they pay a great deal in insurance premiums, the main dangers in the financial system arise from the excessive leverage and more generally mismanaged risk-taking of big banks. The Independent Community Bankers of America has an excellent set of materials on ending too big to fail, in which it asserts,

The U.S. will not have a robust and truly competitive market for financial services until the too-big-to-fail problem is definitively resolved.

I highly recommend the white paper put out by the association on this issue.

On the F.D.I.C. board, the strongest voices for limiting leverage by big banks have been the two Republican appointees, Thomas Hoenig and Jeremiah Norton. If either were in charge, my guess is that we would end up with a leverage ratio closer to 10 percent than 5 percent. (The way “leverage ratio” is defined in this debate is confusing – a higher ratio actually means more equity is required relative to debt, so a higher ratio implies less debt and a safer system, all other things being equal. As with all discussions of financial transactions, you need to check the fine print.)

Martin J. Gruenberg, the chairman of the F.D.I.C., has also been good on the leverage issue (I’m a member of the F.D.I.C.’s Systemic Resolution Advisory Committee, but I’m not involved in any of their work on bank capital or leverage). In its official announcement of the proposed rule-making, the F.D.I.C. said:

A strong capital base at the largest, most systemically significant U.S. banking organizations is particularly important because capital shortfalls at these institutions have the potential to result in significant adverse economic consequences and contribute to systemic distress both domestically and internationally. Higher capital standards for these institutions will place additional private capital at risk before the federal deposit insurance fund and the federal government’s resolution mechanisms would be called upon, and reduce the likelihood of economic disruptions caused by problems at these institutions.

The problem appears to be the board of governors of the Federal Reserve Board, which once again appears to have given in to industry pressure.

The big banks swear up and down that to subject them to a tougher leverage requirement (less debt, more equity for them) would somehow derail the economic recovery or even crater the global economy.

This is a complete fabrication – read the independent bankers’ report or look at the recent paper by Anat Admati and Martin Hellwig, “The Parade of the Bankers’ New Clothes Continues: 23 Flawed Claims Debunked,” which goes in detail through all the fallacious arguments that have surfaced in response to their recent book, “The Bankers’ New Clothes.”

Plenty of smaller banks are willing and able to lend to companies and individuals in the real (i.e., nonfinancial) economy. The bankers’ association, Mr. Hoenig, Mr. Norton and other current and former officials (such as Sheila Bair, the former head of the F.D.I.C.) want to end the subsidies received by too-big-to-fail banks. Create an even playing field by removing – or at least reducing – the advantages enjoyed by the very largest banks, which benefit not just from an implicit subsidy but can borrow on advantageous terms from the central bank and obtain other privileged forms of official support not available to anyone else.

The Fed’s board, unfortunately, has sided with the megabanks, resisting attempts by the F.D.I.C. to set an interim final rule on leverage (which would be more definite and harder to lobby than the proposal put on the table) and pushing back against the idea that the leverage ratio for megabanks should be at least 6 percent.

So what we have instead is a proposal, which will now receive comments, for the leverage ratio to be 5 percent for the largest eight or so financial companies (at the holding company level; debt levels would need to be slightly lower at insured bank subsidiaries). At the same time, this does present an opportunity. There is a split of opinion within officialdom, and the F.D.I.C. still wants to do the right thing – put a tougher cap on leverage. The comment period can cut both ways; representatives of the big banks will argue for 4 percent or even 3 percent (the minimum under the Basel III capital accord), but those more concerned with financial stability can still push for 10 percent or even higher (i.e., allowing less debt and insisting on more equity).

The F.D.I.C. has made some progress but now needs help. With encouragement from their constituents, Congressional representatives might be persuaded to push for tougher limits on the leverage at big banks.

Article source: http://economix.blogs.nytimes.com/2013/07/11/a-call-to-battle-on-bank-leverage/?partner=rss&emc=rss

Credit Tightens in China as Central Bank Takes a Hard Line

China’s interbank and money market rates have soared over the last two weeks, and banks and other financial institutions are afraid of lending to one another. Without that lending, an economy can quickly stultify. Those in need of short-term cash, or liquidity, must pay dearly or risk default.

