Bills Would Set Limits on Financial Companies to Alleviate Risk

President Franklin D. Roosevelt signed the Glass-Steagall Act, passed in 1933, separating commercial and investment banking.

Wall Street Journal  -  Democrats are advancing proposals in Congress designed to limit the size and complexity of financial companies so that any collapse wouldn't damage the broader economy, a sign that lawmakers are responding to anti-Wall Street sentiment by toughening the administration's rewrite of finance rules.

The proposals would allow the government to break up healthy financial companies, and in some cases, would reassert rigid demarcations within finance that were cleared away in 1999, such as barring commercial banking firms and investment banking firms from merging.

Large financial companies, and even some Obama administration officials, are nervously watching the debate. Lobbyists for large financial-services companies, including J. P. Morgan Chase & Co., Bank of America Corp., Prudential Financial Inc., and MetLife Inc. scrambled in recent days to reach out to Capitol Hill aides, people familiar with the matter said.

Along With New Money, IMF Gets Politically Perilous Tasks

International Monetary Fund officials were nearly giddy in early April when they learned that leaders at the G-20 summit backed a fourfold increase in fund resources to $1 trillion. During a press briefing, IMF Managing Director Dominique Strauss-Kahn used the phrase "the IMF is back" six times.

But at the IMF's spring meeting this past weekend, reality set in. In exchange for the money, the IMF has been handed tough assignments in fighting the global recession and staving off another one. The work will require a political dexterity and willingness to stand up to powerful IMF members that the fund has rarely shown in the past.

"There's been a huge expansion of IMF resources and huge attention to the IMF, but nothing has been done to make members fear IMF surveillance" or oversight, says Adam Posen, deputy director of the Peterson Institute for International Economics, a Washington think tank.

The new facility has won plaudits from some developing countries, but the IMF will still have to make tough political calls. Only nations ranked highly by the IMF can qualify for credit line. The IMF often forces other borrowers to cut spending or raise interest rates even if that deepens a downturn, though the IMF has taken steps to protect some programs for the poor.

The disparate treatment has prompted complaints in Turkey, Pakistan, Eastern Europe and elsewhere that the IMF is playing favorites, and it may lead to pressure on the fund to ease its standards. The World Bank has tried to reduce the effect of the budget cuts by financing infrastructure projects that otherwise might be jettisoned.

Pressure on the IMF will ramp up when it must decide whether to renew the credit lines after their one-year terms. Saying "no" would undermine a country's economic standing; saying "yes," if the country's policies don't warrant it, would undermine IMF credibility.http://online.wsj.com/article/SB124078041608357051.html#mod=todays_us_page_one

About $500 billion of the new funds are earmarked for the IMF's main job of bailing out troubled countries. The IMF has introduced a credit line that doesn't require borrowers to make the kinds of painful economic changes -- cutting spending, slashing subsidies -- that have turned the IMF into political poison in much of Latin America and Asia. Mexico, Poland and Colombia have signed up for the credit line.

White House to Put Credit-Card Rates in Cross Hairs

The Wall Street Journal - WASHINGTON -- President Barack Obama will soon turn his attention to high credit-card rates, giving a potential boost to congressional efforts to put limits on the industry.

Banks have come under increasing pressure over raising their credit-card rates in recent weeks. Consumer groups are particularly critical of those that raised rates on some existing card holders even as the banks received federal bailout funds. Banks have said credit-market conditions and changes in borrowers' credit scores necessitated the increases.http://online.wsj.com/article/SB124015800037232541.html#mod=testMod

U.S. May Make Public Bank's Report Card

The Obama administration is considering making public some results of the stress tests being conducted on the country's 19 largest banks, said people familiar with the matter, a move that could help more clearly separate healthy banks from the weaklings.

Until now, the government has tried to treat all banks equally, pouring cash into both strong and struggling institutions to prop up the financial sector. The strategy has provided cover for beleaguered banks, which received funds along with their stronger brethren.

This possible move, combined with first-quarter bank earnings and the push by some financial institutions to raise new capital and repay their bailout funds, could lay the groundwork for a new phase in the financial crisis. Within weeks, the stronger banks could emerge free of government shackles and flush with new funds, with weaker ones still reliant on federal largesse. That would transform how investors and the government view the financial sector.http://online.wsj.com/article/SB123975110468218627.html#mod=testMod

Former Silverado head Wise commits suicide in Fla.

