Financial Reform Movement in Retreat?

It looks like the Obama administration is tempering its ambitions for financial regulatory reform. It seems that the potential political brouhaha that would accompany a reduction in the number of agencies overseeing the financial markets would expend too much political capital. Instead, the administration will focus on securing broader powers for existing regulators to limit risk-taking. While the revamp of oversight will dramatically change the regulatory environment for finance, has the US missed an historic opportunity to completely overhaul the arcane regulatory framework of US finance? Possibly. It seemed as if the financial crisis presented lawmakers with a clear path to reworking the system. As time has passed and the global financial system has stabilized somewhat, the outcry for major structural change has become less loud. reform hawks will no doubt be disappointed by anything short of wholesale change to the system and will lament the loss of reform momentum.

The links:

• Te Obama administration wants Europeans to put their banks through much more rigorous public stress tests to ensure survival in a slipping economy.
  
• Deloitte & Touche released its 6th Global Risk Management Survey. The survey indicates that banks and other financial institutions continue to have significant opportunities to strengthen their risk management processes and tools.
• As plans for banks to leave TARP solidify, the WSJ wonders what to do about Citigroup.
• The 10 banks that got the green light to repay TARP include: Goldman Sachs, JPMorganChase, Morgan Stanley, American Express, Bank of New York Mellon, BB&T, Capital One, Northern Trust, State Street and US Bancorp.
• SIFMA Chief Executive Tim Ryan says that Wall Street accepts its share of responsibility for the crisis and intends to partner with the governments to overhaul the regulatory system.
• Morgan Stanley says there has been a fierce rally in leveraged loan CDO's.

The Compensation Tug o' War

"This is not going to be about capping compensation or micromanagement. It will be about understanding what is the best way to align compensation with sound risk management and long term value creation."

--Obama Administration official, 5/12/09

There it was this morning on the front page of the Wall Street Journal. Above the fold. "U.S. Eyes Bank Pay Overhaul". Just when it seemed that focus on compensation limits had begun to abate, news comes that the Obama administration has begun serious talks about how it can change compensation practices across the financial services industry. Yes, you read that correctly. Not just at TARP recipients, but also at institutions that received no federal bailout money. This is new ground for regulators, although they do currently have the (rarely exercised) power to sanction a bank for excessive comp structures. President Obama and Geithner have been critical of the quarter-by-quarter mentality that pervades the financial services business, and Bernanke said the Fed was working on rules that would more closely align compensation with longer term goals. Recently, FDIC Chairman Bair said regulators needed to examine comp pratices in the mortgage industry. One former regulator thinks it is a bad idea to regulate banker pay. Former SEC chairman Arthur Levitt thinks it is a slippery slope to try and regulate banker pay, saying "it has never worked and it cannot work." So what is the right answer? How do you achieve the goal of aligning compensation with risk management and long term value creation?

Links to recent news:

• Hedge funds get behind registration plan. MFA President Richard Baker told a congressional hearing that the organization supports a regime that would subject the vast majority of investment advisers, including the largest and those considered most systemically relevant, to the SEC's registration requirements.

• The SEC's Elisse Walter said that Financial Advisors should be regulated under a unified umbrella, which would help harmonize regulation. Should RIA's have their own SRO?

• Stephen Morse, managing director and head of compliance, operational risk and information risk at Barclays Capital has been named Compliance Reporter's Compliance Leader of the Year.

• Banks are bracing for a credit card write-off storm.

• What is the future of US financial regulation? Rob Cox at BreakingViews has some thoughts on that question.

Regulators shift gears to focus on loan quality

As bank stress tests for "The 19" evolve, regulators are increasingly focused on loan quality, given the big disparity they are finding in underwriting standards at the banks. Subsequent to their initial due diligence, the feds have determined that lending practices have to be given at least as much weight as macro-economic scenarios in determining individual bank health. This is an important development because it makes it easier to separate vulnerabilities caused by bad management from those caused by factors beyond management's control. This criteria gives Geithner more leverage to make management changes at any banks coming back for more TARP cash.