China’s central bank, the People’s Bank of China, has refused to provide large amounts of additional cash to the credit market. Analysts say the government is holding off for a reason: it is trying to reshape the economy while reducing its future role. The bank is not independent, unlike many other central banks, and reports to the State Council.

A huge shadow banking operation has emerged in China in recent years, with smaller banks and trust companies borrowing from bigger state-run banks and relending that money at high interest rates to private companies and property developers, a practice that fuels speculation.

Pressuring speculators is a risky strategy for the Chinese government, which is also grappling with a slowing economy. Many borrowers may have a harder time paying back their loans, and analysts fear the losses could ripple through the banking system.

“The central bank wants to accelerate reform,” said Zhu Haibin, an economist at JPMorgan Chase. “They want to give the market a lesson: you need to manage your risk and not rely on the central bank.”

Mr. Zhu and other economists say restructuring the economy, which has grown addicted to easy money, could be perilous for another reason. The decision could reduce lending and slow growth too quickly.

The worst case, absent intervention by policy makers, would be defaults at lenders with the most exposure and shakiest balance sheets. The damage could spread to other banks, setting off runs on deposits by ordinary Chinese. In the near term, markets will probably continue to be rattled, especially shares in financial institutions.

That was certainly the fear on Thursday around the globe. “China’s interbank market is basically frozen — much like credit markets froze in the United States right after Lehman failed,” said Patrick Chovanec, managing director and chief strategist at Silvercrest Asset Management. “Rates are being quoted, but no transactions are taking place.”

Stock markets across greater China fell Thursday on news of the liquidity situation and a disappointing survey on manufacturing. The Hang Seng Index in Hong Kong dropped 2.9 percent, and the Shanghai composite index fell 2.8 percent.

The combination of slower economic expansion and the liquidity squeeze offers one of the biggest challenges yet to the newly installed leadership in Beijing.

Prime Minister Li Keqiang, who took office in March, has said he plans changes that will promote sustainable growth, as opposed to relying on the easy credit from state-controlled banks that helped the country rebound since the 2008 financial crisis.

“While the economy faces up to many difficulties and challenges, we must promote financial reform in an orderly way to better serve economic restructuring,” China’s State Council said in a statement Wednesday after a meeting presided by Mr. Li, according to Xinhua, the state-run news agency.

The interest rate that Chinese banks must pay to borrow money from one another surged overnight to a record high of 13.44 percent Thursday, according to official daily rates set by the National Interbank Funding Center in Shanghai. That was up from 7.66 percent on Wednesday and less than 4 percent last month.

China’s policy makers have an arsenal of options at their disposal to inject more money into the financial system, including open market operations — trading in securities to control interest rates or liquidity — or, more drastically, freeing up some of the trillions of renminbi that banks are required to keep on reserve with the central bank.

Neil Gough reported from Hong Kong, and David Barboza from Shanghai.

Article source: http://www.nytimes.com/2013/06/21/business/global/china-manufacturing-contracts-to-lowest-level-in-9-months.html?partner=rss&emc=rss

Piraeus Bank’s Michalis Sallas Reaches the Top in Greece

But now that he has managed to turn his bank into Greece’s largest, ensuring that Piraeus will be eligible for a bailout from the European Union, Mr. Sallas runs the risk that some of the steps he has taken along the way may come back to haunt him. Those moves include borrowing more than 100 million euros ($132 million) from a friendly banker in a bid to prop up the falling shares of his own bank and making risky loans to people and entities with ties to Piraeus.

Europe is preparing to close the books on perhaps the most ambitious aspect of its plan to keep Greece afloat: a cash injection of about 50 billion euros into the country’s four largest banks.

