Interesting articles on "new rules"

June 25, 2010
New Rules May Affect Every Corner of JPMorgan
By ERIC DASH and ANDREW MARTIN

Not since the Great Depression, when the mighty House of Morgan was cleaved in two, have Washington lawmakers rewritten the rules for Wall Street as extensively as they did on Friday.

And perhaps no institution better illustrates what would — and would not — change under this era’s regulatory overhaul than the figurative heir to that great banking dynasty, JPMorgan Chase & Company.

Unlike in the 1930s, the modern House of Morgan will remain standing. So will its cousin, Morgan Stanley, which broke off in 1935 after Congress placed a wall between humdrum commercial banking and riskier investment banking.

The proposed Dodd-Frank Act, worked out early on Friday morning, stops far short of its Depression-era forerunner. But in ways subtle and profound, it has the potential to change the way big banks like JPMorgan do business for years to come.

“It’s a tough bill, and shows the pendulum is swinging toward tighter regulation,” said Frederick Cannon, a banking analyst at Keefe, Bruyette & Woods in New York. “This is going to pressure bank earnings well into the future.”

Of course, all the big banks would feel some effect. Goldman Sachs, for example, would have to rein in its high-rolling traders. Wells Fargo would be subjected to stricter rules on consumer lending. And many large banks would feel the pinch of lower transaction fees on debit cards.

But JPMorgan Chase — forged by a merger of J. P. Morgan & Company with Chase Manhattan in 2001, after the wall came down between commercial and investment banking — and its chief executive, Jamie Dimon, will have to contend with all that and more.

It is the largest player in derivatives, the financial vehicles that have been widely faulted for adding excessive risk to the system. It runs the largest hedge fund in the banking industry, the $21 billon Highbridge Capital unit, and makes billions of dollars’ worth of trades in its own account. And it has a network of retail branches in nearly every corner of the country.

“Given its franchise diversity, JPM is impacted by virtually all of the coming regulatory reforms,” Keith Horowitz, an analyst at Citigroup who follows big banks like JPMorgan, wrote in a research note last week.

One part of the bill would push much of the buying and selling of derivatives onto clearinghouses, forcing banks to put up collateral against each trade. For JPMorgan, that could tie up billions of dollars that would otherwise have gone toward lending or the bank’s own trading.

A smaller portion of trading in derivatives would take place over exchanges, making prices visible to the public and pushing down prices — and profit margins.

Banks would be required to hold more capital in reserve to cover potential trading losses. In some cases they might also be prohibited from using federally insured bank deposits for risky trading. That would hit JPMorgan hard because of its heavy reliance on customer deposits to finance other businesses.

Both changes would take even more money out of play and lower profits.

JPMorgan has already begun dismantling its so-called proprietary trading operation, to comply with new restrictions on banks making speculative bets using their own capital. Analysts say that will force the bank to give up about 2 percent of its revenue.

Under the proposed bill, the bank would also have to be more careful about separating its money from the money it manages for clients in its private equity and hedge fund units, because of a rule to limit the amount banks can invest in such funds. Still, JPMorgan would be able to hang on to Highbridge and several other investment funds because of a special exemption.

It is more difficult to judge how the new rules could affect the Chase side of JPMorgan. A newly created consumer financial protection agency would have broad new authority over financial products like mortgages and credit cards, but it may be years before the agency issues new rules governing such products.

Recent legislation imposing new restrictions on credit cards and overdraft fees has already taken a bite out of bank revenue. The new legislation would add to that drain on revenue by restricting the fees banks can charge for debit card transactions.

In his research note, Mr. Horowitz estimated that the legislation would ultimately reduce the bank’s earnings by as much as 14 percent. That estimate could be cut in half or more because several of the most severe measures in the bill have since been dropped or diluted.

Of course, these assessments do not take into account all the steps that JPMorgan and other banks could take to mitigate the effect of the legislation, like passing on some costs to customers or seeking exemptions from regulatory agencies.

Indeed, JPMorgan could feel a greater effect from deliberations taking place at the United States Federal Reserve and among central bankers in Switzerland. Both sets of regulators are considering a requirement that banks hold additional capital as a cushion against losses. They also may alter the businesses the banks can invest in, or the regions where they can expand.