Bailout Weekly: AIG loses $62B and gets a 4th course at the trough

Anyone remember how much aid A.I.G. asked for way back in September? Well, we are a long, long way from September 16, 2008 when the U.S. government extended the insurance giant a two-year loan of up to $85B in exchange for a 79.9% stake. Less than a month later, those bailout loans were increased to $123B, then to $150B in November, which included a new $40B government investment. So, here we are in March 2009, and AIG is bellying up to the TARP trough for $30B in rescue funds in a reversal of the initial plan. Last fall, the government was acting as short term lender trying to help AIG get through rough times with some "tough love". It looks like Geithner has changed the parenting philosophy by relaxing loan terms and giving more access to TARP rescue funds - now standing at $70B. Yes folks, that is 40% more than Citigroup has taken so far. What does it all mean in the context of "too big to fail"? It appears that the Feds are still trying to their arms around the deep aftershocks any kind of AIG failure would have on the financial system and beyond. It's all about buying more time and keeping the newly vigilant rating agencies at bay.

More news of interest on this snowy Monday:

• Hedge fund D.E. Shaw is reacting to Madoff, et. al. by planning to step-up its due diligence by appointing 3rd party administrators to verify investments.
  
• A Treasury audit report blames an aggressive growth strategy, nontraditional loans and insufficient underwriting for the demise of IndyMac Bancorp last summer.
• The Bank Stress Test is found to be lacking in this piece by David Reilly, and the NYT questions some of the test's assuptions in this Op-Ed.
  
• FT says and FDIC on steroids might be the answer.
• Barney Frank on bailouts.
• S&P sees more losses for subprime securities.
• More on nationalization in the NY Times Magazine.
• Is the crisis spawning new regulation for the European Union?
• Bloomberg's Caroline Baum thinks some banks need to fail to clean out the system. Former Treasury Secretary James Baker writes in the FT that we need to heed the lessons learned from Japan in the 90s and kill off some zombie banks.
  

Bank Lending Picked Up in December

The first results of the US Treasury's new monthly bank lending report are out and they say that bank lending rebounded in December. Overall, loan origination and underwriting activity were weak in October and November, but picked up in December, fueled by falling mortgage rates. Read about the results here. Still no word on how much the shadow banking system is lending...

More news from around the financial world:

• Greenspan comes out in favor of bank nationalization and says U.S. needs to do more
  
• A few Congressional Republicans joined him in putting nationalization on the table.
  
• R. Allen Stanford is accused by U.S. regulators of running a massive ongoing fraud through his Houston-based Stanford Group Co.
• A former chief accountant for the SEC thinks Madoff investors may be able to hold their auditors accountable in the fraud.
• RBS feels the heat and gets Draconian on incentive comp.
  

The Season of Endless Losses

Doesn't it seem like the bank losses just keep coming out of nowhere? In the past, didn't banks just swallow hard, take the equity beating and move on? What's going on here? Well, it's different this time and the so-called Shadow Banking System is why. PIMCO's Bill Gross wrote about it way back in December 2007 in his monthly Investment Outlook, when he wrote that we were witnessing nothing less than a breakdown of a modern banking system that had become exceedingly complex. The piece was an interesting read back then, it is a stunning read now. Flash forward to the current day, where Forbes has a commentary written by NYU-Stern Professors Viral V. Acharya and Philipp Schnabel warning us to expect the shadow banking losses to keep coming. They cite the recent RBS ($41B) and State Street ($10B) losses as examples of losses that seem to come from out of the blue but are largely the product of off-balance sheet vehicles which were set up to arbitrage regulation. The commentary is adapted from a soon to be published book called Restoring Financial Stability: How to Repair a Failed System....A quick tour around the news outlets:

• Today's Wall Street Journal contains several good Op-Ed pieces as the stimulus debate continues. Former Vice Chairman of the Federal reserve Board Alan S. Blinder presents his economic wish list, former U.S. House Majority Leader Dick Armey thinks Washington could use less Keynes and more Hayek, and the inimitable George Soros thinks we can do better than a "Bad Bank".
• Early Madoff critic Harry Markopolos testifies at a Congressional hearing today. His written testimony has been released here. It's more blistering criticism of substandard performance by regulatory and enforcement bodies.
• Continuing yesterday's thread on "Bonus Outrage", early details today of a $500,000 cap on executive pay at TARP banks proposed by the Obama Administration. Also, check out Thomas Frank's WSJ opinion piece about the Wall Street bonus system.

