bizzXceleration: Performance, Value and Profit

 

The Finance Industry was offered the same opportunity but has deliberately chosen to bite the hand that fed it. Much more so than any of the HC interest groups. The President's speech in early September was a declaration of war but recent administration speeches are a clear outline of intentions (Saddam Hussein are you listening?). The video clip above is a recent short speech by the President on a Consumer Protection Agency and financial reform in general. We urge you, again, to listen to it but not just for the content per se but for the tone and attitude. The President sounded as angry as we've ever heard him, and while much less strident than the folks on Rattigan's show, the language and tone were pretty similar. When you get the President that disturbed with you you are NOT in a good place.

After the break you'll find some news story excerpts on the state of things, the Administration's intentions, some industry news which illustrate how badly they are handling things and the whole slew of URL's for the video clips we mentioned. You don't need to listen to them all but we suggest at least a couple.

Peter Drucker in his magnum opus "Management: Tasks, Responsibilities and Practices" has a whole section devoted to social responsibility that is the most insightful and brilliant thing we've ever read on the subject. He points out that no business can be healthy when society is hurting. But he makes a fundamental point that business executives have a primary responsibility to fix problems they create before society is forced to fix them for itself. Let's turn that around - it is a primary executive responsibility to constructively engage with society and help shape fixes to problems. To act otherwise is profoundly irresponsible. It is also counter-productive because, sooner or later, those problems will be addressed and the results will not be to industry's liking.

If we were considering investing in Finance we'd have three major problems:

1) there are lots of problems still exponentiating (bad loans, CRE losses, terrible balance sheets, toxic assets, the need to raise capital and the lurking problem of mortgage writedowns. Taken all together they mean the industry is facing years of operational challenges that make them poor candidates. But,

2) the business models of all the major lines of business are broken which makes them evern worse. Finally,

3) the industry's obtuseness and bad tactics are going to create a major strategic problem for them on current course and speed!

We suggest you evaluate them with these factors in mind.

UPDATE: apparantly we aren't the only ones concerned about truth, justice, the American way and regulatory reform. Both Jim Jubak and Barry Ritholz pinted the topic (in fairness Barry's been hammerring awy for a while). This is going to be as big a fight as HC and will define the playing field for your well-being as much for the next several decades as anything else going on. If you don't take the hint go make a noise unto your Congressional representatives!

• Congress writes strong new regulations for banks–and then exempts everybody but my grandma
• Maria Cantwell re: Loopholes in Financial Regulation

 UPDATE2: This was a startling read in today's WSJ. While it was in a Heard on the Street and sounds like an oped (NB: one suspects the editorial page staff would have tarred and feathered the writer) it makes a strong case for aberrational controls on bonuses created by government policy windfalls.

Windfalls Show That Bonus Tax Makes Sense Government action is logical. There are two legitimate policy objectives: to encourage banks to build capital to support new lending; and to help cut fiscal deficits run up during the crisis. Ideally, governments should act together to avoid damaging competitiveness.One problem is where to levy the tax. Levy it on the banks and the lion's share of the profits already will have been distributed. A better option may be a one-off tax on individual bonuses. True, this won't help recapitalize the banks, but governments will at least recoup some of the cost of their support.Better still would be for governments to adopt a French proposal capping the proportion of revenue banks distribute as bonuses. That would ensure there was a much-larger profit pool to be shared among other stakeholders, including taxpayers and shareholders. If banks can't be trusted to do the right thing and exercise self-restraint, governments shouldn't be afraid to help.