And bank governance has emerged as a critical issue, with the country’s creditors, who arrived in Athens this week to carry out their latest audit, insisting that continued aid is conditional on banks’ demonstrating that their conduct is above reproach.

Still, Greece’s overseers from the European Union and the International Monetary Fund may well find that even with increased oversight, changing the freewheeling business culture that long defined the Greek financial system will be easier said than done.

The rapid rise of Mr. Sallas exemplifies that culture. A tough, charismatic banker who seized control of Piraeus in 1991 and built it up by dint of more than 15 mergers and acquisitions, Mr. Sallas reached the pinnacle of the Greek banking world in March when he capitalized on Cyprus’s banking disaster, buying the Greek units of that island’s three biggest financial institutions, Bank of Cyprus, Laiki Bank and Hellenic Bank.

His supporters say that Mr. Sallas should be hailed for his entrepreneurial expertise and robust appetite for risk. Seeing an opportunity to reinvent his bank, they say, he has stolen a march on his more sclerotic counterparts.

“He is someone who can really navigate the system in Greece,” said John P. Rigas, a Greek-American hedge fund operator and client of the bank who owns an Athens-based investment company in which Piraeus holds the largest share. “This bank has gone from a teetering No. 4 to a solid No. 1 in just a year.”

But others say that Mr. Sallas has pushed the boundaries of proper banking too far and that his maneuvering in the murky world of Greek finance, where the interests of bankers, the media and politicians often commingle, should be more closely scrutinized.

“Piraeus has long used problematic methods that call for investigation,” said Costas Lapavitsas, a political economist at the University of London who follows banking and politics in Greece. “What concerns me is that Piraeus has emerged as the leading bank in Greece not because it improved these methods. The old regime is just adapting to the new conditions, and for me that is a sign of sickness and not health.”

Anthimos Thomopoulos, deputy chief executive of the bank, said all aspects of Piraeus’s business “have been exhaustively examined by independent auditors and regulators, inside and outside Greece, with no adverse findings.”

A trained economist, Mr. Sallas, who is 62, made his first career strides working under Andreas Papandreou, the Socialist premier who led Greece in the 1980s. In the years since taking over Piraeus his influence has continued to expand. He is close to the governor of the central bank, George Provopoulos, who until 2008 was vice chairman at Piraeus. And the bank is one of the largest advertisers in the Greek media.

Altogether, European governments and the International Monetary Fund have staked about 200 billion euros of taxpayer money on keeping Greece in the euro zone and eventually restoring its economy to health. To justify this commitment, Europe has subjected Greece’s largest banks to a root-and-branch investigation, focusing in particular on related-party lending, or loans to entities in which the bank may have a financial interest, and has concluded that they have finally cleaned up their acts.

Article source: http://www.nytimes.com/2013/06/11/business/global/a-wily-banker-reaches-the-top-in-greece.html?partner=rss&emc=rss

Today’s Economist: Nancy Folbre: Mortgaged Diplomas

Nancy Folbre, economist at the University of Massachusetts, Amherst.

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst.

Current and prospective college students are receiving real-world instruction in the dismal political economy of public finance.

Today’s Economist

Perspectives from expert contributors.

Unless Congress can overcome its partisan differences, interest rates on federally guaranteed Stafford loans, an important means of paying for college, will double to 6.8 percent in July.

With the Bank on Students Loan Fairness Act, Senator Elizabeth Warren, Democrat of Massachusetts, proposes to reduce this interest rate to the same level that large banks pay for loans from the Federal Reserve Bank — 0.75 percent — for at least one year, during which longer-term remedies could be explored.

The bill, one of many aimed at addressing the scheduled interest-rate increase, seems unlikely to win passage. But it highlights the double standard that puts the interests of banks and other businesses well ahead of those of students and ordinary people when it comes to debt relief.

As Robert Kuttner explains (both in The New York Review of Books and in his new book “Debtors’ Prison”), bailouts and bankruptcy proceedings both provide a means for businesses to get out from under bad debt. The obligations of a college loan, by contrast, “follow a borrower to the grave.”

