-Caveat Lector-
Begin forwarded message:
From: [EMAIL PROTECTED]
Date: August 26, 2007 8:23:11 AM PDT
To: [EMAIL PROTECTED]
Cc: [EMAIL PROTECTED], [EMAIL PROTECTED], [EMAIL PROTECTED]
Subject: Fed Forced to "Bend Rules"
Fed bends rules to help two big banks
If the Federal Reserve is waiving a fundamental principle in
banking regulation, the credit crunch must still be sapping the
strength of America's biggest banks. Fortune's Peter Eavis
documents an unusual Fed move.
By Peter Eavis, Fortune writer
August 24 2007: 5:09 PM EDT
http://money.cnn.com/2007/08/24/magazines/fortune/
eavis_citigroup.fortune/
NEW YORK (Fortune) -- In a clear sign that the credit crunch is
still affecting the nation's largest financial institutions, the
Federal Reserve agreed this week to bend key banking regulations to
help out Citigroup (Charts, Fortune 500) and Bank of America
(Charts, Fortune 500), according to documents posted Friday on the
Fed's web site.
The Aug. 20 letters from the Fed to Citigroup and Bank of America
state that the Fed, which regulates large parts of the U.S.
financial system, has agreed to exempt both banks from rules that
effectively limit the amount of lending that their federally-
insured banks can do with their brokerage affiliates. The
exemption, which is temporary, means, for example, that Citigroup's
Citibank entity can substantially increase funding to Citigroup
Global Markets, its brokerage subsidiary. Citigroup and Bank of
America requested the exemptions, according to the letters, to
provide liquidity to those holding mortgage loans, mortgage-backed
securities, and other securities.
This unusual move by the Fed shows that the largest Wall Street
firms are continuing to have problems funding operations during the
current market difficulties, according to banking industry
skeptics. The Fed's move appears to support the view that even the
biggest brokerages have been caught off guard by the credit crunch
and don't have financing to deal with the resulting dislocation in
the markets. The opposing, less negative view is that the Fed has
taken this step merely to increase the speed with which the funds
recently borrowed at the Fed's discount window can flow through to
the bond markets, where the mortgage mess has caused a drying up of
liquidity.
On Wednesday, Citibank and Bank of America said that they and two
other banks accessed $500 million in 30-day financing at the
discount window. A Citigroup spokesperson declined to comment. Bank
of America dismissed the notion that Banc of America Securities is
not well positioned to fund operations without help from the
federally insured bank. "This is just a technicality to allow us to
use our regular channels of business with funds from the Fed's
discount window," says Bob Stickler, spokesperson for Bank of
America. "We have no current plans to use the discount window
beyond the $500 million announced earlier this week."
There is a good chance that other large banks, like J.P. Morgan,
have been granted similar exemptions. The Federal Reserve and J.P.
Morgan didn't immediately comment.
The regulations in question effectively limit a bank's funding
exposure to an affiliate to 10% of the bank's capital. But the Fed
has allowed Citibank and Bank of America to blow through that
level. Citigroup and Bank of America are able to lend up to $25
billion apiece under this exemption, according to the Fed. If
Citibank used the full amount, "that represents about 30% of
Citibank's total regulatory capital, which is no small exemption,"
says Charlie Peabody, banks analyst at Portales Partners.
The Fed says that it made the exemption in the public interest,
because it allows Citibank to get liquidity to the brokerage in
"the most rapid and cost-effective manner possible."
So, how serious is this rule-bending? Very. One of the central
tenets of banking regulation is that banks with federally insured
deposits should never be over-exposed to brokerage subsidiaries;
indeed, for decades financial institutions were legally required to
keep the two units completely separate. This move by the Fed eats
away at the principle.
Sure, the temporary nature of the move makes it look slightly less
serious, but the Fed didn't give a date in the letter for when this
exemption will end. In addition, the sheer size of the potential
lending capacity at Citigroup and Bank of America - $25 billion
each - is a cause for unease.
