Political reality has forced compromise into the final version of the financial regulation reform bill in the US

It was billed by Barack Obama as the toughest crackdown on Wall Street since the great depression. But top US banks could be given until 2022 to comply with the so-called Volcker rule, which is supposed to restrict financial institutions’ risker trading activities.

A string of delays and extension periods written into a final version of Congress’s financial regulation reform bill means that firms such as Citigroup and Goldman Sachs could exploit loopholes until 2022 before withdrawing from “illiquid” funds such as private equity. The long gestation period is an example of the degree of compromise inserted into the package following months of lobbying on Capitol Hill by powerful banks.

“You can’t just say ’stop’, you can’t just say ‘unwind,’” said Lawrence Kaplan, a lawyer at Paul, Hastings, Janofsky & Walker in Washington, who said the delay was a dose of political reality. “These things have contracts and detailed legal frameworks. You can’t undo them without doing considerable harm.”

The Volcker rule, championed by formed Federal Reserve boss Paul Volcker, stops banks from engaging in “proprietary trading” whereby they trade with their own capital, rather than clients’ money. It also severely restricts their investments in high-risk hedge funds and private equity ventures.

Language in the act, according to Bloomberg News, allows for a six-month study and a further nine months of rule-making. The measure is supposed to become effective 12 months after the final rule is laid, then banks have two years to conform. But if they need to, they can apply for a three-year extension. On top of that, a five-year moratorium is available for “illiquid” funds that are hard to unwind.

Complicated caveats in the bill are subject to interpretation. A spokesman for Jeff Merkley, a Democrat who proposed various changes to the rule, told Bloomberg that the maximum delay was supposed to be nine years.

Other measures in Obama’s reforms include the creation of a consumer protection agency, the introduction of a vote by shareholders’ on boardroom pay and new powers for authorities to seize troubled financial institutions.

For Wall Street, the Volcker rule and curbs on derivatives trading are the most contentious changes. In a research note, analyst Jason Goldberg of Barclays Capital said JP Morgan, Bank of America and Citigroup would be most affected by a ban on proprietary trading. Taken together with the rest of the regulatory reform bill, Goldberg estimated that Obama’s crackdown could cut earnings at 26 leading banks by 14% in 2013, eliminating nearly $18bn of profit.

US banks off the hook until 2022 is a post from: Bad Credit Loans

Calls to cut social security come from economists who want to line Wall Street pockets with money from ordinary workers

When politicians demand that the public do something because of the dictates of financial markets, it is best to hold on to your wallet. Back in September of 2008, both President Bush and the Democratic leadership in Congress insisted that if we did not immediately hand over $700bn to the banks, the whole financial system would grind to a halt.

The threat worked – the banks got their $700bn from Congress and much more from the Fed – with few questions asked. As a result, Goldman Sachs, Citigroup, and the rest are now as profitable as ever and once again paying out record bonuses to “top performers”.

If the market had been allowed to run its course Goldman, Citigroup, Morgan Stanley, and many other major banks would have been bankrupt, leaving their shareholders and creditors out of luck and their top executives walking the unemployment lines. There are reasons that this outcome would have been undesirable for the economy as a whole, but there is a big difference between the Tarp blank check and doing nothing. If the politicians and their accomplices in the economics profession had not overwhelmed the public with fear, we could have ensured that the bankers suffered from the crisis that they had themselves created.

With the banks back on their feet, the Wall Street crew and their accomplices in the economics profession are again feeling their oats. They are insisting that we have to put our hopes for economic recovery on the back burner. Instead, we have to focus on deficit reduction. The reason is that we have to soothe financial markets.

The claim is that if we don’t act aggressively now to reduce the budget deficit then the “bond vigilantes” will start a run on US debt just as they have recently done with Greece. This is supposed to make us so scared that we will accept large cuts in social security and in other important programmes.

There are three basic problems with this argument. First, why on earth should anyone trust what the bankers’ economist accomplices are telling us? These people completely missed the $8tn housing bubble; is there any reason to believe that their insight into financial markets is better today than it was two years ago?

