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2. FDIC to propose 5 percent leverage ratio

MERS has long been accused by county mortgage registrars of evading fees, to the tune of billions that local governments sorely need. Recall that the registry was founded by banks and the big GSEs in 1995 to essentially automate the mortgage note transfer process.

As the new registry took hold, county land registrars were essentially disintermediated. Because mortgages were held by MERS, these mortgages technically were not changing hands every time the mortgage was bought and sold. As a result, banks saved hundreds of millions in transfer fees. County land registrars have long chafed at MERS, and more than a few have sued.

The issue has cropped up again in Texas, where a U.S. district judge has ruled that a suit brought by case Nueces County against MERS should continue.

"Nueces County, which includes Corpus Christi, claims it was cheated out of fees it should have earned each time a deed was recorded after a property changed hands. The county alleges that properties bundled into mortgage securities may have traded dozens of times within the MERS system without the county being notified of any change in ownership," according to Bloomberg Businessweek.

The county's allegations sufficiently detail "the who, what, where, when and how of a scheme to circumvent Texas recording law, which resulted in the allegedly fraudulent filing of hundreds or potentially thousands of documents," the judge ruled.

The judge thus refused to nix claims against Bank of America and MERS for "fraudulent misrepresentation, unjust enrichment and damages" of as much as $10,000 for each violation.

In a related development, Beaufort County of South Caroline has filed a suit against MERS, alleging that the mortgage database does not accurately reflect a loan's owner. The county asks that MERS correct public records. If that's not possible, it wants "compensatory, consequential and punitive damages for the destruction and harm caused to the Beaufort County Recording System."

For more:
- here's the article

Read more about: mortgages
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By Jim Kim

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3. Public pensions load up on bonds

The leverage ratio has eclipsed its sibling, the common equity capital ratio, in mindshare as of late, as regulators around the world took up the issue, subtly underscoring recent criticism of risk-weighted capital requirements. The beauty of the leverage ratio after all is that it does away with risk-weighing assets---and all the political baggage that entails---in favor of a purer ratio.

The latest: CNBC reports that the FDIC will this week propose a leverage ratio of 5 percent—"stricter" than the 3 percent proposal put forward by Basel III.

The 5 percent proposal actually might be something of a compromise. Previously, the conventional wisdom held that the FDIC would propose a 6 percent leverage ratio. There is still a long road ahead before the proposal is actually enacted. The proposal will first be put up for additional comment. Some revisions are likely in the offing.

The financial services industry lobby will be active on this issue. And the Fed will soon have to decide whether to support a stepped-up leverage requirement or stick with the Basel III requirement.

One wildcard in all this: the political element. The Brown-Vitter bill has suggested a leverage ratio-like target of draconian proportions. It's doubtful that it will prevail in imposing a 15 percent ratio. But the bill sponsors may want to take an active role in the rule-making process.

For more:
- here's the article

Read more about: FDIC, Leverage Ratio
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By Jim Kim

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The expected rise in interest rates over the next few years looms as a game changer for a lot of entities, on the buy-side and the sell-side. The looming rotation, which many see as inevitable, holds the power to reorder the industry, creating new winners and losers. We've noted the pain that the likes of credit hedge funds and bond houses like Pimco have suffered. But not everyone loses in a higher rate environment.

Institutional Investor takes a look at one potential winner: public pensions, which are loading up on bonds right now.

"Understanding their actions requires revisiting the last decade and a half of funding in the pension universe. From a top of 128 percent in 1999, the aggregate funding ratio of pension plans of companies in the Standard & Poor's 500 index fell to 81.6 percent in 2002, slowly climbing to crest again at just over 100 percent in 2007, only to plummet in 2008. Since 2009 the ratio has bounced around 80 percent despite a more than doubling of U.S. equity prices. Last year, the aggregate funding ratio fell to 78 percent, marking the nadir of the last two decades. Would you blame any plan sponsor for reaching for the Dramamine?" an article notes.

"As keen observers know, funding is not just about the value of assets, but also liabilities. Pensions have very long-dated liabilities. And the decline in interest rates that fueled the great bond bull market sent liabilities skyrocketing for plan sponsors, and similarly for their cousins on the life insurance side, because these investors use market rates to discount their future liabilities."

Interest rates increases have led to a rise in the funding ratio, which is great news for pensions, and will likely keep them in a buying mood as many are de-risking to a certain extent by buying long-dated corporate bonds.

For more:
- here's the article

Read more about: bonds, pensions
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4. Tourre trial to start soon

By Jim Kim

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5. Dell buyout drama far from over

The financial crisis isn't over yet!

We've still got the Fabrice "Fab" Tourre trial on tap. Recall that Tourre was a former Goldman Sachs sales-trader of controversial CDOs, who penned some honest emails that got him charged by the SEC. There was a time when his trial was hotly awaited. But now, about 5 years after the crisis, it seems less urgent.

To be sure, some see the trial as momentous, an event fraught with larger significance. "The trial is seen within the S.E.C. and on Wall Street as a referendum on Goldman Sachs and the government's case, which was never argued in front of a jury," notes an esteemed DealBook columnist.

There's a lot of pre-trial skirmishing about what is and what is not admissible as evidence. And there is a danger that the jury will only get a partial view of events, which would make it difficult to interpret the trial as a referendum on the sales practices of Goldman Sachs, much less all of Wall Street.

That said, it will be interesting, in the way that the trial of Brian Stoker, formerly of Citigroup was interesting. He was charged by the SEC with negligence in putting together the marketing documents to support a controversial ill-fated CDO deal. The agency charged that he misled investors by not disclosing that Citigroup helped select the underlying mortgage securities in the CDO (Class V Funding III) and then placed a large bet against it.

In some quarters, Stoker was seen as a scapegoat, a token human defendant. In this view, much higher level executives should have been charged.

At the trial of Tourre, it will be interesting to see if higher-level executives are implicated. It may be that the trial stands as an example of lower-level executive taking the fall for those above him. Recall that Stoker was quickly acquitted by a jury. Tourre is no doubt hoping for the same outcome.

For more:
- here's the article

Read more about: Goldman Sachs, Fabrice Tourre
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By Jim Kim

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