The rolling thunder of accumulating student debt sounds a lot like the perfect storm of mortgage liabilities that threatened major financial institutions and precipitated the Great Recession in 2007.

According to a recent study by the Federal Reserve Bank of New York (nicely summarized in a publication by the Federal Reserve Bank of St. Louis), the dollar value of college loan debt in the United States now surpasses both auto loan and credit card debt.

As states have steadily reduced their support for public higher education, tuition and fees have increased far more rapidly than the rate of inflation. Slow economic growth and persistently high unemployment rates have made it harder for parents to help with tuition bills, while students feel increasing pressure to gain a credential that could improve their job market chances.

The number of student borrowers increased 54 percent from 2005 to 2012, while the average debt per borrower increased 56 percent, to $25,000.

Whether or not you call it a bubble, evidence shows something is likely to pop.

Both delinquency and default rates have increased substantially since 2005. According to the Institute for Higher Education Policy, only a little more than a third of 1.8 million borrowers who entered repayment in 2005 repaid their student loans successfully without delay or delinquency for the first five years.

Low-income minority students, disproportionately likely to attend for-profit schools, are the most vulnerable.

Like the tranches of mortgage securities that were labeled “sub-prime,” their federally guaranteed loans, often arranged by for-profit schools positioned to cash in on them, are the least likely to be repaid.

The New York Fed study reports that students at private, for-profit colleges account for nearly half of all student loan defaults, though they represent only 10 percent of total enrollment.

In a speech titled “Subprime Goes to College,” Steve Eisman, one of the few major investors to anticipate and profit from the earlier mortgage crisis, has drawn explicit parallels between loan-peddling in both realms.

In both cases, federal and state regulation was weak. Yet regulatory tools clearly work. Default rates on college loans declined sharply in the early 1990s, after federal policy makers began penalizing for-profit colleges with default rates greater than 25 percent.

More recent efforts to impose higher loan-repayment standards on colleges have run into legal obstacles.

Meanwhile, many students, like older family members who found themselves underwater on home mortgages, don’t fully understand the complex process of loan renegotiation. The new Consumer Financial Protection Bureau, a hard-won political response to the mortgage crisis, has noted that students who feel confused about the terms of their loan are particularly likely to default. The National Consumer Law Center offers a detailed policy agenda for reducing default rates.

The Obama administration has put in place an important income-based repayment system that could considerably alleviate stress for many student borrowers by limiting the amount they pay monthly to a fixed percentage of their income. Yet the details are complicated, and some students may fear the prospect of paying a larger total amount of interest if they spread their payments out over time.

Like mortgage debt, which discouraged many homeowners from either selling their homes or buying new ones, student loan debt has knock-on effects, making it harder for young people to buy cars or homes.

The reduction in major purchases by the younger generation slows economic growth and contributes to persistently high unemployment and underemployment rates that leave some college graduates with no recourse but default.

High default rates in turn, raise the cost of the loans, fueling the conservative argument that interest rates on them should be set much higher than those on loans to banks.

Of course, loans to large banks are more secure in part because they are bailed out when they get into temporary trouble. My students wish that they, too, were too big to fail.

Article source: http://economix.blogs.nytimes.com/2013/06/03/mortgaged-diplomas/?partner=rss&emc=rss

DealBook: Commerzbank to Raise $3.2 Billion in New Capital

A branch of Commerzbank in Berlin.Fabrizio Bensch/ReutersA branch of Commerzbank in Berlin.

LONDON – European banks have gone on a capital-raising binge.

Commerzbank of Germany, the latest entrant, began a heavily-discounted effort on Tuesday to raise 2.5 billion euros ($3.2 billion) in new capital.

The push by Commerzbank follows similar moves by other European lenders, which have come under growing regulatory pressure to increase capital reserves to protect against future financial shocks.

Despite a series of stress tests on the Continent’s largest financial institutions, investors have remained wary of the firms’ continued exposure to risky loans and sputtering economies like Spain and Greece.