The second reason not to follow their advice is that the financial markets themselves don’t necessarily reflect the underlying reality in the economy. Are we supposed to twist ourselves into knots over whatever is fashionable in financial markets this week? Suppose we structure our policies to make the markets happy this week and then next week the Wall Street diz brains decide that something else is now fashionable? This leaves us forever chasing Wall Street fashions. That is not a sound basis for economic policy.

The third reason not to take the deficit hawks argument seriously is simply that it is bad economics. The country needs deficit spending to sustain demand until private demand recovers from the collapse of the housing bubble. This is basic logic – and the prestigious positions of many of the deficit hawks will not allow them to repeal the rules of logic.

Furthermore, the United States is not Greece, as all serious people know. It has a huge economy that is still largely self-sufficient (imports are only 16% of GDP). The idea that the United States is about to experience a run on its debt is absurd on its face. The Fed can and should buy the debt, if necessary. Let’s hear the deficit hawks say this will cause inflation. With very few exceptions, they won’t dare make such an assertion because they know it is not true.

The deficit hawks are not concerned about national insolvency; they are not worried about soaring inflation; they are worried about how to take every last penny from ordinary workers and give it to the Wall Street crew. That is what the Tarp was about and this is what the latest crusade to reduce the deficit is all about. Now they want to go after workers’ social security because, as Federal Reserve Board chairman Ben Bernanke said: “That is where the money is.” The fact that workers have paid for these benefits doesn’t matter at all to the Wall Street crew.

So, if you feel like giving all your money to the Wall Street gang, then you should take the deficit hawks seriously. But, if you think that people who are not Wall Street millionaires have rights too, then get out the pitchforks and send the deficit hawks and their economist accomplices running.

Why should we listen to deficit hawks? | Dean Baker is a post from: Bad Credit Loans

Rebound in Wall Street trading contributes to US bank’s recovery

Just 18 months after teetering on the brink of collapse, the US bank Citigroup has regained robust financial health as a leap in income from Wall Street trading contributed to a first-quarter profit of $4.4bn.

Citigroup, one of the worst hit players in the financial crisis, revealed that its revenue from securities and banking doubled from $3.3bn in the final quarter of 2009 to $8bn in the first three months of this year, as the bank’s trading floor capitalised on a rebound in both equity and debt markets.

But in common with other US banks, Citigroup is still suffering from woes on the high street as its retail customers struggle with unemployment, small business failures and falling home values. Citigroup recorded a $1.8bn loss from consumer lending, an improvement from the prior quarter’s deficit of $2.4bn. The bank’s provision for bad loans and credit losses dropped 16% to $8.4bn.

Citigroup’s chief executive, Vikram Pandit, said he remained cautious about the environment, citing the “uncertain economic recovery and high unemployment in the US”. He continued: “Realistically, we do not expect our performance to follow an invariable trend-line upward. Longer term, however, the prospects for Citi are clear and bright.”

Crippled by its exposure to sub-prime mortgages and toxic derivatives, Citigroup received a total of $45bn of emergency aid from the US government and American taxpayers have been left with a 36% stake in the bank. Pandit made reference to this bail out: “All of us at Citi recognise that we would not be where we are without the assistance of American taxpayers.”

Once the biggest US bank in terms of assets, Citigroup hived off its Smith Barney asset management business into a joint venture with Morgan Stanley last year. The firm, which has 350,000 employees and manages 200m customer bank accounts, divided its businesses last year into a so-called “good bank” called Citicorp and a troubled arm, Citi Holdings, that contains trickier assets.

Citigroup’s shares, which changed hands for more than $50 before the credit crunch, jumped by 7% during early trading on the New York Stock Exchange to $4.87. The bank’s improvement in fortunes comes on the back of better-than-expected profits last week from JP Morgan and Bank of America.

The figures got a positive response on Wall Street. Matt McCormick, a portfolio manager at investment firm Bahl & Gaynor, said: “It looks like a solid release for Citi. However, you have the micro situation with Citi, but the macro situation is that Goldman is going to be dominating the news with financials for days to come.”

Citigroup reports $4.4bn profit is a post from: Bad Credit Loans

Wall Street bank reporting season off to a strong start despite JP Morgan setting aside $7bn to cover bad loans to consumers

JP Morgan got the US bank reporting season off to a bullish start today by reporting a profit of $3.33bn (£2.16bn) for the first three months of 2010, smashing analysts’ expectations.

