| August 13, 2012
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Today's Top Stories
1. Citigroup launches program to rent homes
2. Downside of eminent domain for mortgages
3. Smaller banks hit by capital ratio worries
4. Wall Street Darwinism in decline
5. DOJ won't bring criminal charges against Goldman Sachs Editor's Corner: John Bogle still going strong Also Noted: Kaseya
Spotlight On... Recovery plans in addition to Living Wills
Merrill plans to sell non-U.S. assets; Meredith Whitney's next target and much more... News From the Fierce Network:
1. Olympics brighten London's financial gloom
2. Bankers not having fun these days
3. The hidden costs of deep liquidity
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John Bogle still going strong
It's hard to believe that at the age of 83, after six heart attacks and one heart transplant, John Bogle is still making his voice heard in the mutual fund industry and beyond. It's as if all the angst in the public markets right now has given him new life, plenty of fodder for him to push his main ideas. He just published a new book, which prompted a long profile by the New York Times, which is well worth the read.
While Bogle has literally had a change of heart, his main messages remain consistent: People should invest in stock, but they should do so wisely. Vanguard, the company he founded, has become the king of the mutual fund industry with its index funds. He still believes in them as long-term investments, eschewing short-term trading. He also thinks that pouring into bonds at this point would be a mistake, as returns are likely to suffer. In many ways, it's refreshing to have such a strong, consistent voice still on the scene. He is nothing if not unique. While he founded Vanguard, he famously clashed with the firm's management, even after he had given up the management reins and had his heart transplant. When he hit 70, he was asked to leave the firm's board. The big clash was over the company's push into VIPERS and other ETFs, which Bogle was against, even though the move has proven to be a good one for Vanguard. And then there's his politics. The New York Times notes that, "Mr. Bogle may be a Republican, but he voted for Bill Clinton and Barack Obama, and plans to vote for Mr. Obama again. He says government regulation of the financial industry is insufficient, and he endorses the Volcker Rule, named for his friend, Paul A. Volcker, the former Fed chairman, who says regulated banks shouldn't be making risky bets with their own money. Mr. Volcker, in turn, embraces Mr. Bogle's critique of the financial services industry. At a public forum held in Manhattan last winter to celebrate Mr. Bogle's legacy, Mr. Volcker said that the only unequivocally good financial innovation out of Wall Street in the last 25 years was the bank A.T.M." -Jim Read more about: Mutual Funds, Vanguard
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Today's Top News 1. Citigroup launches program to rent homes Bank of America generated headlines recently when it announced a program to allow underwater mortgage holders to convert their mortgage into leases and then rent their homes back from the bank, and now Citigroup is following suit. According to the Washington Post, CitiMortgage paints the program as another option for homeowners stuck with mortgages they can no longer afford. The bank has sold a $158 million mortgage portfolio to investment firms that will manage the program; these firms include Carrington Capital and Oaktree. "Carrington says the pilot program will help about 500 homeowners in six markets that have been hit especially hard by the plunge in housing prices: Arizona, California, Texas, Florida, Nevada and Georgia. It says it will begin contacting eligible homeowners this month. Homeowners who choose to participate would have to transfer the ownership of their house to Carrington and another firm, Oaktree Capital Management. Carrington would then negotiate with the homeowners-turned-renters for 'a manageable monthly payment' and how long the lease should last. The rental rates would be determined by local market rates, Carrington said, and they should be less," the paper reports. This may not be the complete answer to the foreclosure backlog blues, but banks deserve credit for thinking outside the box a bit to work down their backlogs. This idea has also taken root in the private equity industry. Several groups are moving to buy up homes in foreclosure with the idea of renting the homes out. For more:
- here's the article Related articles:
Bank of America reasserts itself in mortgage market Read more about: mortgages, Floreclosures
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2. Downside of eminent domain for mortgages The procedure by local governments to use emindnet domain to seize underwater mortgages, pay off the mortgage holder at fair value with money from raised from new investors and then issuing new mortgages with smaller balances is very popular at the moment. The idea has been percolating most actively in California, where San Bernardino County is leading the movement. There are a lot of hurdles in the way, but other locales are no doubt closely following the county's experiment. The county has set up a special committee to explore the idea, and it has already opened talks with private investors. The biggest hurdle, however, will be winning over holders of the securitized bonds into which these mortgages have been packaged. They are up in arms already. Jeffery Gundlach has called the idea "grossly unconstitutional," and Henderson Global Investors raises some other concerns: "First, only mortgages with up-to-date payments will initially be considered for purchase, thereby doing nothing for the most troubled households. The second major concern is that credit will be less forthcoming in future in the areas where the scheme is implemented, and that house prices could fall even further. A related worry is that investors in mortgage securities will demand higher interest rates, or even abandon the market entirely. So while this scheme has its merits, it may be a non-starter." A non-starter? It seems that way for the moment. For more:
