Here is a standard set of moves in talking about bank riskiness:
1. Banks take too many bad risks!
2. Regulators should only let them take good risks!
3. All better now!
There is, like, a problem there, because actually bankers tend to have compensation structures that are more directly tied to their success, and also larger, than those of bank regulators – which means that, if you had to guess who would be better at picking the good risks, you might pick the bankers over the regulators. You can try to address that problem, maybe by improving the incentives of the regulators to make them better at picking the good risks, or by improving the incentives of the bankers to make them better at picking the good risks, because after all your goal is actually not optimal regulation but optimal risk-picking.
There are other approaches available. Here is a cop-out option:
Banks must therefore be restricted to those activities, like making traditional loans and simple hedging operations, that a regulator of average education and intelligence can monitor. If the average examiner can’t understand it, it shouldn’t be allowed.
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Sheila Bair, former head of the FDIC and cartoon-klutz-villain of Too Big to Fail, comes in for the occasional gentle ribbing on Wall Street, and her column in Fortune today is well set up for another round of gentle ribbing, which I will get to in just a minute, so you might think that that headline was intended to make fun of her, but actually, no, she makes a solid point:
MF Global took proprietary positions in European sovereign debt through what Wall Street calls “repo to maturity” transactions. It technically sold the European bonds to other firms, agreeing to repurchase them at a premium when they matured in 2012. MF hoped to make money by pocketing the difference in the rate it paid its trading partners and the higher rate paid on the bonds themselves. … Under the 300-page Rube Goldberg contraption of a regulation recently proposed by federal agencies to implement the Volcker Rule, “repo” transactions like MF Global’s are not generally treated as verboten proprietary trades. Thus, even if MF Global had been a bank, it arguably could have used this exception to gamble away, putting the FDIC at risk.
Now, if I had to guess, I’d say the better side of the argument is that the MF sovereign trades would in fact be streng verboten under the Volcker Rule. (Except, of course, as she points out, that MF is not an FDIC insured bank and so is not covered by the Volcker Rule.) I read the rule’s coverage of “any long, short, synthetic or other position” in a security to include the Corzine repo-to-maturity, which is at least a “synthetic position” in the underlying debt, and since the position seems to have been more “prop” than “flow” it would probably be prohibited. But I had to search around in the proposal for some time to come to that conclusion – it’s not apparent even from the mammoth Davis Polk flowchart that has replaced the actual rule text for my day-to-day Volcker Rule pondering efforts. And the meaning of “synthetic” may not be the same to everyone. So I’ll spot her the claim that a bank could “arguably” use a repo-to-maturity structure to prop trade to its little heart’s content. [Update: A lawyer I trust points to the Volcker Rule's "repo exception" for trades arising out of repo agreements; he thinks that Bair is right that the MF Global trades would fall under the exception and not be covered by the rule. I suspect that the intent of the "repo exception" is to cover the people providing the repo funding (here MF's counterparties), not the people with economic exposure to the position, so I'll tentatively stick to my original claim, but in any case the murk is even murkier than I'd thought. By the way, if I'm wrong, then things are even worse than Sheila Bair thinks. Basically any prop trade is fine as long as you fund it via repo.] Continue reading »
The term “living will,” applied to liquidation plans for big banks, has always seemed like a bit of a euphemism. After all, it really means “instructions on how to divide up our stuff when we die.” So, y’know, more of a regular will:
The Federal Deposit Insurance Corp. board voted unanimously today to release a joint final rule laying out what the largest and most complex financial firms must include in so-called living wills they’re required to file. The panel also approved contingency planning guidelines for insured banks. … Regulators are requiring financial firms to file plans that are developed under the context of the bankruptcy code, with each designed to give a blueprint for how a firm could be taken apart.
And, lest your estate planning was going to be along the lines of “I must keep in good health and not die,” the Feds are on to that scheme too. From the rule:
Several commenters were concerned that the Proposed Rule favored resolution over recovery and was biased in favor of separation of the insured depository institution from the parent organization rather than looking to maintain enterprise value. By issuing the Rule, the FDIC does not intend to substitute resolution planning for recovery planning. Both are very important and serve complementary purposes. The Rule, however, focuses on resolution planning.
It turns out, though, that this may be a bit of an exaggeration. Continue reading »
If you’re looking for a new gig and think it might be the right fit, put in an application today, as Sheila Bair will be stepping down July 8, after her term expires.
As you may have heard, the FDIC has sued three former Washington Mutual execs, including CEO Kerry Killinger, COO Stephen Rotella, and home loans president David Schneider, whose “extreme and historically unprecedented risks with WaMu’s held-for-investment home loans portfolio” resulted in the bank’s collapse (according to filing, the bank’s chief risk officer told Killinger WaMu’s “DNA” was missing “the risk chromosome,” a few weeks before it went into receivership, to which Killinger likely scoffed and called the guy a pussy). The regulator wants $900 million from the trio and they’re not the only ones Sheila Bair says better start cutting checks- Killinger and Rotella’s special lady friends (Linda and Esther) have been named in the suit as well. Continue reading »
Why do it in one year when you can do three? Continue reading »
When a community bank gets seized by the FDIC, you expect its non-deposit assets to include some computers, office chairs, bank vaults, free lollipops, stress balls, stuff like that. But Bank of Lincolnwood, a Chicago-area community bank that was shut down last year, has some peculiar, and expensive, collectibles in its coffers.
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Emails between the Office of Thrift Supervision and the FDIC over the issue of who can do what with regards to Washington Mutual in 2008 are particularly fierce. Carl Levin, chairman of the subcommittee investigating the collapse of WaMu, called it a “turf battle.”
At the Senate hearing today, John Reich, former director of OTS, explained it this way: “Rome was burning” and “Blood pressure was running high.” Levin said: “I don’t see your blood pressure getting up over a bank that was engaged in dangerous practices.” Continue reading »
What is one supposed to do with all the failed banks? Buy them and create a new, prettier one! Former BofA and Wachovia execs are doing just this and are seeking $1 billion to fund their mega-bank, the Blue Ridge Bank N.A., to be based in Charlotte. And they’re hiring!
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Two regional bank CEOs say they can’t find a failed bank they want to buy. The Wall Street Journal runs a story that makes it seem like the Federal Deposit Insurance Corp. is going to be stuck with “a growing pile of terminally ill U.S. banks.”
Well, that’s not exactly true: One of the banks did find a failed bank it wanted to buy, but another bank made a better offer. Oh yea, and the FDIC says it’s having no problem selling the banks it seizes.
You have to look hard for it, way down there in the 12th paragraph, after a quote from Stearns Financial Services CEO Norm Skalicky claiming that many of the seized banks “are of very poor quality” and something about “sluggish interest in doomed banks.” But it’s there:
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How do you limit executive compensation without politically difficult limits? Don’t use limits, of course. Thanks SheBair! We were worried there for a minute!
Banking agencies should become more active in setting compensation standards that are “principles-based” without setting specific amounts for pay, Bair said today in an interview with Bloomberg Television in Washington.
How big is too big? Where does value added end? She knows it when she sees it (so to speak).
Bair Says Regulators Should Set Banker Pay Standards [Bloomberg]