Wall Street Compensation Under Fire

In the time since it was revealed that John Thain paid bonuses to legacy Merrill employees in the run up to the BofA merger, there has been a growing outcry about Wall Street compensation. It seems a day does not pass without a new story and a new angle on the bonus controversy. I know everyone is weary of the "Wall Street / Main Street" rhetoric that was so prevalent in the fall, but the heart of bonus season has added new fuel to the fire. No doubt spurred on by U.S. President Obama's "shameful" comment in reference to Merrill's conduct, it seems every media outlet has an opinion on the matter. Personally, I was pulled into the debate immediately upon arriving at a Super Bowl party on Sunday night. On one side, a guy who makes his living on Wall Street, on the other a tech entrepreneur doing everything he can to keep his small company moving forward in a sinking economy. At the center of the storm, how can a bank that takes government money to survive pay any bonuses at all? Let me be clear, the Wall Streeter is not a guy who has made outsize sums of money pushing now-toxic assets around the financial universe, but rather a hard-working guy with 3 kids who makes a decent living (by NY standards) in a more traditional product area. He is, however, employed by a financial institution that has taken billions in TARP funds to stay afloat. You can guess where this is going...The media loves to write about the hedgies and bankers who got paid millions and ruined the financial system, but there is another side to this as well. While many of the American Middle Class lives paycheck to paycheck to eke out a living, it may come as a surprise to hear that lots of Wall Streeters live bonus check to bonus check. A disruption to the comp cycle can be just as devastating for these folks. Yes, there are lots of people in the NYC suburbs, for instance, with 3 or 4 kids, living in one modest residence, with hefty property tax bills, paying nannies and babysitters to ease the dual working couple burden who, as shocking as it sounds to the rest of the world, cannot make ends meet on a $150,000 base salary. They rely on that "variable comp" component to get even or sock a few bucks away for college and retirement every year. But, the debate raging now is all about the question of what IS a bonus? Is it a little extra cash in years where everything goes right? Or is an entitlement that gets scaled based upon different performance metrics? How many of you who work on the street have heard the mantra, "it's a year end business" when asking for a bump to your base salary, perhaps? Is it "discretionary" compensation, as many bosses like to put it? Or is it "arbitrary" compensation, as many receivers of a bonus can tell you they feel there is no rhyme or reason to the number. I remember vividly being told by a super-cynical more senior banker early in my career that one's bonus is "a little bit about what you've done, a little bit about what we think you're going to do, and a LOT about what the job market away looks like". Well, I'm thinking he may have been right. It seems that this comp year at financial firms that generally did not make money last year and have dim prospects for this year, the defense of bonuses is that troops will simply walk across the street and find another employer if they don't get paid. The Main Street reaction is that this argument is pure B.S. and the hundreds of thousands of layoffs in the sector would seem to back that up. But as the latest news of a financial talent raid illustrates, the reality is that there will always be a bid for skilled people. That's what the banks fear. In past downturns, things have turned hard the other direction and banks did not want to be caught in the talent squeeze by having to dole out even more money by way of guarantees to attract people back to their firms when lots of others want to hire the same people. Will it play out the same way this time?

Let's take a quick tour of compensation news form the last few days.

• Catherine Rampell looks at a history of the holiday bonus
• NY Times has some, er, passionate letters to the editor today regarding the bonus debate.
• President Obama continued to pound the table about Wall Street bonuses.
• Rob Cox at Breakingviews says the bonus system should be reformed, not destroyed.
• Andrew Ross Sorkin ponders what a world where regulators receive bonuses would like.
• David Segal reports on a most unpopular group of professionals.
• News that Credit Suisse will cut bonuses 55%
• BofA looks like it knew more about Merrill bonuses than it initially let on.
• News that Deutsche Bank will cut bonuses by 60%.
• Deal Journal wonders if Thain might have been right about the Merrill bonuses.

