Here are news stories from the week that were easy to miss, but may have some lasting impact.
Senators Propose a Second Dodd-Frank: Terminating Bailouts for Taxpayer Fairness Act
Senators Brown and Vitter aren’t alone in thinking that Dodd-Frank did not do enough to overcome the Too-Big-To-Fail conundrum. Their solution is to propose a new piece of legislation that would require banks with more than $50 billion in assets to meet capital requirements of 15%—nearly twice the 8% that would be demanded of smaller institutions. If enacted, the “TBTF Act” would also do away with Basel III and its system of risk-weightings for asset classes. In short, the Act would likely make it virtually impossible for any bank with assets over $50 billion to remain competitive with smaller institutions. Most pundits do not believe the legislation has much chance of passing in its current state, but the controversial bill has garnered substantial public attention, and this may not be the last we hear of TBTF legislation.
Sherrod Brown Senator of Ohio: Brown, Vitter Unveil Legislation That Would End “Too Big To Fail” Policies
Et Tu ISDA?
The dust is not settled (nor the final settlements inked) from the Libor scandal that came to light last year, and we are faced with another potential global rate-setting scandal. The Commodities and Futures Trading Commission that regulates futures, options and swaps markets has issued subpoenas to a number of brokers regarding the rate setting of the ISDAFIX. Similar to the Libor calculation ISDAFIX is calculated by taking the submissions from 15 banks to set the rate of interest rate swaps. What impact does the ISDAFIX have? The rate is used to calculate certain interest rate swap payments as part of the $379 trillion (yes, trillion with a ‘t’) interest rate swap market. Bloomberg reports that a number of brokers are being interviewed in connection with the investigation. If there was collusion, and that is still very much in question, it would be, as Rolling Stone magazine says “The Biggest Rate-Fixing Scandal Ever.” Let’s hope they are wrong.
The Telegraph: ICAP probed by US regulators over rate fix
AP’s Twitter Gets Hacked: Prank or Diabolical Plot?
We tend to think of hackers stealing data or passcodes to steal from the hackee. But what if the hackee is a news service followed by millions worldwide? What if the tweet claims that there were two explosions at the White House and the president is injured? (As happened with AP news service’s Twitter account earlier this week.) What if the trading algorithms that automatically interpret Twitter believe the report? What if trading systems cause a sell-off of over 100 points in two minutes (faster than any human can trade, as also happened earlier this week)? What if courts one day find corporations liable for losses caused by false reports coming through their Twitter feed? What if foreign governments were involved in disrupting our markets—via Twitter? Whew. Or what if it was just a prank? Forget I mentioned it.
BloombergBusinessweek: A Fake AP Tweet Sinks the Dow for an Instant
Correspondent Banks Take a Step Back
As regulators start to get tougher about enforcing money-laundering regulations under the Bank Secrecy Act, larger banks are responding by closing correspondent banking relationships with smaller banks and credit unions. (Correspondent banks are financial institutions that act as agents for another bank, providing services and products in an area the other bank does not operate so its customers can access things like wire transfers and international deposits.)
Credit unions are questioning whether the motive for their termination of such dealings is regulatory scrutiny or simply lack of profitability in such relationships. Either way certain credit unions are being forced to scramble and replace their correspondent banks. This could signify a shift in the way smaller institutions look to larger partners for ancillary services.
Hedge Funds – All in the Family
Family offices are an interesting type of financial service company. They are private firms established to manage the wealth (and often the accounting, taxes, travel and even household staff) of very wealthy families. They are also exempt from some of the onerous scrutiny faced by asset managers that deal with the general public. The cost of such personal attention is not cheap, and family offices generally manage funds of $100 million or more. With the hedge fund industry coming under closer scrutiny and regulation, some funds are closing their doors to investors and dedicating themselves to the management of the portfolio and needs of a few wealthy investors and rebranding themselves family offices. It should also be noted that family offices also tend to be sued less than hedge fund managers. Families hate to air their dirty laundry.