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Reform Readings

Summers: 'Time has come' for deep change for banks White House senior economic adviser Lawrence Summers challenged U.S. financial institutions Friday to think about what they can do for their country by stepping up and accepting the regulations imposed upon them in the wake of the largest financial crisis since the Great Depression. "Financial institutions that have benefited from government support can, should and must use this moment to think about what they can do for their country -- by accepting the necessary regulation to protect the American people," Summers said in remarks prepared for delivery at the Economist's Buttonwood Gathering in New York. "There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system." Summers, the director of the National Economic Council, defended efforts on Capitol Hill to reform regulation in the sector. Legislators in the House and Senate are working on a broad set of reforms for financial firms, including new regulations on derivatives, credit rating agencies and banks. "The time has come for fundamental change in the financial sector of our economy -- both in how financial institutions conduct their business and how they are regulated," Summers said. The U.S. Chamber of Commerce is lobbying against numerous aspects of the legislation, including a measure to create a Consumer Financial Protection Agency that the chamber has characterized as a new bureaucracy that will limit choices for consumers. Financial firms are concerned about new fees that lawmakers might impose on institutions to fund a mechanism to resolve an insolvent megabank so that its collapse doesn't cause collateral damage. The House Financial Services Committee took a major step in the reform effort Thursday by approving a broad set of regulatory reforms for the derivatives industry, including a provision requiring that standardized derivatives traded by large financial institutions go through transparent clearinghouses and exchanges. The House Agriculture Committee is set to push forward work on derivatives legislation, which is expected to be coordinated with the bill approved in Rep. Barney Frank's committee.

Obama Administration Pushes Back at Bank Lobbying Against Financial Rules  White House officials say they are growing frustrated that the banking industry is fighting President Barack Obama’s plan to overhaul financial regulations after taxpayer bailouts helped firms restore profits and near- record compensation for executives. Their anger is directed even at firms such as New York’s JPMorgan Chase & Co. and Goldman Sachs Group Inc. that have paid back their government assistance and reported a surge in third- quarter earnings this week. The issue, according to administration officials, is the industry is generally on sound footing because of government help and lobbying against Obama’s regulatory plans goes against the nation’s long-term interest. “We are disappointed by the lobbying of anyone in the financial industry against regulatory reform, considering the obvious need for change on that front,” Valerie Jarrett, a senior adviser to Obama, said. Wall Street regulation is scheduled to be among the topics when Jarrett, Obama adviser David Axelrod and White House Chief of Staff Rahm Emanuel appear on Sunday news talk shows Oct. 18. The administration is mounting a counteroffensive by pointing to a disconnect between Wall Street and the rest of the country: while some big banks report compensation plans and profits at pre-crisis levels, the unemployment rate rose to 9.8 percent last month and home foreclosures jumped 29.2 percent from a year earlier. The tougher message is being repeated from the president on down. Now is the time for “firm rules of the road so that banks can’t game the system and the financial crisis on Wall Street doesn’t end up hurting folks on Main Street,” Obama said last night at a Democratic Party fundraiser in San Francisco. Lawrence Summers, director of Obama’s National Economic Council, was giving voice to it today in New York. “There is no financial institution that exists today that is not the direct or indirect beneficiary of massive taxpayer support for the financial system,” Summers said in remarks to a conference sponsored by the Economist newspaper. Obama is renewing his push to redo financial industry regulations by the end of the year, and many of his proposals, including a Consumer Financial Protection Agency, are facing stiff industry opposition.

• Citigroup, JPMorgan Seek Delay of Higher Capital Requirements Set for 2010

Frank committee approves key derivatives bill A key congressional committee on Thursday approved wide-ranging legislation to strengthen oversight of and increase transparency in the $592 trillion derivatives industry, which has been widely blamed for contributing to the financial crisis. The House Financial Services Committee chose not to ban transactions in the complex financial instruments. However, committee members voted 43-26 to require derivatives traders and dealers to keep greater capital on hand. They also imposed new transparency, recordkeeping and reporting regulations on traders of the previously opaque derivatives transactions. "There is a lesson of the last year, which has been that the systemic impact of not having most of this be put on exchanges, is too great," said Chairman Barney Frank, D-Mass., a key author of the legislation. A number of key amendments were included in the base bill, including a major provision introduced by Frank that would require a derivatives transaction cleared through a clearinghouse to be traded on a transparent exchange if it is between financial institutions. The provision includes exemption for certain end-user traders such as small business owners who trade derivatives to manage commercial risk to their production facilities. Small business end users are usually employers that use derivatives to hedge fluctuations in interest rates, alterations in foreign currency or hikes in oil prices. The committee members also approved a variety of other key provisions, including one that would prohibit private financial institution broker-dealers engaging in major derivatives deals from owning clearinghouse facilities.