Regulators have also pushed banks to shed unprofitable assets and protect against rising delinquent loans, and a proposed banking union for the euro zone is expected to lead to even greater scrutiny of balance sheets. Authorities want to ensure that banks meet stringent capital requirements outlined in new rules known as Basel III.

Under the rules, which are to come into force by 2019, firms must achieve a 7 percent core Tier 1 ratio, a measure of an institution’s financial health. Banks considered to be systemically important must hold an additional 1 to 2.5 percent in reserve.

As a result, banks have been pulling out all the stops to meet the capital demands. Last month, Deutsche Bank raised almost 3 billion euros through a rights issue specifically intended to improve its capital buffers.

The British bank Barclays has issued a number of contingent capital instruments – known as CoCos – that will wipe out investors if the firm’s core Tier 1 ratio falls below a certain level. A number of other banks, including Credit Suisse and BBVA of Spain, also have raised capital by this method.

The Swiss bank UBS, which announced a major restructuring last year, has a 10.1 percent core Tier 1 ratio. That is currently the highest figure among Europe’s largest banks, according to the data provider SNL Financial. Other big banks, including Deutsche Bank and HSBC, have ratios above 9.5 percent.

For Commerzbank, whose current core Tier 1 capital ratio of 7.5 percent is expected rise to 8.4 percent after its capital-raising effort is completed, the new funds will help to repay an 18 billion euro government bailout the firm received in 2009.

“The transaction marks the beginning of the federal government’s exit from Commerzbank,” the bank said in a statement. “The capital structure of the bank is improving considerably.”

The offering – the bank’s fifth since 2010 – allows investors to buy 20 shares at 4.50 euros apiece for every 21 shares they already hold. The price represents a discount of about 55 percent on Commerzbank’s closing share price on Monday. The bank’s shares fell 3.8 percent in afternoon trading in Frankfurt on Tuesday.

As part of the deal, Commerzbank is reportedly in talks to sell 5.7 billion euros of British property loans to the American bank Wells Fargo and the investment firm Lone Star.

More capital-raising moves are expected. British banks, for example, must raise a combined £25 billion ($38 billion) by the end of the year, according to local regulators. That includes potentially raising up to £1.8 billion, according to banking analysts at Barclays, for the small British lender Co-Operative Banking Group, which was downgraded to junk status last week by the credit rating agency Moody’s Investors Service over concerns about an increase in delinquent loans.

Commerzbank, Deutsche Bank, Citigroup and HSBC are the book-runners for Commerzbank’s capital-raising effort, which the bank said would close on May 28.

Article source: http://dealbook.nytimes.com/2013/05/14/commerzbank-to-raise-3-2-billion-in-new-capital/?partner=rss&emc=rss

In Hours, Thieves Took $45 Million in A.T.M. Scheme

In two precision operations that involved people in more than two dozen countries acting in close coordination and with surgical precision, thieves stole $45 million from thousands of A.T.M.’s in a matter of hours.

In New York City alone, the thieves responsible for A.T.M. withdrawals struck 2,904 machines over 10 hours starting on Feb. 19, withdrawing $2.4 million.

The operation included sophisticated computer experts operating in the shadowy world of Internet hacking, manipulating financial information with the stroke of a few keys, as well as common street criminals, who used that information to loot the automated teller machines.

The first to be caught was a street crew operating in New York, their pictures captured as, prosecutors said, they traveled the city withdrawing money and stuffing backpacks with cash.

On Thursday, federal prosecutors in Brooklyn unsealed an indictment charging eight men — including their suspected ringleader, who was found dead in the Dominican Republic last month. The indictment and criminal complaints in the case offer a glimpse into what the authorities said was one of the most sophisticated and effective cybercrime attacks ever uncovered.

It was, prosecutors said, one of the largest heists in New York City history, rivaling the 1978 Lufthansa robbery, which inspired the movie “Goodfellas.”

