Below are news stories from the week that were easy to miss, but may have some lasting impact.
1. Taking Credit
The Attorney General has filed suit against one of the largest rating agencies, claiming that they inflated credit ratings for collateralized debt obligations. As far as we are aware this is the first time the federal government has brought suit directly against a rating agency for losses caused by subjective ratings. The Attorney General claims the rating agency defrauded investors and caused over $5 billion in damages. Perhaps more importantly, the case may represent an interesting policy shift in the government’s role in credit rating oversight. The government asserts that the agency was not “objective,” and the agency says the claim is “meritless.” This could be an opening salvo and may lead to major changes in the way credit ratings are issued.
MarketWatch: Holder: $5 billion in damages from S&P ratings
2. Reserving Judgment – The Mary Jo White SEC Nomination
I can’t think of many tougher jobs than Chairman of the SEC. With a constrained budget you are responsible for making sure that the U.S. securities markets operate safely and smoothly, and you must protect investors against frauds, charlatans and lack of adequate disclosure. Daunting really. Two weeks ago President Obama nominated Mary Jo White to replace Mary Shapiro as new head of the regulator. A prosecutor for the U.S. Attorney’s office in New York and a senior partner for the white shoe firm of Debevoise & Plimpton, White comes with a plethora of advocates and detractors. Her advocates, like American Banker, cite her knowledge of financial markets and her outstanding record pursuing criminals as a prosecutor. Meanwhile detractors, like CNN, claim that as a financial institution’s defense attorney she will be conflicted by loyalty to her past clients. I would say give the new kid a chance, but perhaps a more appropriate statement would be, “Past performance is no guarantee of future results.”
3. Dodd-Frank – If You Have to Ask, You Probably Can’t Afford it
Nearly every banker I talk to mentions the increased cost associated with complying with Dodd-Frank. Prudent bankers never implement new processes or programs without a careful cost-benefit analysis, but here’s an interesting twist: Most federal financial regulators are not held to the same standard. As independent regulatory agencies, regulators are not subject to executive orders that require comprehensive benefit-cost analysis in accordance with guidance issued by the Office of Management and Budget (OMB). Last month’s review by the Government Accounting Office’s of 54 Dodd-Frank related rules found that regulators did not consistently follow key elements of the OMB guidance for cost-benefit analysis. Courts have already struck down two Dodd-Frank rules, for failing to demonstrate the recommended analysis.
4. Banking Consultants – Angels or Demons?
It was an early American preacher who coined the phrase “damned if you do, damned if you don’t” in reference to preachers telling parishioners conflicting messages. Bankers can relate. Regulators have requested that bankers hire consultants and politicians have requested the opposite. The Office of the Comptroller of the Currency (OCC) recently ordered some banks to hire outside consultants to review their anti money-laundering controls, others to seek help with their foreclosure review. Despite these orders, last week Senator Elizabeth Warren and Representative Elijah Cummings announced that they would open an investigation into the foreclosure review, seeking “additional information about the scope of the harms found.” The reason for the investigation? The politicians are questioning whether the consultants can be objective or, as Senator Jack Reed put it, “How can you be independent if you’re hired by the entity you’re reviewing?”
Perhaps the more burning question for bankers is, “How do you keep your regulators and the politicians happy?”
The New York Times: Doubt Is Cast on Firms Hired to Help Banks
5. Sub-prime 2: The Revenge of the College Graduates?
Everyone’s heard the speculation that student loans are the “next crisis.” I don’t know if that’s true, but here are some disturbing stats from various sources this week:
- In the past five years, the average student loan debt has increased 30% to $23,829.
- Over half of all student loan accounts and more than 40% of the total dollars owed, are in deferral status.
- Delinquencies have risen by 22% in the past five years.
One very smart friend of mine points out that these struggling college graduates (with the newly obliterated credit ratings) are the same young people who won’t be buying houses and lifting the housing market anytime soon.