- here's the article Related articles:
Should eminent domain be used on underwater mortgages Read more about: mortgages, Eminent Domain
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3. Smaller banks hit by capital ratio worries There were plenty of regional banks and community banks that seemed to avoid the excesses of the mortgage meltdown, which proved so costly to the big universal banks. One might have thought they these smaller banks would be better positioned for the future, but that's not uniformly true. Dow Jones reports that, "The recent selloff in bank stocks illustrates how much investors have come to rely on dividends and share buybacks for their returns, rather than on banks' ability to expand and grow profits. Any hint that banks' ability to return capital to shareholders could be in doubt is therefore disconcerting." The big issue for many banks remains the capital requirements that in some cases will not take hold until 2019. Evercore Partners has issue a report that says the average decline in Tier 1 capital ratios due to the Fed's new capital rules would be 207 basis points for large banks and 157 basis points for regional banks. For some regional banks, this is a massive hit. First Horizon National, for example, said the new rules would reduce its Tier 1 common capital ratio 240 basis points. Its stock has fallen significantly since the release. The implication for many is that while banks will not have trouble complying with new capital requirements, they may find themselves under pressure to be less aggressive when it comes to stock buybacks and dividend payments. This will play out over many years. For more:
- here's the article Related articles:
Fitch: Banks still need to raise capital Read more about: capital, capital ratios
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4. Wall Street Darwinism in decline The Deal Professsor makes an interesting point about Knight Capital: "The near implosion of the Knight Capital Group on an accidental $440 million trading loss may make many feel that Wall Street firms are on automatic self-destruct with the timer set to go off fairly soon. The truth may instead be that the finance industry not only has fewer missteps than the rest of corporate America, but that sometimes failure is a good thing." He notes also that, "about 15 percent of the Standard & Poor's 500-stock index is made up of financial companies. Financial and banking companies appear to have a lower rate of failure than the rest of corporate America." So what to make of this? I would quibble that this industry makes fewer missteps, though that is a subjective issue. But everyone would agree that failure can be a good thing, keeping Schumpeter's "creative destruction" alive and well for the good of all. Many traders liken their industry to a Darwinian game, marked by "survival of the fittest." But the reality is that as a whole, creative destruction in banking has been frustrated by too big to fail policies. For the good of the system, destruction has been understandably limited. All in all, the low failure rate among big banks is not surprising. Among small banks, however, such destruction would appear to be more alive, though the effects have been muted by bailouts. It would be nice if we could let destruction work its magic unfettered, but our system, despite Dodd-Frank, doesn't really allow for that. For more:
- here's the column Read more about: banks
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5. DOJ won't bring criminal charges against Goldman Sachs On the heels of the news that the SEC would not pursue charges against Goldman Sachs after looking into the Fremont Home Loan Trust 2006-E CDO, the Justice Department has said that it too will not seek a criminal indictment against the bank. Recall that an investigation by the Senate's Permanent Subcommittee on Investigations found that Goldman Sachs "designed, marketed, and sold CDOs in ways that created conflicts of interest with the firm's clients and at times led to the bank's profiting from the same products that caused substantial losses for its clients." The investigative report was referred to the DOJ along with a recommendation by two senators that executives at Goldman Sachs, including CEO Lloyd Blankfein, should be investigated for perjury, pursuant to their testimony in a hearing before the subcommittee. "There is not a viable basis to bring a criminal prosecution with respect to Goldman Sachs or its employees in regard to the allegations set forth in the report," Justice said in a statement. "The department and its investigative partners conducted an exhaustive review of the report and its exhibits, independently gathered and scrutinized a large volume of other documents, and tenaciously pursued potential evidentiary leads, including conducting numerous witness interviews." This will stoke more criticism from bank critics who contend that prosecutors have let banks get away with massive crimes, but it is undoubtedly good news for Goldman Sachs and Blankfein. This is one more small step on the path toward an eventual transition at the top. For more:
- here's an article from ABC News Related articles:
Goldman Sachs: No CDO charges by SEC Read more about: Goldman Sachs, Criminal Charges
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Also Noted | This week's sponsor is Kaseya. |  | Ten Effective Habits of Indispensable IT Departments
It's no secret that responsibilities are growing while budgets continue to shrink. Enact these ten IT habits throughout your financial institution to help you cut costs, create operational efficiencies and align IT to business goals. Download Today!