Beyond the sheer amount of money involved, law enforcement officials said, the thefts underscored the vulnerability of financial institutions around the world to clever criminals working to stay a step ahead of the latest technologies designed to thwart them.

“In the place of guns and masks, this cybercrime organization used laptops and the Internet,” said Loretta E. Lynch, the United States attorney in Brooklyn. “Moving as swiftly as data over the Internet, the organization worked its way from the computer systems of international corporations to the streets of New York City, with the defendants fanning out across Manhattan to steal millions of dollars from hundreds of A.T.M.’s in a matter of hours.”

The indictment outlined how the criminals were able to steal data from banks, relay that information to a far-flung network of so-called cashing crews, and then have the stolen money laundered in purchases of luxury items like Rolex watches and expensive cars.

In the first operation, hackers infiltrated the system of an unnamed Indian credit-card processing company that handles Visa and MasterCard prepaid debit cards. Such companies are attractive to cybercriminals because they are considered less secure than financial institutions, computer security experts say.

The hackers, who are not named in the indictment, then raised the withdrawal limits on prepaid MasterCard debit accounts issued by the National Bank of Ras Al-Khaimah, also known as RakBank, which is in United Arab Emirates.

Once the withdrawal limits have been eliminated, “even a few compromised bank account numbers can result in tremendous financial loss to the victim financial institution,” the indictment states. And by using prepaid cards, the thieves were able to take money without draining the bank accounts of individuals, which might have set off alarms more quickly.

With five account numbers in hand, the hackers distributed the information to individuals in 20 countries who then encoded the information on magnetic-stripe cards. On Dec. 21, the cashing crews made 4,500 A.T.M. transactions worldwide, stealing $5 million, according to the indictment.

While the street crews were taking money out of bank machines, the computer experts were watching the financial transactions from afar, ensuring that they would not be shortchanged on their cut, according to court documents.

Nicole Perlroth, Frances Robles and Mosi Secret contributed reporting.

This article has been revised to reflect the following correction:

Correction: May 9, 2013

An earlier version of this article misspelled the surname of a former prosecutor in the computer crime division of the Justice Department. She is Kim Peretti, not Paretti.

Article source: http://www.nytimes.com/2013/05/10/nyregion/eight-charged-in-45-million-global-cyber-bank-thefts.html?partner=rss&emc=rss

Economix Blog: Simon Johnson: The Problem With Corporate Governance at JPMorgan Chase


Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

Some proponents of the current American version of corporate capitalism contend that if there is a problem with the way our largest companies are run, shareholders will take care of it – by putting pressure on directors, sometimes voting them out. Shareholders are not supposed to replace chief executives directly but apply pressure to the board to improve oversight and produce management change when appropriate.

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In contrast, critics like to point out that owners – including small shareholders, pension funds and large mutual funds – seem unable to exercise even a modicum of control over many of today’s larger corporations, particularly the largest financial institutions.

The situation at JPMorgan Chase, in the run-up to its annual meeting on May 21, is an interesting test case with regard to two specific decisions: whether Jamie Dimon should continue to serve as both chief executive and chairman, and whether three members (David Cote, Ellen Futter and James Crown) of the risk committee of the board should be voted out.

Two proxy advisory firms – Glass, Lewis Company and Institutional Shareholder Services Inc. – have called for JPMorgan Chase shareholders to vote against the recommendations of management on both issues. Leading shareholders have apparently not yet made up their minds – and are being lobbied hard by supporters of Mr. Dimon to resist change. Mr. Dimon likes being chief executive and chairman and very much wants to keep things that way.

The interests of shareholders would be better served by following the advice of Glass Lewis and Institutional Shareholder Services. (Glass Lewis is also recommending that the three members of the board’s audit committee be replaced; I support that suggestion.)

Changing board governance is not a panacea at any company. An independent chairman can be an effective constraint on a chief executive, but many chairmen lack the stature or experience to play that role. And the risk committee of a big bank will always be constrained by the knowledge and ability of board members, very few of whom understand the risks in large financial institutions today. (There is a process of certifying that board members have relevant expertise; it is meaningless.)

