It’s a new year but the same old story when it comes to regulators’ efforts to rein in the banks: The banks always win.
Over the weekend, global regulators agreed to substantially ease the new Basel III regulations and delay their full implementation by four years. The global liquidity standards were designed to ensure banks had sufficient capital on hand to survive another Lehman-like crisis, as well as require that capital be high-quality and liquid. There was a lot of fanfare from regulators when the regulations were first announced in 2010 -- and a lot of gnashing of teeth from investors about how they would “cripple” the industry and potentially hurt economic growth.
After coming under pressure from the banking industry, global regulators agreed to loosen the definition of "high-quality liquid assets" to include highly rated residential mortgage-backed securities. “Ultimately, the negotiators agreed to let banks use less-traditional assets to satisfy up to 15% of their [capital] requirements under the rule,” The WSJ reports.
Given that triple-A rated mortgage-backed securities were at the heart of the 2008 crisis, it’s mind-boggling that banks were able to successfully lobby for this change. Moreover, with the Fed aggressively buying mortgage-backed securities and the U.S. housing market starting to heat up, it's the definition of insanity to expect a different result from the banks if they're given a green-light to both invest in MBS and treat them on par with government bonds and cash for liquidity purposes.
In addition, regulators downgraded the severity of crises banks are supposed to be buttressed against and delayed full implementation of the rule until Jan. 1, 2019 vs. the originally proposed Jan. 1, 2015. In other words, banks have been given four more years (four more years!) to continue business as usual, without much fear of regulatory pushback.
In separate but related news:
Bank of America reached a $10 billion settlement with Fannie Mae and Freddie Mac over claims related to loans written by its Countrywide Financial subsidiary. Bank of America says it will pay the bulk of the settlement from cash reserves. This will reduce its fourth-quarter net income by $2.7 billion but the deal is seen as a victory for Bank of America as it removes uncertainty over the litigation. Plus, the bank having that much cash on hand is a reminder of how profitable the business is, especially when regulators use kid gloves.
U.S. regulators are reportedly close to a $10 billion settlement with a group of banks to settle charge of improper foreclosure practices. The settlement means a halt to investigations into the so-called robo-signing scandal and will surely require occur without banks admitting to any wrongdoing. Notably, the banks were eager to get the deal done so they could include the settlement in fourth-quarter (and year-end) results -- yet regulators backed down after the banks “threatened to walk away from the deal if the Fed's demand for an additional $300 million was included,” The WSJ reports. That pretty much tells you all you need to know about who holds the power in these negotiations.
These settlements are in addition to the $25 billion deal the banks reached with the White House and state attorneys general last year, as well as big fines levied in recent years against Goldman Sachs, Bank of America, Citigroup and Wells Fargo among others.
The settlements and fines do add up to “real” money but let’s put them in some perspective: For 2012, the six biggest investment banks are expected to pay employee bonuses totaling nearly $38 billion while annual profits for the S&P 500 Financials Index are expected to approach $155 billion, according to Bloomberg. And that's just one year!
Given this industry can produce those kind of profits in a sluggish economy, what disincentive do banks have to rein in bad behavior – or big leveraged bets – when regulators continually go easy and “not a single senior banker from a major firm has gone to prison for conduct related to the 2008 financial crisis,” as Jesse Eisinger and Frank Partnoy lament in The Atlantic.
Tim Geithner may be stepping down as Treasury Secretary but the era of policymaking designed to benefit the banks and the bankers above all else rolls on.