Congress writes strong new regulations for banks–and then exempts everybody but my grandma You may not be familiar with the term “carve out.” I wasn’t until this round of action in the U.S. Congress.A carve out is when you write really strong regulations–regulations that voters think will do the job that needs to be done–and then gut them in a way that you hope nobody will notice by making sure that they apply to almost nobody.Lobbyists, I’d note, love carve outs.The House Financial Services Committee delivered a big carve out to the banking industry on October 15. The pumpkin on the table was a bill to set up a new consumer financial protection agency to prevent banks from writing confusing or just plain deceptive mortgages, from hiding all the important details of a credit card in dozens of pages of fine print so that no consumer without the patience of Job could be expected to know what the fees and charges were, or from piling fees on top of fees until a consumer wound up paying hundreds of dollars for bouncing a $25 check.No consumers don’t need anything like that. The sub-prime, alt-A, and prime mortgage meltdown shows that banks can be trusted to do the best for their customers. And the aftermath of the global financial crisis, a period when banks are attempting to plug the holes in their balance sheets with the flesh of their customers, shows that banks never overcharge for their services or try to hide the full extent of the fees that come with a checking account or credit card.As you might imagine the banks aren’t overjoyed with the idea of creating a new regulator charged with making sure they don’t rip off their customers. And they’ve pulled out all the stops to prevent it, sending an army of lobbyists to the House Financial Services Committee where chairman Barney Frank (D-MA.) was cobbling together both a bill and the political coalition to pass it.It’s never a good idea to watch sausage being made, the saying goes, because if you see what goes into it, you won’t want to eat. It’s always a good idea to watch how Congress puts together legislation because then, at least, you won’t have any illusions about what’s being forced down voters’ throats.

Video Clips: the Anger This Time!

Ferguson Says Bank of America Shows Crisis Not Over The dollar will extend its drop versus the euro over the next two to five years, falling as much as 20 percent to an all-time low under a widening U.S. budget deficit, Harvard University’s Professor Niall Ferguson said. Policy makers favor the dollar’s slide as a means of supporting a recovery from the worst economic slump since the Great Depression even as they voice support for a strong greenback, Ferguson said in an interview on Bloomberg Radio.A weak dollar is “the simplest solution to most of America’s problems right now,” said Ferguson, author of “The Ascent of Money: A Financial History of the World.” “We are likely to see 1 percent to 2 percent growth unless exports take off, and that’s what everyone in Washington is quietly hoping: If the dollar keeps sliding, then maybe we can get some traction on exports.” The weakening of the dollar is “terrible news for practically all of the rest of the world’s economies,” except the U.S. and China, said Ferguson. China, which manages the yuan’s appreciation, will “intervene to make sure the dollar does not weaken” relative to its currency, Ferguson added.

Wall St. Is Winning: Elizabeth Warren "Speechless" About Record Bonuses But Warren admits to being "speechless" at reports of record bonuses on Wall Street. "I do not understand how financial institutions could think they could take taxpayer money and turn around and act like it's business as usual," Warren says. "I don't understand how they can't see that the world has changed in a fundamental way - it's not business as usual. All I can say right now is they seem to be winning this argument."

Warren: Housing Market Getting Worse There's been a lot of talk lately about a recovery in the housing market – even reports of bubbles re-inflating in certain markets. Elizabeth Warren, chair of the Congressional Oversight Panel, isn’t buying it. "We see things getting worse in the housing market," Warren says, citing the pernicious effects of foreclosures, which rose 5% in the third quarter to a total of 937,840, according to RealtyTrac. "The long-term impact of high foreclosure rates on our housing market and overall economy would be disastrous," Warren warns, citing estimates that 10 to 12 million U.S. homes could ultimately go into foreclosure. "We have to get foreclosures under control."

