sábado, 13 de diciembre de 2014

sábado, diciembre 13, 2014
Heard on the Street

Ratings Game Behind Big Banks’ Derivatives Play

Wall Street’s Victory May Have Steep Political Costs

By John Carney 

Dec. 12, 2014 3:45 p.m. ET


Why did fierce fighting on Capitol Hill over an arcane piece of financial regulation nearly derail passage of the $1.1 trillion spending bill passed by Congress Thursday night?

The provision largely repeals a Dodd-Frank Act rule that required banks to push some derivatives into subsidiaries that aren’t eligible for government support, such as deposit insurance or borrowing from the Federal Reserve’s discount window. So far, none of the big banks have explained why such a fight was worth having. There has been talk of the move helping small businesses and midsize financial firms, or clearing up inconsistencies within the financial overhaul law.

That rings hollow. As with so much else on Wall Street, short-term profit was the likely motive along with reluctance to give up what is essentially a taxpayer subsidy.

For starters, the banks’ own actions show there was a good deal at stake. J.P. Morgan Chase chief James Dimon called to lobby lawmakers Thursday, according to people familiar with the calls. And the provision’s language was reportedly authored by lobbyists for Citigroup . That led Sen. Elizabeth Warren to say, “This is a democracy and the American people didn’t elect us to stand up for Citigroup.”And while 1,404 U.S. banks had derivatives activities at the end of the second quarter, according to the Office of the Comptroller of the Currency, just five accounted for 95% of the total notional derivatives of $302 trillion. They are: J.P. Morgan, Citigroup, Goldman Sachs Group , Bank of America and Morgan Stanley .

Of vital importance, especially for Citi, is where the derivatives are legally housed. Except for Morgan Stanley, the banks hold most derivatives in their depository unit. The advantage: The bank subsidiaries, with implicit government backing, are considered less risky than parent holding companies. Being seen as a less-risky counterparty gives banks an advantage in pricing and collateralization of derivatives.

Bank-capital rules matter, too. These impose capital charges based on an assessment of counterparty risk, which is closely linked to credit ratings. And those ratings explain the big banks’ desire for the rule change.

Citigroup’s insured depository unit is rated A2 by Moody’s ; the parent company is a far lower Baa2. So a bank buying a derivative contract from the parent would receive a higher capital charge than if it bought it from the depository unit. So the price Citi could fetch for it would be lower. The same divergence exists at the other banks, though to a lesser degree.

The result: Each would suffer from having to push derivatives out of their depository units. In effect, they would lose the advantage of the higher rating and the view the government will support the bank unit.

Resistance on Capitol Hill wasn’t baseless. The rule would have pushed out nearly $10.4 trillion in credit default swaps, of which J.P. Morgan owns 44%, according to Thomas Hoenig, Federal Deposit Insurance Corp. vice chair. That is three times the amount of such swaps American International Group had when it was bailed out.

One irony is that Morgan Stanley arguably lost out because it has few derivatives in its bank. So the push out would have leveled the playing field among Banks.

Another is that the banks may have overreached. Yes, they have secured a short-term financial advantage. But they have also galvanized Wall Street’s critics and potentially squandered political capital being rebuilt following the financial crisis.

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