Levine on Wall Street: Too-Big-to-Fail Insurers and Russian Banks

Also a bunch of financial regulatory stuff, including everyone's favorite, swaps push-out. And Bill Gross sports metaphors.
Corrected

MetLife is too big to fail.

MetLife is not going quietly into systemic importance, and continues to rumble about seeking judicial review even after the Financial Stability Oversight Council yesterday designated it a "systemically important financial institution." I have some sympathy: For one thing, life insurance, as a business, really isn't subject to the run-type risks that make banks dangerous. For another, it's all well and good to say that the designation "subjects MetLife to stricter Federal Reserve oversight that could include tougher capital, leverage and liquidity requirements," but the fact is that the Fed actually knows how to regulate systemically important banks -- it has lots of capital rules and does examinations and so forth, and has done that for decades -- but is less clear on how to regulate systemically important insurers. Insurance is basically state-regulated, and federal rules for the capitalization, etc., of systemically important life insurers are considerably more vague and inchoate than they are for banks. MetLife is not just objecting to stricter regulation, it's objecting to regulation by a novice regulator. But! MetLife's problem is basically AIG, which, like Prudential, has already been designated a SIFI, and without objection. You can go around saying "life insurers don't have run risks like banks," but the answer to that is "AIG." Or you can say "but insurers are already well regulated by state insurance commissioners," but, again, "AIG."

Financial regulatory delays and reversals.

Feels like there's a bunch of them? The Fed is giving banks two more years to comply with the Volcker rule's limits on investments in hedge funds and private equity funds; the new deadline is basically July 2017. 1  Paul Volcker is, of course, not amused -- "It is striking that the world’s leading investment bankers, noted for their cleverness and agility in advising clients on how to restructure companies and even industries, however complicated, apparently can’t manage the orderly reorganization of their own activities in more than five years" -- and I suppose he's right. The Volcker Rule limit on investing in hedge funds and private equity is notably silly; it basically prohibits banks from owning between 3 and 99.9 percent of such funds, but 100 percent is fine, and it is hard to see why owning 30 percent of a private equity fund is riskier than owning 100 percent. 2   Nonetheless, Volcker -- the guy not the rule -- has a point: This is not that hard to implement (though the prop-trading ban in his rule might be!), so it's kind of unimpressive that it'll take an extra two years.

Elsewhere, here is Dan Davies on the swaps push-out, arguing that banks' bitter fight against the push-out was not about credit but about liquidity. Derivatives businesses are mostly collateralized, so credit doesn't matter that much, but "access to Federal Reserve monetary operations" to backstop your ability to post collateral does. But how much does it matter? Davies:

Securities dealers had de facto access to the discount window in the crisis, through a variety of lending facilities, and it looks very much as if this is going to be institutionalised going forward. So, even if the “push out” had been enacted, it seems likely to me that the derivatives industry would have ended up getting access to liquidity support when it needed it.

I'm with Davies: Insured depository bank subsidiaries have formal advantages (FDIC insurance, discount window access) over non-bank subsidiaries. But derivatives dealer banks are big and concentrated and interconnected, and there is not much reason to think that, if one of them got into trouble, it wouldn't (or shouldn't!) have informal access to most of the same advantages. Davies concludes that the push-out would have been annoying for banks, and "it’s not obvious what the countervailing benefit to society would have been --- certainly not the ability to allow a great big financial market to collapse without public involvement."

Also, here is a story about the anti-Citigroup backlash from the swaps push-out fight. And the Securities and Exchange Commission is implementing some delayed, and kind of boring, JOBS Act rules. And Ben Lawsky has revised his proposed BitLicense rules, and one possibility is that BitLicense will be finalized on the exact day that bitcoin stops being a thing.

Today in Russia.