Banker Michael Wise is dead. How strange. I first met this gentleman back in the mid 1980s when I started writing about Silverado Banking. He was smooth, impeccably dressed, wearing tie bars and high end Hart Marx suits.

As they saying goes,Michael could sell ice to an eskimo. People in Denver, which at that time, was a small town, loved him. He joined all the right clubs and said all the right things. But Wise also had a hidden, less obvious side. He keep people at a distance. He employed a slick PR man who I never trusted. Most people who met Wise always wondered what they weren't being told. The answer eventually came out - and it turned out there was a lot to be told. Silverado was built on a funny money scheme. It collapsed in 1988. The feds took it over, bailing out depositors. When the dust settled, Silverado went down in the banking log books as classic '80s S&L gangster behavior.

Wise slipped away. He was always slippery, maybe too much for his own good. He was very good at selling people, knowing when he turn on the charm and when to use his intellectual muscle. He was so good that he convinced Neil Bush, brother of George W. Bush to sit on Silverado's board. Neil was just a dump kid at the time, but Neil's dad, George H. Bush was vice president at the time. Wise wanted an Ace card to play with federal regulators. And Neil, of course, had no idea what he was getting involved in at the time or how he was being used by Wise.

Well, Wise stopped selling this week - committing suicide in Florida. And at this point, Wise is just a post script to a scandal that to most people is a distant memory. The thrift banking crisis cost the government $180 billion - but that seems like a drop in the bucket to the $2.5 - $3 trillion the government is now spending to bail out banks, insurers and re-inflate the economy. My how times change. What follows is a piece from my former employer, the Denver Post where I first wrote about Wise's shenanigans with another former Post reporter, Henry Dubroff who is now a publisher in California. - MT

The Denver Post - Michael Wise, who became a symbol of the savings-and-loan debacle of the late 1980s, committed suicide in Florida last week.

Wise jumped from the ninth floor of a parking garage at Tampa International Airport on April 8, said Henry Poage of the Hillsborough Medical Examiner's office, which ruled the death a suicide.

According to the medical examiner's office, Wise drove a rental car to the ninth floor of the short-term parking garage.

A security video shows Wise pacing, then he stepped off the side. Wise landed in a landscaped area with palm trees and some greenery, said Tampa International Airport spokeswoman Brenda Geoghagan.

He was taken to a hospital but died in the emergency room at 1:39 p.m. The airport's police department ruled out any foul play or accident.

Wise was chairman of Denver-based Silverado Savings and Loan, which collapsed in 1988. http://www.denverpost.com/breakingnews/ci_12140329

http://www.nytimes.com/1990/07/21/business/how-silverado-recruited-neil-bush.html?scp=3&sq=Michael%20Wise&st=cse

Obama Administration Launches Housing Plan

The Wall Street Journal - WASHINGTON -- The Obama administration Wednesday unveiled key guidelines for its housing market rescue plan that should enable loan servicers to immediately start modifying eligible mortgages.

Two weeks ago, the president laid out a clear path forward to helping up to 9 million families restructure or refinance their mortgages to a payment that is affordable now and into the future," Treasury Secretary Timothy Geithner said Wednesday in a statement. "Today, we are providing servicers with the details they need to begin helping eligible borrowers."

The administration's new housing rescue effort includes a program aimed at reducing the amount homeowners owe per month. Under the program, the lender will have to first reduce monthly payments on mortgages so that the borrowers' monthly mortgage payment is no greater than 38% of his or her income. The program will then match further reductions in monthly payments dollar-for dollar from 38% down to 31% debt-to-income ratio for the borrower.

The modified payments will be kept in place for five years and the loan rate will be capped for the life of the loan, Treasury said in technical documents provided Wednesday morning. After five years, "the interest rate can be gradually stepped-up by 1% per year to the conforming loan survey rate in place at the time of the modification."

Treasury said that in order to reach that 31% debt-to-income ratio level, interest payments will first be reduced down to as low as 2%.

Meanwhile, servicers will receive an upfront fee of $1,000 for each eligible modification meeting guidelines established under this initiative. Servicers will also receive "pay for success" fees, as long as the borrower is successful at staying in the program, of $1,000 each year for three years, said Treasury.

http://online.wsj.com/article/SB123617623602129441.html

Banks May Need to Be Nationalized

Bank Chieftains Appear Before Congress

WASHINGTON — James D’Agostino craned his neck to get a view of the Morgan Stanley chief executive John J. Mack in the hope that the Wall Street titan would be subjected to a firestorm of criticism in a reckoning before Congress.

