The N-Word

With the G-7 meeting kicking off in Rome today, Treasury Secretary Geithner will want to tap into his European counterparts for experience with the big N: Nationalization. Ireland injected €7B into its two largest banks this week, four of Britain's largest banks are under de facto control of the new government holding company, and now word that Germany may be ready to get in the act as Hypo Real Estate Holdings could be nationalized by Merkel. Europeans have put the questionable banks on a tight leash, while the US so far has been committed to keeping its banks in private hands. Who has the better approach? Economists seem to agree that the government needs to exercise some control to get bad assets off the books, but disagree on how much control. It is not surprising that Nouriel Roubini is one who believes it's time to nationalize U.S. banks. Roubini says the banking system is basically insolvent, with bank and finance company losses already passing the $1T mark and possibly peaking at $3.6T. He estimates the banks will need another $1.4T in new capital to resolve the credit crunch. Scary stuff. Keeping with that theme, Steve Lohr of the NYT says banks look like "dead men walking". Without a cure for the bad assets, the problem will linger and keep dragging the economy and banking system further into the mire. In a preview of the Washington Post's Sunday Outlook section, Roubini and fellow NYU professor Matthew Richardson push the idea of nationalization even further. Although Obama seems to be against a full scale nationalization, some say the U.S. is engaging in "creeping nationalization" as it empowers regulators and implements bank stress testing, but where we end up is anybody's guess at this point. Who knows, maybe some of that European aggressiveness rubs off on Geithner this weekend...

On to the Headlines:

• With all that is happening at Treasury, it looks like Geithner is understaffed. Bloomberg reports that a dearth of staff experts is slowing him down. Hmmm, hasn't he heard of GlobalRiskJobs?
• There's more grist for the regulatory mill. Hedge fund insider trading is top news today as unsealed court documents obtained by Bloomberg indicate Kynikos, SAC and other funds are being accused of trading on material non-public information. New regs may be on tap in Europe as France seems to be calling for a hedge fund crackdown. The US and UK have been oceans apart on hedge fund regulation.
  
• Regulators from the SEC are probing Stanford Financial Group.
• AIG's London-based financial products unit is being investigated.
• George Mason University law professor Todd Zywicki says the price for mortgage modification is too high in this WSJ opinion piece.
  
• Ahhhh, politics. Are campaign contribution rules going to stifle real regulatory reform?
• A Tale of Two Cities in the Junk market. Charter's filing is more evidence that souring corporate debt starting to fester, but the amount of new issue high yield bond sales tripled ($2.38B) this week, signaling investor appetite for risk may be increasing.
• Former HBOS risk chief Paul Moore stood firm on his claims against the bank.
• John M. Reich, Director of the Office of Thrift Supervision stepped down yesterday. Read the official press release.
• More negative news for big banks as Wells adds an impairment.
• Art imitates life on the big screen, as Clive Owen stars in "The International" a new film about, yup, financial corruption.
  
• And finally, some snark from Michael Lewis to get the weekend started. No matter what you think of his views, they are usually entertaining.
  

Stress Test will Empower Regulators

In the aftermath of Geithner's layout of the bank rescue plan, federal banking regulators are descending upon the 18 biggest US banks with a set of new more stringent criteria with which to stress test the banks for long term health. NYT's Eric Dash wonders if regulators could become the new arbiters of American finance. The new scrutiny may go a long way toward determining which banks succeed long term, and which wind up being nationalized or allowed to fail. And regulation is sure to be a hot topic at the upcoming G-7 meetings in Rome. The Financial Stability Forum will likely propose new global standards on bank capital rules and for regulating off-exchange markets.

More news:

• The HBOS whistleblower saga continues. Read the full text of the Moore memo here.
• Speaking of whistleblowing, WSJ's Aaron Lucchetti wonders why Wall Street is reluctant to blow the whistle on the likes of Madoff.
  
• Bank CEO testimony on Capitol Hill had its moments. Evan Newmark thinks the CEOs showed their sales chops at least. It looks like Congress needs a lesson in the shadow banking system to understand who is not lending. Bloomberg's Caroline Baum imagines the tables being turned and CEO's questioning Barney Frank.
  
• Keep an eye on RBS as a model for the future of banks with big government ownership. If the the UK wants the balance sheet reduced, where do you think it's going to come from? Not the domestic market...
• At least one firm thinks investment grade debt looks attractive.
• Shareholders rise up and the Fortis deal is voted down.

Remember to visit GlobalRiskJobs for career news and job postings in risk and compliance.

What's a Toxic Asset Worth?

Well, everyone knows by now what the equity markets thought of Geithner's bank rescue plan yesterday. Long on generalities, short on specifics seems to have been the consensus. Investor doubt surrounds failure to address 3 major issues: 1) will some banks be forced to fail? 2) How will illiquid assets be removed from bank balance sheets? 3) How do we stop the decline in housing prices? One of the key issues relating to toxic assets seems to be how to value them. Oaktree's Howard Marks is one veteran of distressed debt investing who appears to be in no hurry to wade into the sub-prime swamp. The main hangup seems to be what these assets are really and truly worth. In response to Geithner's plan, GlobalRiskJobs favorite Andy Kessler weighs in with a radical plan of his own in today's WSJ. Kessler stresses valuation as well, saying banks can sell toxic assets today; they just don't like the price. Geithner faces a dilemma in trying to find a "market price" that could very well push banks to insolvency. Kessler also says we need to learn from Japan's experience and stay away from creating "Zombie Banks", something that PIMCO's Koyo Ozeki would appear to agree with in this piece about using Japan's lost decade to put the current crisis in perspective.

A tour of some of the news for a Wednesday morning....

• An interesting take on banker pay from Bloomberg's Matthew Lynn
• Geithner pledges $2T to help banks.
• Senate approves stimulus package.
• The prospect of Pan-European supervision is back in the headlines, and the FSA is ready to debate.
• More on HBOS former Risk Chief Moore's allegations about his firing. And Bloomberg reports that James Crosby, deputy chairman of Britain's FSA, resigned after claims he fired Moore when he HBOS Plc's CEO.
• Who needs A-Rod and Roger on The Hill when you've got Jamie, Ken and Vik? A preview of bank exec testimony in what's sure to be an entertaining session on Capitol Hill.
• Mortgage servicers are under increasing stress.
• WSJ's Holman Jenkins says the markets wonder if Geithner understands Regulatory Forbearance.

HBOS ex-Compliance Chief Moore Hits Back

Paul Moore, HBOS plc Head of Group Risk from 2002-2005 said he was fired for saying the bank was a threat to the financial system. In a document released today, Moore stated that HBOS was a serious risk to financial stability and consumer protection. Moore further claims his group was threatened by management for carrying out its role of complying with FSA rules. Just one more piece of evidence as to where risk and compliance has been, and where it needs to go.