Despite setting aside $7bn to cover bad loans to consumers, the Wall Street firm reported earnings of $0.74 per share, compared with forecasts of $0.64. Its investment banking, commercial banking and asset management operations all recorded significant increases in profits, but its credit card and retail banking arms suffered losses.

Analysts had expected JP Morgan to report a profit of around $2.9bn, and its shares jumped by 2% in pre-market trading. As well as beating the $2.14bn profit recorded in the same period a year ago, today’s earnings also exceeded the $3.28bn profit racked up in the last three months of 2009.

Chief executive Jamie Dimon said JP Morgan is more optimistic about the future than a few months ago.

“While the economy still faces challenges, there have been clear and broad-based improvements in underlying trends. We believe these improvements will continue and are hopeful they will gather momentum, resulting in a strong recovery,” he said.

But the company also highlighted the fragile state of the US economy by setting aside $7.01bn to cover losses from customers who default on their credit card debts or mortgages.

JP Morgan’s investment banking arm continued to be highly profitable, generating a net income of $2.47bn – 54% higher than a year ago. Commercial banking made a profit of $390m, up 15% on last year.

Goldman Sachs and Citigroup are also expected to report solid results next week, as their investment banking arms continue to profit from trading in government debt. Smaller US banks, though, are suffering from the downturn, and many are expected to report a loss for the last quarter.

JP Morgan smashes expectations with $3.3bn profit is a post from: Bad Credit Loans

Analysts predict big payouts despite political pressure

Goldman Sachs bankers are forecast to enjoy an 81% rise in their pay and bonuses for 2009, even though the bank may be forced to respond to political pressure by reducing the amount of money it sets aside for employee payouts in the fourth quarter of the year.

Goldman is braced for a furore this week when it completes the US bank reporting season on Thursday, following the row sparked by rival JP ­Morgan when it disclosed on Friday that it would be handing out $9.3bn (£5.7bn) in bonuses and salaries for 2009.

By the time Goldman unveils the size of its bonus pool, Citigroup, Bank of America and Morgan Stanley will all have published their figures. They are likely to show that chancellor Alistair Darling’s estimate for £550m of revenue from his 50% bonus tax was too cautious.

JP Morgan alone is estimated to face a bonus-tax levy from the exchequer of at least £300m. It admitted on Friday that Darling’s super-tax influenced its decision to pay staff just 11% of revenues in the fourth quarter compared with a more usual 50%, prompting predictions that other banks would also reduce pay for the final three months of the year. Analysts at Wells Fargo Securities expect Goldman’s compensation costs “to drop materially”, as do those at JMP Securities, who also predict changes to the way Goldman Sachs structures its payouts so staff receive more in shares.

If bonuses are paid in shares they do not appear under the expense of “compensation” reported by banks, which includes the costs of paying staff such as salaries, benefits and pensions. A new stipulation from the G20, included in its principles on pay introduced in the wake of the banking crisis, states that banks ought to defer bonuses over at least three years and pay a greater proportion of them in shares.

But the JMP Securities analysts concluded that even though the proportion of pay and bonuses to revenues will fall at Goldman, “we still expect an 81% rise in compensation per employee in 2009 to $599,000 per head … although this remains 14% below peak 2007 compensation levels”.

Goldman’s top executives have already tried to respond to public anger over pay by promising to take their bonuses in shares rather than cash and are also forcing their best-paid employees to make charity donations.

The bank has traditionally reserved 45% of its revenues to pay staff. But analysts note the reductions being expected in the bonus pool in the fourth quarter of the year still give Goldman a competitive advantage in hiring staff: average pay levels remain relatively high.

Goldman is thought to have taken a strategic decision to be last of the major Wall Street firms to report results. It was originally expected to publish last week. Like Morgan Stanley, it traditionally informs staff of their bonuses a day or two before the formal publication of results. But this year both banks appear to have delayed releasing that information until after the figures have been published. Some staff may not learn the terms of their individual payouts until the start of the following week.

Analysts say the last three months of a bank’s year are quieter, as traders restrict risk-taking to ensure they do not jeopardise their bonuses. But the last quarter of 2009 was also slower for many banks as the extraordinary revenues seen recently from bond trading eased.