After participating in a protest last weekend at Mr. Mack’s home in Rye, N.Y., Mr. D’Agostino said he was eager to see lawmakers “go after him. And the others, too.”

But inside the House chamber where Mr. Mack sat shoulder to shoulder with Vikram S. Pandit, Kenneth D. Lewis, and the heads of five other too-big-to-fail banks leaning on government support, lawmakers instead delivered the equivalent of a slow burn.

“There is in the country a great deal of anger about the financial institutions, including those represented here,” Barney Frank, the chairman of the House Financial Services Committee said, gazing at the row of executives. But, Mr. Frank continued, it would be impractical to scrap the entire financial system and start anew. “We have no option if we are to get credit flowing in this country other than to work with the existing institutions,” he said.

Bank of America. Citigroup. Goldman Sachs. Morgan Stanley. These are the among the banks that the public blames for creating the mess that ravaged financial markets and ripped into the economy.

They and others that have taken in billions of dollars in hard-earned taxpayer dollars are widely perceived not to be returning the favor to the nation. Some say they are curbing lending while continuing to dish out millions in executive pay. But they are also the giants of the banking world that lawmakers are counting on to haul the economy back onto its feet.

This “dilemma,” as Mr. Frank described it, led some lawmakers to walk a finer line with the bankers than had been the case with the heads of the Big Three automakers, who have also sought billions in support to shore up their teetering industry.

So, at the first hearing to call banking chiefs to account for how they have spent a collective $165 billion in taxpayer money, the pitchforks were tabled — for the most part.

“You once lived behind a one-way mirror, unaccountable to the public at large,” said Representative Paul E. Kanjorksi, a Democrat from Pennsylvania. “When you took taxpayer money you moved into a fishbowl.”

The love-hate relationship with Wall Street dates back to the days when the financial district was settled by the Dutch. But the 1930s holds the greatest echoes to today. Back then, lawmakers were looking for answers behind the 1929 stock market crash, and for years they hauled bankers into contentious hearings. http://www.nytimes.com/2009/02/12/business/12bank.html?partner=permalink&exprod=permalink

http://www.cnbc.com/id/15840232?video=1030938318

Nationalization of Banks Gets A Serious Look

The New York Times - WASHINGTON — Only five days into the Obama presidency, members of the new administration and Democratic leaders in Congress are already dancing around one of the most politically delicate questions about the financial bailout: Is the president prepared to nationalize a huge swath of the nation’s banking system?

Privately, most members of the Obama economic team concede that the rapid deterioration of the country’s biggest banks, notably Bank of America and Citigroup, is bound to require far larger investments of taxpayer money, atop the more than $300 billion of taxpayer money already poured into those two financial institutions and hundreds of others.

But if hundreds of billions of dollars of new investment is needed to shore up those banks, and perhaps their competitors, what do taxpayers get in return? And how do the risks escalate as government’s role expands from a few bailouts to control over a vast portion of the financial sector of the world’s largest economy?

Taxpayers are now the biggest shareholders in Bank of America, with about 6 percent of the stock, and in Citigroup, with 7.8 percent. But the government’s influence is far larger than those numbers suggest, because it has guaranteed to absorb the losses of some of the two banks’ most toxic assets, a figure that could run into the hundreds of billions of dollars.http://www.nytimes.com/2009/01/26/business/economy/26banks.html?partner=permalink&exprod=permalink

Lending at Top Banks Drops Despite Federal Cash

The Wall Street Journal - Lending at many of the nation's largest banks fell in recent months, even after they received $148 billion in taxpayer capital that was intended to help the economy by making loans more readily available.

Ten of the 13 big beneficiaries of the Treasury Department's Troubled Asset Relief Program, or TARP, saw their outstanding loan balances decline by a total of about $46 billion, or 1.4%, between the third and fourth quarters of 2008, according to a Wall Street Journal analysis of banks that recently announced their quarterly results.

