Friday, May 25, 2012

This Week in Bank Failures

Spain took full ownership of Bankia as part of a new €20 billion bailout. Bankia has 10 percent of deposits in Spain and has the largest real estate loan portfolio in the country. New managers will spend the next month assessing the bank and preparing a plan of action. The takeover may have been prompted by a run on the bank, which reportedly has lost more than €2 billion in deposits this week. Regulators denied reports of deposit flight for days before the government took over the bank.

Deposit flight, or a slow-motion run on the banks, remains a problem in Spain and Greece and across southern Europe. Many of the deposits are moving to the United Kingdom, increasingly seen as a safe haven outside the euro zone.

The SEC has decided not to pursue prosecutions in the Lehman Brothers case. The announcement wraps up a three-year investigation. There was no rationale given, but the presumption has to be that the wrongdoers were considered too big to prosecute. It will give the Occupy Wall Street movement something to talk about for years to come.

Wells Fargo acknowledged this week that it does the same kind of high-risk hedging that got JPMorgan into trouble. Wells Fargo, though, insists that its credit default swaps business is on a much smaller scale, not large enough to present any kind of economic risk to its balance sheet.

Anyone hoping for the Fed to find out what happened at JPMorgan shouldn’t hold their breath. JPMorgan’s CEO is a New York Fed director and can be expected to use his board position to deter any substantial investigation. The JPMorgan board of directors also may not be much help. Its risk committee lacks banking experience, but includes a director who was a director at AIG when it fell apart because of unmanaged risks.

Wall Street might have lost half a billion dollars on the Facebook IPO last week, included an estimated $100 million in hypothetical exchange liabilities and $200 million in market maker losses. Essentially, when Facebook declined in value by $10 billion in its first day of trading, Wall Street firms got stuck with a share of that decline.