Still, JPMorgan Chase undoubtedly has a serious problem from a shareholder perspective that needs to be addressed through strengthening board oversight.

Exhibit A in this discussion is the recent report by the Senate Permanent Subcommittee on Investigations, headed by Carl Levin, Democrat of Michigan, the chairman, and John McCain, Republican of Arizona, its ranking minority member, into the so-called London Whale trades that lost more than $6 billion. This report finds repeated failures in risk management at the highest levels within the company.

As Senator McCain put it (see the second statement):

JPMorgan executives ignored a series of alarms that went off as the bank’s Chief Investment Office breached one risk limit after another. Rather than ratchet back the risk, JPMorgan personnel challenged and re-engineered the risk controls to silence the alarms.

The report itself is more than 300 pages and the exhibits run around 500 pages (links to both documents are on the upper left on this page). For a concise statement of the core issues, I recommend this analysis by Bart Naylor of Public Citizen focusing on Exhibit 46 and explaining how JPMorgan Chase executives were gaming regulatory constraints to drive up their stock price (and presumably bonuses).

Specifically, the bank’s senior management changed how they calculated the risk of their positions so that they could reduce the amount of equity funding they needed. This allowed them to increase their leverage (borrowing relative to assets) as well as their risk – without this risk actually showing up in a report.

Mr. Dimon says he did not know this was going on, but even his denial is a concession that his management system completely broke down.

JPMorgan Chase’s policy, as stated to shareholders in its annual report, required risk limits to be taken seriously, with senior management responsible for signing off on high-level model changes. It is not unreasonable for shareholders to expect Mr. Dimon himself would take these risk limits seriously. And where was board oversight in this entire process?

For further detail, you can read the summary opening statement by Senator Levin (the first statement on the subcommittee’s Web page). Or try this somewhat more colorful and even emotional assessment by Matt Levine, a commentator who does not usually agree with people like Senator Levin, Mr. Naylor, and me that very large banks can pose serious danger to society (caution: Mr. Levine’s language is not suitable for family members too young to have a brokerage account).

Or, if you are a JPMorgan Chase shareholder, read the full report – or at least the executive summary. And wonder about whether a handful of traders and one inexperienced risk officer (with questionable authority) can effectively oversee a complex derivatives portfolio that grew tenfold over a period of months (with a notional value eventually in the trillions of dollars). How can a member of the board’s risk committee without financial services expertise possibly spot the risks and ensure management is keeping the bank out of trouble?

Senator McCain makes the link to the important broader policy issue on Page 3 in his opening statement:

This bank appears to have entertained – indeed, embraced – the idea that it was quote “too big to fail.” In fact, with regard to how it managed the derivatives that are the subject of today’s hearing, it seems to have developed a business model based on that notion.

Whether shareholders should be bothered by a firm’s being too big to fail is an interesting question. If this status purely confers a subsidy – in the form of taxpayer support when things go badly – then we should expect shareholders to be quite excited by the prospect.

Unfortunately for shareholders, the JPMorgan Chase case demonstrates that the distortion of incentives also means it is much harder to control what goes on at a large complex financial company. From 2000 through the end of 2012, the stock was down 15 percent; midsize banks have done much better over this time period. You can call this “too big to manage,” but it is more likely that executives and traders on the inside are doing well, so it is really outsiders (e.g., shareholders, as well as taxpayers) who are doing badly.

The London Whale losses did not bring down the company, but shareholders still have cause to want change. When planes almost collide at an airport, we do not say, “there was no actual accident, so that means the system works well.” Instead, our reaction is along the lines of, “What went wrong?” and “How can we prevent this from happening again?”

But at JPMorgan Chase, it is business as usual, despite reports of further regulatory investigations into other areas of the bank, including whether it helped manipulate interest rates and commodities prices and whether it was honest with shareholders and regulators about the London Whale big bets on derivatives.