"Astonishing" That Big Banks Are Taking Taxpayer Money, Writing the Rules, Warren Says Elizabeth Warren may be the American consumer's new best friend. "The banks, big banks, always get what they want," says Warren, in the third part of her sitdown interview with Aaron Task at The Economist's Buttonwood gathering. "They have all the money, all the lobbyists. And boy is that's true on this one. There's just not a lobby on the other side." "This is a moment when all around the country people are saying we've had it about up to here with these large financial institutions that want to write the rule then take our money. I find it astonishing that they have the nerve to show up and say, 'I'm a big financial institution. I took your money. And now I'm going to lobby against anything that might offer some protection to ordinary families in this marketplace,' " Warren says. "This might be the time that the rules change," she says. The proposal for the Consumer Financial Protection Agency heads to the House Financial Services Committee next week.

J.P. Morgan sees soaring profits : Morning Meeting's Dylan Ratigan and panel discuss how J.P. Morgan's third quarter profits surging to 3.6 billion dollars may cause other banks to follow.

House begins markup of new financial bill : Morning Meeting's Dylan Ratigan speaks with Rep. Barney Frank, D-Mass., about a new bill that will change the financial industry by offering more protection for the consumers. 

Wall Street facing upturn? : Wall Street seems to have beaten the odds as the Dow Jones Industrial average finally hit the 10,000 mark, but Main Street is still faces high unemployment rates. Rep. Scott Garrett, R-N.J., and The Washington Post's Jonathan Capehart discuss. 

Should Geithner be blamed for bank bonuses? Oct. 15: Former N.Y. Gov. Eliot Spitzer and author Nomi Prins explain to Morning Meeting's Dylan Ratigan why Treasury Secretary Tim Geithner is at fault for not reigning in the banks big 2009 bonuses.

Economy due to suffer again? : The Dow hit the 10,00 mark, yet foreclosures have hit a five year high. A Morning Meeting panel debates whether the economy may start to fail again. 

Fixing 'too big to fail' : Morning Meeting's Dylan Ratigan and panel discuss a bill passed by the House Finance Committee which is supposed to be the beginning of fixing "too big to fail," as well as the problems which led to the financial collapse last year.

Moore and Ratigan face off on big bonuses : MSNBC's Dylan Ratigan and documentary filmmaker Michael Moore debate the issue of big bonuses being given out to Wall Street executives. TODAY's Matt Lauer referees.

Industry Readings

First Fed California Modifies Performing Loans, Brags about 28% Default Rate

First Federal Bank of California put out a press release claiming better modification performance than the national average: Wow. Maybe other banks can learn something from First Fed on loan modifications! But wait: Not so impressive. Most loans that are modified by national banks are delinquent, and redefault rates are much higher than initial default rates. Amherst Securities noted that this week (no link):

 

[R]e-performing loans are defined as those that were once more than 60 days delinquent, and are now less than 60 days delinquent. This can occur either through natural curing or modifications. However, these re-performing loans do not perform in the same manner as loans that have never been delinquent.In particular, the default rates on the re-performing bucket is huge. Most of these loans will eventually fail. The question is just – when?

Of course First Fed is targeting loans that will probably default (a good strategy), but the solution of modifying to a low fixed rate for up to ten years (without principal reduction), sounds like "extend and pretend".

 

The Chamber of Commerce Has It Backwards The US Chamber of Commerce is opposing the administration’s proposed Consumer Financial Protection Agency, on the grounds that it would hurt small business.  Their argument is that this agency will extend the dead hand of government into every small business.For the Chamber of Commerce, government is the enemy of small business and should always and everywhere be fought to a standstill.  Chamber Senior Vice President (and former Fred Thompson campaign manager) Tom Collamore sees this as “advocacy on behalf of small businesses, job creators, and entrepreneurs” (quoted in the WSJ link above), and the Chamber has launched the “American Free Enterprise” campaign.Somewhere, the Chamber’s senior leadership missed the plot.  What brought on the greatest financial crisis since the 1930s?  What has hurt, directly and indirectly, small business of all kinds to an unprecedented degree over the past 12 months?  What is killing small and medium-sized banks at a rate not seen in nearly 80 years?It’s the behavior of the financial sector, particularly big banks and their close allies – by consistently mistreating consumers.  And the letter and spirit of the regulatory regime let them get away with it.

