Relevant and even prescient commentary on news, politics and the economy.

Moved your money

Think Progress points us to

…the Credit Union National Association (CUNA) reports that a whopping 650,000 Americans have joined credit unions since Sept. 29 — the date that Bank of America announced it would start charging a $5 monthly debit fee, a move it backed down on this week.

To put that in perspective, there were only 600,000 new members for credit unions in all of 2010.

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Banks, repos and transparency in accounting

by Linda Beale

Banks, repos and transparency in accounting

A repo transaction is essentially a collateralized financing. For tax purposes, everybody knows that it will be treated as a loan, no matter that it is called a “sale” with an agreement for a repurchase later. For accounting purposes, though, some repo transactions have been able to slide by and look like a “real” sale rather than debt on the financial statement. That’s a perfect example of the fact that tax theory pays attention to economic substance, whereas accounting somehow sets up rather arbitrary categories that may end up letting a repo count as a sale instead of a loan on an entity’s financial statement.

As most everybody is aware by now, the 2000+ page report on the Lehman breakup found that the firm had engaged in repo transactions to make its capital position look better than it actually was by reducing the leverage showing on its books. It concluded that the Lehman executives and the company’s outside auditor (Ernst & YOung) had improperly allowed the repos to temporarily reduce leverage on the firm’s books, which contributed to the company’s ultimate downfall.

Now the SEC is asking 24 large financial institutions and insurance companies to provide information about their accounting and disclosure practices in connection with their use of repos. The sample SEC letter is available here.

Financial institution reform needs to deal with a myriad of factors–over-leverage is one of them. Transparency in accounting, and focus on economic substance rather than form, should be high on the list of reforms needed.

crossposted with ataxingmatter

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What is a Bank, then?

I was trying to avoid mentioning this, partially because I half-suspected it was deliberately over the top, and I’m not reading tone well these days. After all:

Virtually every BHC has elected to become an FHC. Under 12 U.S.C. § 1843(k)(4)(H), FHCs are allowed to make “merchant banking investments” in nonfinancial companies, on a principal or agency basis, through affiliated private equity funds or other invesment funds. (Private equity affiliates are dealt with at length in 12 C.F.R. § 225.173.) Goldman carried out the investment in Greely Automotive Holdings through one of its private equity funds, GS Capital Partners VI Fund LP.

I find it very difficult to believe that any serious bankers, no matter how “annoyed,” wouldn’t have known this. [links in original]

is difficult to treat seriously, given the infodump being followed by the snideness. But so it goes.

Until today, when Brad DeLong made it ones of his links of the day. Because now we have to go into context and depth, and remember a year ago.

Bear was sold to JPMChase in March. Six months later, IBs still had not lowered their leverage ratios, and credit was more difficult to find. So the IB that had six months to return to some semblance of sanity—Lehmann Brothers—dangled on the edge for a while and finally fell off, “murdered” we’re now told. (Whether it was murdered by its own CEO is left as an exercise.) But the best was yet to come.

So the weekend was going to be a rocky one. And various plans in various stages were executed:

  1. Endangered IB #3, the successor firm to Merrill Lynch Pierce Fenner & Smith, looked around for a sucker, saw Ken Lewis, and locked in their bonuses.
  2. Endangered IB #4, the successor firm to Dean Witter Sears, teetered on the edge, hoping for a life preserver. And, apparently, it was more like Leo-in-Titanic than anyone wanted to admit.
  3. Endangered IB #5, The Vampire Squid, called its buddies at Treasury.

Maybe it didn’t go exactly like that, but by the end of the weekend, there was the declaration that, so long as they re-incorporated as a Bank Holding Company (BHC), IB#4 and IB#5 would have full access to lootsupport from the U.S. Treasury.

And now we are told—in answer to the question Simon Johnson initially raised:

If this is temporary, is it envisaged that Goldman will cease being a bank holding company, or that it will divest itself shortly of activities not usually allowed (and with good reason) by banks? Or will all bank holding companies be allowed to expand on the same basis. (The relevant rules appear to be here in general and here specifically; do tell me what I am missing.)

Increasingly, the issue of “too big to regulate” in the public interest is being brought up – an issue that has historically attracted the interest of the Department of Justice’s Antitrust Division in sectors other than finance. Should Goldman Sachs now be placed in this category? [italics mine; links, again, from the original]

The response appears to be that those regulations can be circumvented with impunity. Or, as Simon unbelievingly snarked initially, Goldman is doing nothing any other bank cannot do.

But all that does is beg the question: if a BHC can do everything that GS used to be able to do, what was the actual cost to Goldman and Morgan Stanley of converting their business. Or was it just a way for the Fed to save face while letting the taps flow wide?

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Spitzer and the OCC – Who you gonna call?

OCC press release

WASHINGTON Feb. 14, 2008 — Comptroller of the Currency John C. Dugan issued the following statement today, responding to comments from New York Governor Eliot Spitzer:
Almost everyone who has paid attention to the subprime lending crisis has concluded that OCC-regulated national banks were not the problem. Instead, the worst abuses came from loans originated by state-licensed mortgage brokers and lenders that are exclusively the responsibility of state regulators.
However, comments from today assert that the OCC and national bank preemption have prevented the states from taking action against predatory or abusive lenders. That’s just plain wrong.
The OCC extensively regulates the activities of national banks, including mortgage lending. The OCC established strong protections against predatory lending practices years ago, and has applied those standards through examinations of every national bank. As a result, predatory mortgage lenders have avoided national banks like the plague. The abuses consumers have complained about most — such as loan flipping and equity stripping — are not tolerated in the national banking system. And the looser lending practices of the subprime market simply have not gravitated to national banks: They originated just 10% of subprime loans in 2006, when underwriting standards were weakest, and delinquency rates on those loans are well below the national average.
Nothing the OCC has done has prevented the states from regulating and preventing abuses among the lenders that they license – lenders that are the source of most of today’s problems. The states have ample authority – as well as clear responsibility – to set standards for these lenders and enforce them. It defies logic to argue that preemption was an impediment. National banks are bound to obey the strict standards enforced by the OCC everywhere they operate – even in states that had far less rigorous standards. The states should have applied equally rigorous standards to the non-bank lenders that were responsible for the bulk of the problems.

If a little worried while everyone passes the buck so to speak, you might want to go here to check on who is in your wallet!

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