Seems ... not so good? "The efficiency of the interbank lending market has declined," for one thing, which means among other things overnight interbank lending rates in the high 20s, and the banks may require government support. Which appears to be on its way: Russia's parliament is pushing through a law "that would give the banking sector a capital boost of up to 1 trillion rubles ($16.5 billion) on Friday, part of measures to shield banks from Western economic sanctions." And here is Paul Krugman on how Russia's debt load was "masked by the growing overvaluation of the ruble thanks to high oil prices," and revealed when those prices dropped. Meanwhile, among oil exporters who are not invading their neighbors, Nigeria's banks have been hit hard by the oil slump, since their business is pretty concentrated on oil lending, and the central bank has imposed foreign-exchange controls to try to protect the naira.

Today in Bill Gross.

"Bill Gross is our Peyton Manning, that game-changing level of talent for us," says Janus Capital chief executive Richard Weil, and I won't rest until we have a Bill Gross analogy for every sport. We have football, and basketball, and of course horse racing. For soccer, Luis Suarez -- great, but bitey -- feels right. But who is his baseball counterpart? Hockey? Golf? Curling? Rhythmic gymnastics? Elsewhere in people news, John S. Weinberg is stepping down as a co-head of investment banking at Goldman Sachs, replaced by John Waldron. And James Gorman vs. Brian Moynihan. And Giles Money is joining Pimco as a money manager. And "CEO gives back bonus, says he doesn't deserve it."

Today in general naughtiness.

Here are civil and criminal charges against an alleged Staten Island boiler room, which is accused of applying the usual high-pressure boiler-room sales tactics to elderly investors, and then just for good measure stealing their money instead of investing it:

The defendants located their victims by using a printed list, which one of the defendants referred to as “the suckers list.” Once the victims wired or mailed money to Premier Links, the defendants and other co-conspirators typically stole the funds for their personal use. Bank records show that the defendants converted the investors’ money into cash through over 900 ATM and teller withdrawals. They also wrote checks to themselves and made purchases at Bloomingdales, the Gap, Macy’s, various restaurants, gas stations, and Party City, among other places.

Here is a $35 million Commodity Futures Trading Commission settlement with Royal Bank of Canada over wash sales in stock futures contracts. This case puzzled me when it was announced: The wash sales seem to have taken place in pretty quiet markets and without actually deceiving anyone or harming market quality. The CFTC itself says here that "Illegal wash trades may seem innocuous. They are not," and if you start out that way you're probably protesting too much. The problem with RBC's trades is that they were a fairly transparent tax avoidance device, but why should the CFTC go after tax avoidance?

A tax lawyer.

I'm a bit late to it, but this Bloomberg Businessweek story about the late John Carroll Jr., the tax lawyer who invented the inversion and (maybe) the currency swap, is utterly charming:

Around the Manhattan offices of Davis Polk, Carroll was known as a wit and a curmudgeon. To keep fellow lawyers on their toes, he slipped nonsense words, such as “phlaminimony,” into legal documents. He always seemed to do his best work in the middle of the night. His office was a mess. He didn’t own a television set. If someone asked how he was doing, he’d reply, “They haven’t caught me yet.”

And don't miss Carroll's letter denying that he invented currency swaps, in which he describes the work of tax lawyering as being divided into the "rocking and moaning" and "lurching and flailing" phase, a taxonomy that quite aptly describes a number of other professions, including of course financial blogging.

Things happen.

Morgan Stanley Analysts Try GoPro, Discover Their Lives Are Boring. In Search of Lost 'Time': Algos Didn't Wait on Fed Nuance. Banks are confused by cell phones. An erasable Internet, but you print it. The sandwich industry. The lead guitarist of Blind Melon is now a labor and employment lawyer. Job burn-out and depression. Suspected serial killer gets 2 month MARTA suspension for not paying fare.

(Corrects Blind Melon band member in 12th paragraph.)
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
  1. I mean, it's July 2016, but "The Board also announced its intention to act next year to grant banking entities an additional one-year extension of the conformance period until July 21, 2017." It's that famous Fed clarity!

  2. That's a little unfair. Here's my best guess at an explanation.

To contact the author on this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net

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