• Blankfein Puts Mouth Where Goldman’s Profit Is

Bailout Helps Revive Banks, and Bonuses Even as the economy continues to struggle, much of Wall Street is minting money — and looking forward again to hefty bonuses.Many Americans wonder how this can possibly be. How can some banks be prospering so soon after a financial collapse, even as legions of people worry about losing their jobs and their homes?It may come as a surprise that one of the most powerful forces driving the resurgence on Wall Street is not the banks but Washington. Many of the steps that policy makers took last year to stabilize the financial system — reducing interest rates to near zero, bolstering big banks with taxpayer money, guaranteeing billions of dollars of financial institutions’ debts — helped set the stage for this new era of Wall Street wealth.Titans like Goldman Sachs and JPMorgan Chase are making fortunes in hot areas like trading stocks and bonds, rather than in the ho-hum business of lending people money. They also are profiting by taking risks that weaker rivals are unable or unwilling to shoulder — a benefit of less competition after the failure of some investment firms last year.So even as big banks fight efforts in Congress to subject their industry to greater regulation — and to impose some restrictions on executive pay — Wall Street has Washington to thank in part for its latest bonanza.

“They are able to charge more for all kinds of services because companies need banks and investment banks more now, and there are fewer strong ones to help them,” said Douglas J. Elliott of the Brookings Institution.

A year after the crisis struck, many of the industry’s behemoths — those institutions deemed too big to fail — are, in fact, getting bigger, not smaller. For many of them, it is business as usual. Over the last decade the financial sector was the fastest-growing part of the economy, with two-thirds of growth in gross domestic product attributable to incomes of workers in finance.Now, the industry has new tools at its disposal, courtesy of the government.With interest rates so low, banks can borrow money cheaply and put those funds to work in lucrative ways, whether using the money to make loans to companies at higher rates, or to speculate in the markets. Fixed-income trading — an area that includes bonds and currencies — has been particularly profitable.“Robust trading results led the way,” said Howard Chen, a banking analyst at Credit Suisse, describing the latest profits.

Wall Street: What Happened to Financial Reform? In the past four months, President Obama has talked extensively about creating a new federal agency to protect the financial rights of consumers, monitoring everything from the terms of home loans to credit-card contracts to bank accounts. But so far, the president's talk hasn't translated into reform. In fact, the legislation that was originally written to safeguard consumers' financial health has been gutted so much in recent weeks that it no longer applies to real-estate agents, auto dealers, tax preparers, attorneys, retailers, or credit-rating agencies. Banks, credit-card companies, and mortgage brokers no longer have to offer the most basic financial products, such as 30-year fixed mortgages or basic credit cards, nor do they have to ensure that consumers understand the nitty-gritty of contracts and newfangled products. Worst of all, at the end of this debate, there's no guarantee that Congress will pass even the weakest version of financial reform. "If you start horse trading in the first stage, you have to worry about where it will go," says Kathleen Keest, senior policy counsel at the Center for Responsible Lending.

A windfall tax is blunt, arbitrary and something supporters of free markets usually instinctively avoid. Even so, following news that Goldman Sachs Group has already set aside a $16.7 billion bonus pool for 2009, the case for windfall taxes on banks that pay giant bonuses is becoming unanswerable.

This year's bank profits are windfalls in the purest sense. They aren't the due rewards for exceptional skill but gifts from taxpayers. Many banks are earning huge, risk-free profits borrowing from central banks at ultralow interest rates and lending back to governments at much-higher rates. If this giant, hidden subsidy was being used to support new lending, fair enough. Instead, it looks destined for bankers' pockets.