And remember, wherever you stand on the bonus debate, you can always look to GlobalRiskJobs for Risk and Compliance career opportunities and compensation information.

ICAP bids for LCH.Clearnet. Money Funds the Next Big Risk?

News from the world of CDS this morning as Bloomberg reports that ICAP Plc is among a group of financial companies that may bid for LCH.Clearnet Group as regulators look to overhaul the $28 trillion Credit Default Swap market. The offer competes with DTCC which has an existing bid of over $900 million for the firm...Also from Bloomberg, U.S. President Obama will require banks to boost lending to businesses and consumers in return for taxpayer aid from the $700 billion bailout fund. While Treasury may not unveil the plan until next week, the administration is likely to reveal a stricter set of rules about executive pay for those who take taxpayer money...JP Morgan economist Jes Staley says the $4 trillion money market fund industry poses the greatest systemic risk to the financial system that has not yet been addressed....Valuation is the problem as the Obama administration prepares to buy or guarantee troubled assets on the books of the nation's biggest banks. The New York Times reports about the challenge of pinning a "real" or even objective value on assets whose prices are not only subject to huge volatility, but also vary wildly depending on the source of those prices...The Wall Street Journal has an Op-Ed piece by consultant Bert Ely challenging the conventional wisdom that commercial banks aren't lending and maintaining that banks must always lend prudently...and finally, a story about the circularity of the market for CDS protection on U.S. government debt, where prices have soared over 700% in a year...Remember to visit GlobalRiskJobs to keep up with current news and career information that affects risk and compliance professionals around the world.

Davos, Sovereign Debt Risk & More Regulation for Hedge Funds?

As the US floats plans for a two-part bank bailout, there is lots of risk and regulatory news to pass along today as we close out the month of January...At the NY Times, DealBook is doing its usual excellent job with its coverage of the World Economic Forum. It has frequent dispatches and video reports from the WEF with its Davos Diary . Check it out…Along those lines, an article about world leaders like Ernesto Zedillo wondering how the US is going to pay for all those stimulus dollars ($819 billion and counting)….Also in the NYT, Floyd Norris wonders in his High & Low Finance column if decoupling of world economies is on the horizon. While most of the world economies are currently experiencing the downside of globalization, not all global economies are created equal. While the US debates details of how to spend a trillion dollars, smaller economies find themselves caught in the credit squeeze...Signs of a pullback in European cross-border banking? NYT's Carter Dougherty says it would make sense given the government dollars that are being invested to keep banks afloat. Expect huge pressure on bailed out banks to refocus on their home markets and use those balance sheets for domestic lending….Is there another troubling credit bubble brewing? The Wall Street Journal has an Op-Ed piece from German economist Ulrich Volz warning of increased Sovereign Debt Risk this year. S&P has already downgraded Spain, Portugal and Greece due to deteriorating public finances and the rollover of government debt has been severely disrupted by the seizing of the international capital markets. The repricing of risk and the shortage of liquidity in international capital markets has made it increasingly difficult for even well-managed emerging markets to access external financing….And finally, yesterday we reported that the House of Representatives was pushing a plan to regulate the CDS market, today we note that the Senate has taken up a bid to intensify regulation of hedge funds. Senators Levin (D-MI) and Grassley (R-IA) introduced proposals to regulate hedge funds just as the Obama administration is preparing a broader legislative overhaul of the regulatory system...What does this mean for risk and compliance professionals? A new regulatory regime can only mean more career opportunities and higher profiles for risk and compliance pros. Bookmark GlobalRiskJobs on your browser of choice and check in frequently. Enjoy the weekend!

List of TARP banks

The following is a list of 20 banks subject to the new Treasury TARP reporting requirement:

1. JP Morgan
2. Bank of America
3. Citigroup
4. Wells Fargo
5. Goldman Sachs
6. Morgan Stanley
7. PNC
8. US Bank
9. SunTrust
10. CapitalOne
11. Regions Financial
12. 5/3
13. BB&T
14. BNY Mellon
15. KeyBank
16. CIT
17. Comerica
18. State Street
19. M&I
20. Northern Trust