Indeed, this move to exempt Citigroup casts a whole new light on
the discount window borrowing that was revealed earlier this week.
At the time, the gloss put on the discount window advances was that
they were orderly and almost symbolic in nature. But if that were
the case, why the need to use these exemptions to rush the funds to
the brokerages?
Expect the discount window borrowings to become a key part of the
Fed's recovery strategy for the financial system. The Fed's
exemption will almost certainly force its regulatory arm to sharpen
its oversight of banks' balance sheets, which means banks will
almost certainly have to mark down asset values to appropriate
levels a lot faster now. That's because there is no way that the
Fed is going to allow easier funding to lead to a further propping
up of asset prices.
Don't forget: The Federal Reserve is in crisis management at the
moment.
However, it doesn't want to show any signs of panic. That means no
rushed cuts in interest rates. It also means that it wants banks to
quickly take the big charges that will inevitably come from holding
toxic debt securities. And it will do all it can behind the scenes
to work with the banks to help them get through this upheaval.
But waiving one of the most important banking regulations can only
add nervousness to the market. And that's what the Fed did Monday
in these disturbing letters to the nation's two largest banks.
-------------------
Subprime hitting credit cards, too
The credit crunch has begun to affect consumers' wallets in areas
other than housing
By Jeanne Sahadi, CNNMoney.com senior writer
August 23 2007: 12:39 PM EDT
http://money.cnn.com/2007/08/23/pf/credit_card_credit_crunch/index.htm
NEW YORK (CNNMoney.com) -- Fallout from the mortgage mess and lower
home prices may have started to creep into the credit card arena,
judging from July payments and some initial moves by issuers to
tighten the screws on cardholders.
After falling for three consecutive months, delinquent payments on
credit cards -- defined as more than 30 days late - increased
slightly in July, to 4.64 percent from 4.62 percent in June,
according to CardWeb.com. A year ago, the delinquency rate was 4.18
percent.
The amount of credit card debt consumers are paying off, meanwhile,
has fallen. The portion of outstanding balances paid in July
slipped to 18.3 percent from 18.4 percent a month earlier.
The repayment rate hit its peak (21 percent) in October 2006 after
credit card companies began complying with regulators' mandate to
boost minimum payments to cover interest, fees and some principal.
For years, the default minimum was just 2 percent of your
outstanding balance.
CardWeb.com CEO Robert McKinley suspects delinquencies may increase
in the fourth quarter because of the credit crunch. Mortgages and
home equity loans are harder to come by, home prices have fallen
and more than 2 million subprime adjustable rate mortgages (ARMs)
are beginning to reset to much higher rates.
"As an adjustable mortgage payment rises it may limit the ability
to service other debt, and lower home prices may limit the ability
to do a cash-out refi," McKinley said.
Credit card issuers, meanwhile, have begun to take steps to protect
themselves. Curtis Arnold, CEO of CardRatings.com, has seen
evidence of issuers boosting transfer fees and introductory rates,
reducing the periods for which lower introductory rates are valid
and even lowering credit limits on existing cardholders, including
some prime customers.
"That correlates in my mind with what's going on in the subprime
market," Arnold said. "I wouldn't say [these moves are] widespread,
but I think we'll see an uptick."
That's why he cautions consumers to keep a close eye on their
credit card bill and, in particular, any pamphlets that accompany
them which may notify them of policy changes.
The risk of not noticing, for instance, that your credit limit has
been lowered can lead to over-the-limit charges if you
inadvertently exceed your new limit. A lower limit can also reduce
your credit score, because if your charging habits don't change,
you will automatically be using more of your credit capacity - the
more you use, the lower your score. (Here's a look at just how much
your score can get hit.)
And a reduced score, in turn, can boost the interest rate your card
issuer charges you.
Get a sneak peek of the all-new AOL.com.
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