Goldman Sachs bankers ’set for 81% rise in bonuses’ is a post from: Bad Credit Loans

‘Twas the night before bonus season, when all through the White House many an adviser was stirring with the fierce urgency of acting now.

Later today JP Morgan will be the first big Wall Street bank to announce exactly how much its masters of the universe will receive in bonuses for simply doing their jobs. No wonder that avant le déluge Barack Obama yesterday announced his grand scheme to tax the bankers. Indeed, the surprise is that he has left it so late. Imagine the American public fury that is likely to erupt over the next few days as the papers publish all the billions doled out by Goldman Sachs and Citigroup for jobs which would not exist without huge cash bungs from taxpayers. Couple that with the embarrassing disclosures that are bound to come out of the congressional public hearings into the causes of the banking crisis, and there is every chance that “the change president” will spend the next few months under pressure to show exactly what changes he has made to a greedy and reckless banking system. Which is precisely the sort of pressure he does not need ahead of the midterm elections this November.

So consider yesterday’s announcement as Mr Obama’s first serious attempt to reform, rather than rescue, Wall Street. His language was ­certainly strong, with blasts at “massive profits and obscene bonuses” and a “commitment to recover every single dime the ­American people are owed”. And his proposal was not bad: large financial firms are to repay over £70bn to the American taxpayer as a fee for bailing them out through the troubled asset relief programme. This is nowhere near the amount of taxpayer support that has been given to the banks, nor will it be a serious worry to the likes of Goldman Sachs, which has a bonus pool of about £13bn for this year alone.

Compare it to Gordon Brown’s scheme to tax bankers’ bonuses unveiled in last month’s pre-budget report, and three fascinating points of difference emerge. First, Mr Obama’s scheme is much bigger and longer-lasting than the UK’s one-off levy, which is (on Treasury estimates) set to raise just a few hundred million pounds. Second, the US tax is on the liabilities of banks and therefore much harder to dodge than a tax on individual bonuses.

But the final point must go to Mr Brown, for making the express purpose of his scheme to change the culture of banking. His bite is not as bad as his bark, but at least the prime minister identifies a reform agenda. Yet neither leader has got very far down the best exit route from this crisis: shrinking the finance sector and making it less risky. Railing against bonuses is clever politics; thorough reform of the banks is the only ­intelligent policy.

Bankers’ bonuses: The (small) change we need is a post from: Bad Credit Loans

Very telling little story out of Detroit this morning. The Detroit Auto Show is taking place right now, and a Michigan branch of the tea party movement was putting together a demonstrate outside the venue to protest government aid to the auto industry.

Two people showed up. It turned out that other conservative Michiganders opposed the idea of the rally because they kind of liked the idea of the bailout:

Joan Fabiano, who organizes tea parties as part of a group called Grassroots in Michigan, e-mailed supporters asking them not to show up Monday, saying such action could hurt business in the state.

“I’d like to think I had something to do with that,” Fabiano said of the low turnout Monday.

Fabiano, of Holt, Mich., worked at GM for 30 years and believes protesting at the auto show sends the wrong message.

“I think it was ill-conceived,” she said. “It only hurts fellow Michiganders and Michigan commerce. Businesses are already hurting.”

So in other words, government intervention is evil, except when it’s not, which is when it’s for us. Lovely.

This gets to a larger point that the Democrats have made over the past year with their usual effectiveness (which is to say, not). Everyone who think the government should have done nothing for Detroit and nothing for the banks and nothing in the way of stimulus (except the very small mostly tax-cut variety the GOP was proposing) should be made to answer:

All right, then, you’d let Detroit fail? Up to a quarter million jobs in the auto and related companies? You’re really prepared to throw 100,000 or more families on the bread line? You really think it’s okay for Citigroup or Bank of America to go under? The knock-on effects in both micro- and macro-economic terms of the collapse of two of America’s biggest banks — the lack of credit, the shuttering of small businesses all over the country, the attendant unemployment; the effect on the markets and on the country’s debt posture — are just fine by you?

The D’s never really forced these arguments, forced R’s to answer these questions. And now we see on the ground that when people are directly affected, they think twice. But, alas, only then. Disgusting.