Indeed, Mr. Dimon has delayed raising the bank’s dividend until international rules are set on capital requirements.

Investors seemed to signal relief that the legislation did not turn out to be as tough as it might have been, sending the share prices of most major banks up about 3 percent on Friday.

Charles Geisst, a professor of finance at Manhattan College and a Wall Street historian, said the bill, which is expected to be signed by President Obama before the Fourth of July holiday, was the most comprehensive financial regulation since the Great Depression because it touched on so many different areas. But he said its effects would not be as fundamental as the impact of changes made in the wake of the Depression.

“It doesn’t go anywhere near,” he said. “It doesn’t change institutional behavior like that did. This is business as usual, with some moderation.”


June 25, 2010
Banks Likely to Offset Impact of New Law, Analysts Say
By CHRISTINE HAUSER

Banks are expected to find ways to offset the impact of the new financial regulations on their earnings, though they face a potentially complex process of adapting to the new requirements, analysts said on Friday.

The share prices of some of the biggest United States banks, including Citigroup, JPMorgan Chase and Bank of America, were higher in afternoon trading, hours after a House-Senate conference committee completed work on a bill that would toughen financial regulations.

Analysts pored over the specifics of the deal as they emerged on Friday and expressed a wide array of views about the impact it would have. Some saw the bill as more of a political statement than a practical measure that could prevent another financial meltdown. Others said banks’ costs would increase, but banks would pass the increased costs along to consumers.

“They have got their work cut out for them, absolutely,” said William Fitzpatrick, an equities analyst who focuses on banks for Optique Capital Management

“The terms of this regulation appear to be extremely onerous on the large banks,” he said. “It is indeed a tough bill, and you are going to see several measures that are going to weigh on the profitability of the large banks.”

“I suspect they are going to have a hard time offsetting the increased regulations,” said Mr. Fitzpatrick.

Richard Bove, a banking analyst with Rochdale Securities, said the bill would not severely curtail banks’ operations.

“I don’t see there being a tremendous clampdown on the ability of banks to make money,” he said.

“The banks will have numerous methods of getting around the most onerous provisions in this bill to maintain their earnings growth,” he added. “But the things they will do will increase the cost of banking to everybody in this country.”

For instance, Mr. Bove pointed to last year’s credit card bill, which led banks to push up rates pre-emptively or reduce customers’ credit limits.

“You’re going to get a letter from your bank saying you now have to pay $1 to $15 a month to pay for this bill,” he said. “The banks are going to get the money back because the consumer is going to pay for the bill, and that’s the killer for the consumer.”

John McDonald, a financial services analyst at Sanford C. Bernstein in New York, said there should be relief among investors, but the implementation would usher in a new phase of uncertainty.

“There is still a long way to go in terms of getting clarity on the key issues that investors are focused on, like required capital,” Mr. McDonald said.

Just take an issue like derivatives. It is still not clear what activities the banks will need to cordon off in a separate holding tank. Nor is it clear how much capital they will need, which is a major factor affecting the profitability of the business, he said.

One part of the legislation known as the Lincoln Amendment, for example, would demand the banks hold more capital. At the same time, another part that drives derivatives trading onto clearinghouses and exchanges could lessen, in aggregate, the amount of capital that banks must hold. “There are a lot of variables in the air,” Mr. McDonald noted.

Mr. Fitzpatrick said he expected the restrictions on overdraft fees, less proprietary trading and the alteration of the banks’ swaps desks to have an impact on earnings.

“All these things, in addition to higher capital requirements, will weigh on the bottom line of the large banks,” he said.

Cornelius Hurley, a professor at the Boston University School of Law and a former counsel to the Federal Reserve Board of Governors, saw deficiencies.

“They missed the crisis,” he said. “The crisis they’re dealing with now is the November elections. This is a bill, despite its length and complexity, that’s more geared to the elections than the financial system.” He said that the bill would inevitably be revised and that “in no way does it address the too-big-to-fail issue.”

“The credit ratings agencies keep rating the too-big-to-fail banks higher than everybody else, and they say it’s because of the implicit government support,” he added.

“There will be a lot of regulatory costs,” Mr. Hurley said. “There will be a lot of motion, smoke — but not fire — as we go through the regulatory process. There’s going to be ton of activity, but at its core we’re going to be back where we were the day that Lehman failed.”

