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Wednesday, April 9, 2014

Capital raise

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US banks need $95 billion more capital by 2018. A new federal rule will raise the leverage ratio – a bank's capital versus its total assets – to a minimum of 5%, while all FDIC-insured banks will see their ratio rise to 6%.

When the rule takes effect, the US will have a higher capital requirement than the international Basel III agreement's 3%. Dealbook's Peter Eavis says the leverage ratio is a "more straightforward tool that will be harder to evade and easier to enforce than many of the new regulations covering the sprawling, complex businesses of banking". The FT's Gina Chon and Tom Braithwaite point out that the rule "does not allow banks to use their own models" (cough, risk-weighted rules, cough).

Matt Levine digs into the method for calculating leverage ratio and finds it's actually more than just capital divided by total assets. But he thinks that's a good thing, because bankers should be continuously confronted and terrified by the inchoate, contingent businesses they are trying to manage.

Tim Pawlenty, head of bank trade group the Financial Services Roundtable, isn't happy about new divergence between US and international rules: "This rule puts American financial institutions at a clear disadvantage against overseas competitors".

Jim Pethokoukis thinks banks and their lobbyists should stop complaining. The rule change, he says, isn't that drastic – "megabanks could borrow only 95% of money they lend versus 97% under Basel" – and could lead to a virtuous cycle where better-capitalized banks are less risky, less risk leads to lower return expectations from shareholders, and lower return expectations from shareholders makes bank take fewer risks.

Finding more over the next four years probably won't be too hard, says Matthew Klein. He points out that the banks in question had about $80 billion in profits in 2013. Retaining one out of every four dollars earned between now and 2018 would make up the capital gap without any new equity raises.

Bloomberg View's editors – approvingly linking to Anat Admati and Martin Hellwig's call for equity in the range of 20% to 30% of assets – think more equity is good, but even more would have been better: "Erring on the high side would be prudent. The point isn't that banks should avoid taking risks; taking risks is their business". When all loans are risky loans, and banks seem to have a problem knowing exactly how risky, having more capital is the most effective way to avoid a blowup. – Ben Walsh

On to today's links:

The Fed
FOMC meeting minutes from March 18-19th - The Federal Reserve

Alpha
The MLM lobbying fight isn't one-sided: Herbalife is millions of dollars and years ahead of Ackman - The Verge
Analyst sets new, low bar for bullish anecdotes - BI

Politicking
The political preferences of the rich are 15x more important than average people - The Monkey Cage

Niche Markets
A 50-year history of Slurpee marketing prowess - Priceonomics

Mas Kapital
"The enormous trade deficit makes the U.S. a massive net importer of capital. And the world loves this" - Frances Coppola

Surprisingly Difficult Questions
What is fair? - Josh Hendrickson

Please Update Your Records
London is "a clean, dull city populated by clean, dull rich people and clean, dull old people" - Alex Proud

Housing
"You don't get 30% of tenants to move out without harassing them and committing some type of fraud" - Mother Jones

Tech
The Secret app as bubble-burster for Silicon Valley positivity - Kevin Roose

Leaders
"Bush painted his portraits from the top search result on Google Images" - Greg Allen

Servicey
This is what an infographic should look like - WaPo

Study Says
Telling workers how much their colleagues make increases productivity by 10% - The Atlantic

Oxpeckers
The Labor Department just got serious about unpaid (media) internships - ProPublica

 

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Business Today: Wall Street ends sharply higher after Fed minutes

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04/9/2014
Reuters Election 2012 Daily round-up of the day's top news from the campaign trail, the White House and all the politics in between
Wall Street ends sharply higher after Fed minutes
NEW YORK (Reuters) - U.S. stocks finished sharply higher on Wednesday after minutes from the Federal Reserve's latest policy meeting showed a more supportive central bank than previously expected.
Fed officials fretted about hawkish 'dots' forecasts: minutes
WASHINGTON/SAN FRANCISCO (Reuters) - Federal Reserve policymakers fretted last month that investors would overreact to published forecasts that suggested a more aggressive cycle of interest rate increases was coming down the pike than they planned.
Energy firms to Fed: Hands off banks' commodity trading
NEW YORK (Reuters) - Energy companies are mounting a last-ditch effort to prevent the Federal Reserve from cracking down on physical commodity trading by major Wall Street banks, saying more restriction may further damage liquidity and raise hedging costs.
HP pays $108 million to settle foreign bribery probes
WARSAW/WASHINGTON (Reuters) - Hewlett-Packard agreed to pay $108 million to resolve wide-ranging U.S. government investigations into whether some of its foreign units bribed government officials to obtain lucrative contracts, U.S. officials said on Wednesday.
Fannie, Freddie shareholders lobby against U.S. housing reform bill
WASHINGTON (Reuters) - A coalition of investors in Fannie Mae and Freddie Mac on Wednesday launched an effort to stop Congress from moving ahead with a U.S. housing finance reform bill, arguing it would deny them a fair share in any remaining value in the two companies.
Global PC shipments fall for eighth straight quarter
SAN FRANCISCO (Reuters) - Global personal computer shipments fell in the first three months of 2014, the eighth straight quarter of decline, although the industry got a boost from companies replacing aging computers, according to two market research firms on Wednesday.
P&G selling pet food brands to Mars for $2.9 billion
(Reuters) - Procter & Gamble Co is selling the bulk of its pet food business to Mars Inc for $2.9 billion to focus more on its personal care and cleaning brands, the companies said on Wednesday.
BofA to pay $727 million to consumers over credit card practices
WASHINGTON (Reuters) - Bank of America agreed to pay nearly $800 million in fines and restitution to settle allegations of deceptive marketing and unfair billing involving credit card products, U.S. regulators said on Wednesday.
Fairfax's Watsa says BlackBerry a good long-term investment
TORONTO (Reuters) - Struggling smartphone maker BlackBerry Ltd is a good long-term investment that is being unfairly punished by the stock market, the chief executive of the company's top shareholder said on Wednesday.
U.S. House panel to look at aluminum prices, warehousing
WASHINGTON (Reuters) - A U.S. congressman on Wednesday urged the U.S. commodity regulator to take a tougher stance on the London Metal Exchange as it struggles to resolve a year-long controversy over inflated prices and distorted supplies of aluminum.
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