Huh, maybe the gummint’s not so evil after all | Michael Tomasky is a post from: Bad Credit Loans

• Troubled US bank botched $20.5bn fundraising
• US treasury would have made a loss on sale of shares

Confidence in the ability of Citigroup to weather the financial crisis plummeted today after the troubled US bank botched a $20.5bn (£12.5bn) fundraising intended to pave the way for repayment of billions of dollars in emergency support from US taxpayers.

Shares in the bank plunged by 7% at the stock market’s opening bell today, sparking sharp criticism of its management from Wall Street analysts.

Citigroup, which came close to collapse during the financial crisis, encountered tepid demand from investors for a placement of 5.4bn new shares late on Wednesday. The reception for the offering was so poor that the bank was obliged to cut the price of the shares to $3.15 – well below the market price for Citigroup stock on the New York stock exchange.

The US treasury, which owns a 34% stake in Citigroup and has $20bn of loans outstanding to the bank, was due to offload a $5bn chunk of its equity holding alongside the offering. But the pricing was so poor that the government would have made a loss on the $3.25 it paid for shares earlier this year and treasury officials made a last-minute decision to abandon participation in the sale.

In a terse statement, Citigroup said that the government had delayed selling its shares by at least 45 days, although the entirety of the publicly owned stake is still expected to be sold within the next six to 12 months.

Citigroup’s handling of the fundraising has damaged Wall Street’s already fragile confidence in the bank and the bank’s chief executive, Vikram Pandit, came under fire as finger-pointing began.

Richard Bove, a banking analyst at Rochdale Securities, said the offering had been “a terrible deal for shareholders” and suggested that Citigroup’s haste to extricate itself from government support had been more to do with escaping from restrictions on bankers’ bonuses than any solid financial rationale: “Vikram Pandit should never have done this thing.”

Sources at Citigroup pointed out that the offering was one of the largest corporate share placements on record in the US, and was undertaken amid volatile market conditions. Citigroup insiders were dismayed that a rival bank, Wells Fargo, embarked on a similar fundraising to repay bailout funds the same week, contributing to a glut of newly issued banking shares on the market.

The debacle is a significant setback for Pandit, who has struggled to overcome accusations that Citigroup is a “zombie bank” kept alive artificially during the credit crunch by the treasury. It came a day after Abu Dhabi’s sovereign wealth fund accused the bank of “fraudulent misrepresentation” and tried to extricate itself from a deal to pump $7.5bn into Citigroup.

“There are questions about why the deal didn’t get done the way it was planned,” Michael Mayo, an analyst at Calyon Securities, told the New York Times. “I am not sure who has the answers.”

US treasury puts sale of Citigroup stake on hold is a post from: Bad Credit Loans

Moves comes day after Barack Obama accused Wall Street institutions of handing back funds simply in order to escape curbs on multimillion dollar bonus payouts

Citigroup has been given the go-ahead by the US treasury to repay its $20bn (£12.3bn) of government bailout money, a day after President Barack Obama accused Wall Street institutions of handing back funds simply in order to escape curbs on multimillion dollar bonus payouts.

The US bank, which teetered on the brink of collapse at the height of the financial crisis last year, is one of the few major US banks still supported by taxpayers’ funds. Its repayment plan follows a similar move earlier this month by Bank of America, leaving Wells Fargo as the last nationwide bank yet to institute repayment.

To raise the money, Citigroup intends to issue $20.5bn of stock and debt. In total, the treasury pumped $45bn into Citigroup to prevent the bank from collapsing, although $25bn of this was converted into a 34% stake. The government, which has benefited from a 20% appreciation in Citigroup’s share price, said it will sell its shares in an “orderly fashion” over the next 12 months.

The Citigroup chief executive, Vikram Pandit, said he was grateful to the government for its financial support: “We owe the American taxpayers a debt of gratitude and recognise our obligation to support the economic recovery through lending and assistance to homeowners and other borrowers in need.”

The haste with which banks are repaying funds is causing unease in political circles. Restrictions over dividend payouts and employee bonuses lapse when banks free themselves of taxpayer funding. The treasury’s so-called compensation tsar, Kenneth Feinberg, loses his remit to scrutinise bankers’ pay contracts once they break financial ties with the government.

