Today's Top Stories Also Noted: Spotlight On... Man pays mortgage in pennies News From the Fierce Network:
Today's Top News1. Impact of LIBOR scandal on Bank of America, others
At this point, a fair question is how will the LIBOR scandal will play out in the U.S. Certainly, the likes of Bank of America, Citigroup and JPMorgan know what Barclays is going through. They know what it's like to squirm in the harsh spotlight of a scandal. It's unclear whether regulators will seek massive penalties against other banks, but the fact is that Barclays was ahead of the pack in terms of cooperating with regulatory officials, and it was still hit with a massive fine and potentially other fallout. Another threat stems from massive amounts of private litigation. "Disgusting," writes Richard Bove to a client, as quoted by the Philly Inquirer. "If the rate is false, all of the charges associated with Libor-based loans are wrong … tens of thousands of businesses are paying the wrong rate on their loans … all of the bank stock [prices] are wrong." Some suits are in the making. One Philly government officials was quoted as saying, "I think we are in line to collect from Libor settlements to come." That sentiment will no doubt be shared by other aggrieved parties, of which there are many. So this represents yet another litigation risk that must be accounted for, and it is doubtful that any of the big U.S. banks have reserved against any of it. On top of all this, there's a chance that prosecutors will seek criminal charges against specific executives over this. They are salivating at the chance, no doubt. There would appear to be ample evidence. For more: Related articles: Read more about: LIBOR, LIBOR Scandal 2. Showdown: Oakland vs. Goldman Sachs
All in all, Goldman Sachs has weathered the storms since the 2008 financial crisis surprisingly well. Despite some witheringly bad news, it lost a lot fewer customers than many expected, but the fallout continues. You have to wonder what municipalities are thinking as the Oakland showdown continues. "Oakland is poised to become the first city to cut ties with Goldman Sachs if the investment bank refuses to cancel" a swap contract that didn't turn out well for the bank, according to the Oakland Tribune. It will likely cost about $4 million this year. "The city has paid Goldman about $32 million more than it has received so far on the deal, union officials said, and projects to lose another $20 million before the investment expires in 2021." Responding to demands from union and community leaders, "the City Council voted unanimously Tuesday to stop doing business with Goldman if no agreement is reached on canceling the investment within 70 days." Obviously, there is a decent amount on the line for the gilded bank. According to one union estimate, public agencies have entered into about 1,100 interest rate swaps that have soured, costing taxpayers about $2.5 billion a year. Goldman Sachs certainly cannot afford to honor Oakland's demands to cancel the contract. If it did that, it would have to cancel every other contract that soured. But there may be other steps that might appease the city. Other aggrieved cities are no doubt watching this closely. For more:
Read more about: municipal bonds, Swaps 3. Refinancing boom augurs well for earnings
I suggested recently that banks may be poised to provide some upside surprises when it comes to mortgage-related business. The consumer activity so far this year has been really intriguing, at the refinancing level but also at the purchases level. Could this be the big story, for consumer banks anyway, when second quarter earnings are released? Bloomberg weighs in with a closer look at the wave of refinancings we're seeing. Refinancings "probably rose 4.2 percent to $275 billion in the quarter ended last week, the bankers group forecast, three months after saying the boom was over. About 5.6 million loans will be refinanced this year." The mini-boom will have an outsized impact on consumer-oriented banks that have remained committed to the market. Wells Fargo is certainly poised to benefit, as is JPMorgan Chase. In fact, JPMorgan analysts said this month that Wells Fargo stock is their "best idea" among large U.S. banks, in part because of its "strong mortgage- origination revenues." Certainly government programs are making a difference, notably the HARP. Wide spreads have been a windfall as well. The bottom line is that low interest rates are not necessarily a lose-lose for consumer banks. It will be interesting to see how all this shakes out in terms of earnings. Relatively speaking, banks without consumer mortgage operations might be in line as the losers in all this. For more: Related articles: Read more about: earnings, mortgages 4. Volcker Rule helped big banks' PE units
Some banks have already taken action in anticipation of the implementation of the Volcker Rule, which still hasn't been finalized. They have scaled back proprietary trading units, for example, and they have scaled back their direct alternatives investment activity. As of now, many have limited their alternatives activity to 3 percent of their capital. Deal Journal notes that has helped banks withstand the recent Moody's downgrade. To be sure, the banks did a great job preparing analysts for the worst. So when the actual downgrades came, they weren't as bad as expected in some cases. "The Volcker Rule turned out to be a blessing in disguise – sort of. According to people familiar with the situation, neither Morgan Stanley nor Goldman Sachs expects any impact on its private equity business from the downgrades. That is because the Volcker Rule is already capping the banks' commitment to private equity at 3 percent of their total capital, meaning any potential impact would be minimal or negligible. That should be good news for the banks' private equity practitioners, who remain very active." All in all, you have to conclude the big banks sailed through the Moody's activity in fairly good position. It could've been a lot worse. For more: Related articles: Read more about: Private Equity, Volcker Rule 5. Credit cards could boost results at big banks
Credit card operations have been seen as a net drag on earnings for quite a while now, but the reality isn't crystal clear at the moment. Reuters suggests that the credit card operations could be one of the bright spots in second-quarter earnings reports, helping hopefully to offset major weakness elsewhere. As of now, the general take is that trading activity and investment banking activity will be weak. Some banks will likely post some strong offsets from consumer mortgage operations. Will they also get another big offset from credit cards? For the six biggest U.S. credit card lenders, including JPMorgan Chase, Bank of America, and Citigroup, the average delinquency rate has fallen to 2.35 percent from more than 6 percent in early 2009. What's surprising is that this decrease has occurred at a time of weak employment growth. This raises the possibility that previously set aside reserves for losses will be released, giving earnings a boost. We'll get a good indication for the likelihood of this scenario later this week. On Friday, Wells Fargo and JPMorgan Chase are scheduled to report second-quarter earnings. If we don't see big release for the second quarter, they will likely come in the third or fourth quarter, assuming credit card activity stays healthy. For more:
Read more about: earnings, Credit Cards Also NotedSPOTLIGHT ON... Man pays mortgage in pennies For some reason, Thomas Daigle of Milford, Mass. had pledged to himself that he would make his last mortgage payment in pennies. He made good on his promise recently, settling his final payment with 62,000 pennies weighing 800 pounds, which he dropped off in two boxes. He bought his home in 1977. He told The Milford Daily News he just wanted to make his last payment "memorable." Article Company News: And Finally…More seniors divorce. Article
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Tuesday, July 10, 2012
| 07.10.12 | Impact of LIBOR scandal on Bank of America, others
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