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SPOTLIGHT ON... Recovery plans in addition to Living Wills The requirement that big banks come up with Living Wills has been a huge issue since Dodd-Frank was passed, but as it turns out, a concomitant requirement holds that big banks must also come up with recovery plans, subject to regulatory approval. The distinction is that the recovery plans, which are not plans aimed liquidation without government assistance. Rather, they are plans to recover in the face of turmoil, notes Reuters. Regulators "told banks to consider drastic efforts to prevent failure in times of distress, including selling off businesses, finding other funding sources if regular borrowing markets shut them out, and reducing risk. The plans must be feasible to execute within three to six months, and banks were to 'make no assumption of extraordinary support from the public sector.' " Article Company News:
> Janus aims to stem redemptions. Article
> Knight Capital to sell certain assets. Article
> UBS offers dollar-denominated debt. Article
> Icahn in court over Forest Labs. Article
> Merrill close to deal to sell non-U.S. assets. Article
> Meredith Whitney is bullish on…Article
Industry News:
> Flood of foreclosures a worry? Article
> New virus vexes banks. Article
> SWFs look for bonds in China. Article
> IBM interested in parts of RIM? Article
Regulatory News:
> Libor reform implications for mortgages. Article
> Evading U.S. rules an issue abroad. Article And Finally…College degree no longer a good job guarantee. Article > Investment Consultants Forum - The Crowne Plaza Times Square, New York, NY - March 2, 2012 This conference provides a unique environment for developing dialogue between plan sponsors, managers and consultants. This event will feature panel-driven discussions focused on specific investment techniques of fixed income and hedge fund managers, the evolving role of institutional consultants, the manager evaluation process and more. Register today. > NFC Ticketing Europe 2012 - March 20-21 - London Come and join MasterCard, Renfe, Deutsche Bahn, Visa Europe, Orange, Arriva Netherlands, O2 and many more for the first event to bring together the whole NFC Ticketing industry for discussion, debate and quality networking. Click here. > NYIF Essentials of Project and Infrastructure Finance - September 10-12 - New York, NY This is a practical course that provides executives, whether as financiers, sponsors, or professional support, an opportunity to understand the risk-return character of limited recourse projects from multiple perspectives. Case studies span a variety of sectors and geographical regions. This course will not use in-depth models involving Excel™, but the instructor (a broad-based finance and investment executive with global experience throughout the U.S., Europe and the emerging markets of Latin America and Asia who has negotiated numerous transactions, including mergers and acquisitions, public offerings, mezzanine financings, international bank syndications, corporate valuations and fairness opinions) will review modeling approaches with examples. Register today. > Investment Trends Summit - September 12-14, 2012 - The Four Seasons, The Biltmore - Santa Barbara, CA The Investment Trends Summit is an educational forum focused on analyzing trends for the future, and exploring ways to implement new strategies in investment plans. Speakers and attendees will discuss topics such as investor's perspectives, investment management theories, and more. Register Today! > NYIF Core Skills Analyst Program - October 22- November 16 - New York, NY Bringing together core finance concepts and theories, this program is a challenging and rewarding experience for entry-level analysts, finance and investment professionals seeking to enhance their skill set. Real-life case studies supplement the hands-on learning experience, providing a wealth of practical knowledge to take back to the workplace. The program provides four weeks of intensive training in accounting (optional), corporate finance, credit risk and financial modeling. Register today. > NFC Payments USA Unites NFC Experts in Boston Once Again - October 29-30 - Boston, MA NFC Payments USA (Oct 29-30th)is back for its second year, hosting 150 senior level delegates to debate industry challenges and facilitate the roll out of NFC payments. Speakers include Best Buy, PayPal, Verizon, Barclaycard, T-Mobile, Best Buy, VISA, Capital One, MasterCard. Click here for more information. > The Mobile Wallet Summit - November 28-29 - London The Mobile Wallet Summit is the only show that looks at the future of mobile transactions. It brings together every industry you find in your physical wallet, loyalty, identity, ticketing and payments and provides a forum for debate on how they will fit on your mobile.
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