The Obama administration has shown no inclination to follow Britain by imposing a tax on bankers’ bonuses. However, the president made it clear over the weekend that he is unhappy with Wall Street’s rapid return to six or seven-figure remuneration payouts.

Citigroup made a modest profit of $101m in its most recent accounts, for the quarter to September. But the bank is suffering substantial losses on consumer loans and credit cards in the US, and its bonus payouts are unlikely to rival those of healthier banks such as Goldman Sachs and JP Morgan.

The plunge in Citigroup’s fortunes during the worst of the crisis was so severe that the bank was ejected from the blue-chip Dow Jones Industrial Average. Its share price slipped 4% on Monday as investors anticipated dilution in their holdings by Citigroup’s plan to issue a large amount of new stock.

Citigroup gets greenlight to repay $20bn bailout money is a post from: Bad Credit Loans

The wizards of Wall Street are finally admitting they were wrong. But we can’t trust that they have learned their lesson

It was a startling admission from one of the architects of the modern financial system. John Reed, who with Sandy Weill created Citigroup, said the merger was a mistake. What’s more, Reed went on to say that the repeal of the Glass-Steagall Act, which was needed to make the merger legal, was also a mistake. He said we should “compartmentalise the industry for the same reason you compartmentalise ships” and keep “consumer banking separate from trading bonds and equity”. Reed’s mea culpa came a decade late and left the world’s financial system a few hundred billion dollars short.

Twenty years ago, the fall of the Berlin Wall shook the world. The fall of the wall that separated commercial and investment banking 10 years ago took rather longer to reverberate around the world. The Citigroup merger was so big that it literally required an act of Congress, but that didn’t keep it from needing $45bn in taxpayer funds to survive. Today, Citigroup and the other financial monsters created in the wake of that fateful merger are struggling to recover from their self-inflicted wounds and repay billions in bailout dollars from the US government.

After nearly 30 years of financial innovation, it’s time to reconsider the laissez-faire attitudes that have wreaked such havoc. The savings and loan crisis of the 1980s should have warned us of the dangers of freeing stodgy lenders to take on risks they didn’t understand. Instead, the free-market acolytes argued that we needed even less regulation, not more. The collapse of Long-Term Capital Management in the 1990s should have warned us of the dangers of exotic financial instruments. Instead, the wizards spread their poison throughout the financial system, and banks became more and more like hedge funds.

Time and again, we have given the wizards of Wall Street all they want, and what do we get? Bigger and bigger messes. Time and again, we have been told that an increasingly unfettered financial system will unlock more capital and give us ever-growing prosperity. Instead, we are suffering through the greatest economic crisis since the 1929 crash that prompted the adoption of Glass-Steagall Act in the first place.

A year ago, Alan Greenspan, the high priest of laissez-faire capitalism, admitted that he was “absolutely, precisely” wrong in thinking that self-interest would protect the financial system from self-inflicted collapse. Yet, the belief that unfettered finance would bring blessings to shareholders and customers alike dies hard.

Instead of wondering which institutions might be too big to fail, it’s time to consider whether the financial behemoths are too big to succeed. Sandy Weill spent his career trying to build the world’s biggest bank, only to see it destroy billions in shareholder wealth and require federal bailout funds to keep it alive. John Reed’s admission that the grandiose dreams of the bankers have turned out to be nightmares should bring pause to those who still argue that bigger is better.

Chris Dodd has introduced a bill in the Senate to overhaul financial regulation, saying the current system was “created piece by piece over decades“, forgetting the parts that have been dismantled piece by piece. His draft bill has garnered favourable comments from Timothy Geithner, the US Treasury secretary, even though it differs in some respects from Barack Obama’s plan. It is reassuring to see lawmakers renounce their faith in unfettered free markets and propose measures to bring order to the chaos they helped create.

The bankers who have left us with yet another mess either don’t know what they’re doing or, worse, have created an inherently unmanageable financial system. Either way, we have to admit that unfettered finance is too dangerous to be left to the financiers. It’s time to impose new controls on those who have shown themselves incapable of self-control.

A decade late and billions short | Thomas Noyes is a post from: Bad Credit Loans