Several of the larger banks said that they were still studying the bill.

“Although there are aspects of the legislation which are different from what we would have preferred, we will be able to conduct a fuller assessment of its impact after the regulators issue new rules,” said Vikram Pandit, the chief executive officer for Citigroup.

A spokesman for Goldman Sachs said: “We are studying the bill and are mindful that it still has to go through the House and the Senate. We’re also mindful of the fact that much interpretation responsibility lies with regulators, so we think it is too early to be able to express an informed view.”

But it is apparent already that banks will have to adapt the way they currently do business with their subsidiaries.

“As they wind down and spin off these more market-oriented derivatives businesses, that is going to be a challenge for them in part because of the complexity of the business,” said Jim Eckenrode, a banking analyst at TowerGroup, a financial services consulting firm.

But some analysts noted that the overhaul served an important purpose in improving confidence and providing transparency as a response to the challenges posed to the American financial system.

“My first line of thinking is that obviously there was a lack of systemic oversight in some of the businesses that were generating a lot of profits for the industry,” said Mr. Eckenrode.

“Trying to harmonize the regulatory environment I think makes a lot of sense. I do think that generally the banks should be pleased that it was not worse than it was,” he said.

For example, creating a resolution fund addressing the financial crisis, Mr. Eckenrode said, “certainly has been reduced quite a bit.”

The chief executive of the Securities Industry and Financial Markets Association, Tim Ryan, said in a statement that the new law should bolster confidence.

“Much of this new law should help to restore and maintain confidence in U.S. financial markets, including several important provisions such as the establishment of a systemic risk regulator, resolution authority and a new federal fiduciary standard for retail investors,” he said.

“But this is a tough law that will also have profound effects on the operations and cost structure of most financial services companies and financial markets,” Mr. Ryan added.

Joshua Steiner, a managing director who covers the financial sector for Hedgeye Risk Management, said he was still examining the legislation but said the new regulations could potentially weigh on earnings.

“One of the issues is really going to be going forward trying to understand how this is actually going to affect earnings, because the banks have been very cagey on how much of their earnings generally come from proprietary trading and private equity and hedge fund investing,” he said.

“So I think net-net over time this will come to represent essentially a tax on the industry for all intents and purposes,” Mr. Steiner said. “It will be a long-term depressant on earnings.”

He added: “Constraints will force them to re-allocate their capital elsewhere.”

The approvals on Friday cleared the way for both houses of Congress to vote on the full financial regulatory bill next week.

One lawmaker was quick with criticism of the bill. Senator Judd Gregg, Republican of New Hampshire and a member of the Senate Banking Committee, said: “In an effort that should be geared toward correcting deficiencies in our regulatory structure, and during a time when we should be focused on economic recovery, this legislation is a failure on both counts. It will not encourage much-needed stability and confidence in our financial markets. It will not significantly reduce systemic risk in our financial sector.”

But Ed Mierzwinski, consumer program director for the Federation of State Public Interest Research Groups, saw some positives for consumers and described the bill as “landmark legislation.”

He noted that the idea for creating a new consumer financial protection agency was proposed just three years ago. Despite intense efforts by the banking industry to water down the agency or kill it outright, Mr. Mierzwinski said the agency survived with broad authority, a strong financing stream and an independent director.


Graham Bowley, Eric Dash, Andrew Martin, Cyrus Sanati, Louise Story and Edward Wyatt contributed reporting.

Nice article on the US housing market

June 23, 2010
U.S. New Home Sales Drop 33% in May
By DAVID STREITFELD

The new housing market has never been this bad, at least not since the government started tracking such things in 1963.

Outdoing even the pessimists’ expectations, sales of new homes declined by a record amount in May to a new low. The dismal data, released by the Census Bureau on Wednesday, followed a disappointing report on sales of existing homes earlier in the week and added to growing concerns about the strength of the economic recovery.

Unemployment remains stubbornly high as private sector employers do not add jobs and retail sales are weak. And if no one seems to want to buy a house, many other people apparently are voluntarily ditching the ones they already have.

Fannie Mae, the big mortgage finance company that is a ward of the government, said Wednesday that homeowners who intentionally defaulted because they owed much more than the house was worth would be ineligible for a new Fannie Mae-backed loan for seven years.