What is likely to happen on or before May 21? Large shareholders will not want to rock the boat, and the prospect of continuing too-big-to-fail subsidies is too alluring. Mr. Dimon and his board will get another chance.

That will be good news for Mr. Dimon and his directors, but bad news for the rest of us, again. And JPMorgan Chase’s shareholders will likely not do so well, once more.

Article source: http://economix.blogs.nytimes.com/2013/05/09/the-problem-with-corporate-governance-at-jpmorgan-chase/?partner=rss&emc=rss

DealBook: Regulators Find British Banks Must Raise $38 Billion

LONDON – British banks must raise a combined £25 billion, or $38 billion, in new capital by the end of the year to protect against future financial shocks, according to a report from local authorities on Wednesday.

The Bank of England, which takes over the direct supervision of British firms like HSBC and Barclays next week, said the new reserves were needed to protect against losses connected to risky loan portfolios, future regulatory fines and the readjustment of banks’ bloated balance sheets.

The announcement follows a five-month inquiry by British officials into the financial strength of the country’s banking industry. With the world’s largest financial institutions facing new stringent capital requirements, the Bank of England had been concerned that local firms did not have large enough capital reserves to offset instability in the world’s financial industry.

Earlier this month, the Federal Reserve also released the results of so-called stress tests of America’s largest banks, which indicated that most big banks had sufficient capital to survive a severe recession and major downturn in financial markets. Citigroup and Bank of America, after disappointing performance the previous year, now appeared to be among the strongest.

British banks are not so lucky.

The reported released on Wednesday said that local banks had overstated their capital reserves by a combined £50 billion, which authorities said would now be adjusted on the firm’s balance sheets. Many of the country’s banks already have enough money to handle the accounting adjustment, the report said on Wednesday.

The country’s regulators also said that British banks must raise a total of £25 billion in new capital by the end of the year. The Bank of England did not name which firms needed to meet the shortfall.

Local regulators have set a deadline for the end of 2013 for banks to increase their reserves to a core Tier 1 capital ratio, a measure of a bank’s ability to weather financial crises, of at least 7 percent under the accounting rules known as Basel III.

Regulators on Wednesday called on banks to increase their reserves by raising new equity, selling noncore assets or restructuring their balance sheets. British policy makers are concerned that firms will cut lending to the local economy as part of their efforts to increase their capital.

Speaking in November, Mervyn A. King, the outgoing governor of the Bank of England, said firms’ push to raise new capital was “perfectly manageable, but it requires some action now.”

As part of increased oversight of British banks, the Prudential Regulatory Authority, a newly created division of the Bank of England that will have daily regulatory control of the country’s largest firms, will have a direct say in how banks raise the new capital.

The authority’s board is expected to meet over the next couple of weeks to decide which banks will be forced to raise new money. British firms must receive regulatory approval for their capital raising plans.

Attention is likely to focus on both the Royal Bank of Scotland and Lloyds Banking Group, which both received multibillion-dollar bailouts during the financial crisis. The banks, which are part nationalized, have recently announced the sale of some of their divisions, including the Royal Bank of Scotland’s American subsidiary, Citizens Financial Group, in a bid to raise new money.

“We see R.B.S. as most exposed,” Citigroup analysts said in a research note to investors on Wednesday.

As the capital increased was in line with many analysts’ expectations, British banking stocks were relatively flat in late morning trading in London on Wednesday.

Others firms are taking a different route. In November, Barclays issued $3 billion of so-called contingent capital, or CoCo bonds, which converts to equity if a bank’s capital falls below a certain threshold.

The push to increase cash reserves for Britain’s largest banks is part of an effort to prevent future financial crises. Starting in 2014, the Bank of England plans to conduct regular stress tests of the country’s financial institutions to check they have sufficient capital reserves.

Article source: http://dealbook.nytimes.com/2013/03/27/regulators-find-british-banks-must-raise-38-billion/?partner=rss&emc=rss