Those 13 banks have collected the lion's share of the roughly $200 billion the government has doled out since TARP was launched last October to stabilize financial institutions. Banks reporting declines in outstanding loans range from giants Bank of America Corp. and Citigroup Inc., each of which got $45 billion from the government; to smaller, regional institutions. Just three of the banks reported growth in their loan portfolios: U.S. Bancorp, SunTrust Banks Inc. and BB&T Corp.

The loan figures analyzed by the Journal exclude some big TARP recipients that haven't reported fourth-quarter results yet, such as Wells Fargo & Co.

The overall decline in loans on the 13 banks' books -- from about $3.36 trillion as of Sept. 30 to $3.31 trillion at year's end -- raises fresh questions about TARP's effectiveness at coaxing banks to reopen their lending spigots.http://online.wsj.com/article/SB123293041915314113.html?mod=testMod

Bank Shares Plunge on Nationalization Fears

The Wall Street Journal - Shares of the biggest names in American banking plunged Tuesday as some investors feared that the government would need to nationalize the most deeply wounded financial institutions, wiping out stockholders.

The hours-old administration of President Barack Obama is expected to move swiftly to try to stabilize the financial system by pumping more capital into weakened banks and buying bad assets. Nationalization appears to be a last resort, but other options on the table move the U.S. in that direction. In one idea under consideration, the government could buy convertible securities from financial institutions, an approach that could ultimately leave the government owning large chunks of many firms' common shares.

Obama administration officials are sorting through a menu of options as they prepare efforts to clean up bank balance sheets and put them in a better position to lend. Discussions have also advanced on creating a government-backed institution that would buy and hold banks' bad assets, as well as a plan to provide government guarantees on bank holdings. Analysts say that until the Obama plan is unveiled, investors appear to be bracing for the worst-case scenario.http://online.wsj.com/article/SB123249848926800519.html?mod=testMod

Bank of America Gets Billions in U.S. Aid

WASHINGTON -- The U.S. government is close to finalizing a deal that would give billions in additional aid to Bank of America Corp. to help it close its acquisition of Merrill Lynch & Co., according to people familiar with the situation.

Discussions over these funds began in mid-December when Bank of America approached the Treasury Department. The bank, already the recipient of $25 billion in committed federal rescue funds, said that it was unlikely to complete its Jan. 1 purchase of the ailing Wall Street securities firm because of Merrill's larger-than-expected losses in the fourth quarter, according to a person familiar with the talks.

Treasury, concerned the deal's failure could affect the stability of U.S. financial markets, agreed to work with the Charlotte, N.C., lender on the "formulation of a plan" that includes new capital from the $700 billion Troubled Asset Relief Program, according to the person familiar with the talks. The amount and terms are still being finalized, this person said. Details are expected to be announced with Bank of America's fourth-quarter earnings, due out Tuesday.http://online.wsj.com/article/SB123197132814683053.html

What if the Government Bailout Fails?

The New York Times - Trust is a precious thing, and the banks still don’t have much of it. Not from the public, and not from one another.

The government’s latest bailout plan — to invest $250 billion in banks with few strings attached — could help restore that trust. But it will succeed only if the government is able to make it clear that those investments confer a sort of “Good Bookkeeping” seal of approval.

That will depend on whether the government makes sure that the cash goes only to banks that are in decent shape, or at least will be after they get the cash.

By committing half the money to nine large banks, the Treasury Department presumably has taken care of most, if not all, of the banks whose failure would threaten the system. Now it has the chance to carefully go over the books of banks that apply to join the bailout club.http://www.nytimes.com/2008/10/17/business/17norris.html?partner=permalink&exprod=permalink

The signs of possible distress that the government should look for go far beyond toxic mortgage securities and credit-default swaps. Many smaller banks were not invited to those parties, and therefore suffer no hangover from them. But real estate construction loans, both for homes and commercial buildings, were far more prevalent in banks all around the country. Credit card losses are looming as unemployment rises.

It will take weeks, if not months, for the government to prove that it will invest the money wisely. But so far, it has not even made clear that it is determined to leave out the bad banks.

Treasury officials say they have not made any decisions on what criteria will be used to decide which banks are allowed into the program, other than to consult with regulators. That is probably true; the government’s frantic efforts to halt the slide in recent weeks have had a “ready, fire, aim” feel to them.

Or, in the gentler words of the Federal Reserve chairman, Ben S. Bernanke, “Our strategy will continue to evolve and be refined as we adapt to new developments and the inevitable setbacks.”