“Walking away from a mortgage is bad for borrowers and bad for communities and our approach is meant to deter the disturbing trend toward strategic defaulting,” Terence Edwards, Fannie Mae’s executive vice president for credit portfolio management, said in a statement.

Fannie Mae and its sister company Freddie Mac own or guarantee about 30 million mortgages. The new measures could help limit demand for houses for much of the next decade.

Fannie Mae said it would take legal action to recoup outstanding mortgage debt from borrowers who walk away. According to one study, 588,000 borrowers strategically defaulted in 2008.

Other economic news on Wednesday was downbeat.

Policy makers at the Federal Reserve, meeting in Washington, said that “financial conditions have become less supportive of economic growth.” As expected, the Federal Open Market Committee voted to keep short-term interest rates near zero.

Even as mortgage rates fell again last week, flirting with their modern-day lows, the Mortgage Bankers Association said that applications for loans to purchase homes fell. It was the fifth drop in six weeks for the purchase index, which is 36.8 percent below its level in June 2009.

“We can’t get the phones to ring,” said Michael E. Menatian, president of the Sanborn Mortgage Corporation in West Hartford, Conn. “Until there is economic growth — i.e., more jobs, wage appreciation, overtime and bonuses — we will have a housing problem.”

Builders sold new homes in May at an annual rate of 300,000, the Census Bureau said. That was 32.7 percent below the 446,000 rate in April, when buyers could still qualify for a tax credit, and is about a third the level in a normal economy.

Analysts had been expecting a drop to about 400,000. “We would be lying if we said the size of the drop was not shocking,” Dan Greenhaus, chief economic strategist for Miller Tabak, said in a research note.

Sales are now even lower than they were during the recession of the early 1980s, when interest rates approached 20 percent. The previous record low was September 1981.

“I think that builders should bite the bullet and stop building houses,” said Howard Glaser, a housing consultant. “They keep dumping new inventory into the market when what the market really needs is a moratorium.”

The builders maintain that they build only when they have orders from customers, and that their buyers are not interested in older stock. But the result is the same: too many houses, new and old, are competing for too few buyers.

The situation will likely get worse over the summer. In a normal market, the supply of homes available is less than six months. Currently, there are more than eight months’ worth of both new and existing homes.

With more foreclosures headed to the market, those numbers will likely go up.

Government data released Wednesday showed that newly initiated foreclosures increased 18.6 percent during the first quarter, to 371,000. Foreclosures in process increased 8.5 percent, to 1.17 million.

Under the system announced Wednesday by Fannie Mae, owners who walk away from their mortgages will be penalized even more than those who filed for multiple bankruptcy protection. Multiple filers are eligible for a new Fannie-backed mortgage after five years.

A Fannie spokeswoman said executives were not being made available to comment. The release did not address the question of how Fannie intended to distinguish between those who walk away and those who really could not avoid foreclosure.

Analysts and economists are growing more discouraged about the housing market; a majority said in one new survey that they expected prices to decline again this year. The size of the drop will be dictated by whether the market’s current queasiness is a temporary reaction to the end of the $8,000 tax credit or a more permanent malaise.

Buyers who signed contracts before April 30 qualified for the credit. These purchases will turn up in sales reports as they are completed.

While the credit clearly stimulated sales, the effect was milder than anticipated. The National Association of Realtors said this week that existing houses sold in May at an annual rate of 5.66 million, down slightly from April.

At a mortgage conference last month, David H. Stevens, Federal Housing Administration commissioner, said housing was “a market purely on life support, sustained by the federal government. Having F.H.A. do this much volume is a sign of a very sick system.”

In a recent interview, Mr. Stevens said his point was misconstrued. “The system is showing signs of stabilizing,” he said. “We’re vastly improved over where we were a year ago.”

To underline that notion, the Obama administration released this week its first monthly “housing scorecard.” It presents an optimistic picture of a housing market saved from the abyss by extensive government intervention.

Some of its good news, however, was distinctly relative. “Home equity up more than $1 trillion since first quarter 2009,” said one headline in the report. But, as the chart clearly indicated, in the three years before that, equity had fallen $6 trillion.