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So far Arezou Rafikian has created 2002 blog entries.
5 07, 2024

Marketplace, Friday, July 5, 2024

2024-07-08T11:21:18-04:00July 5th, 2024|Press Clips|

Unpacking the June jobs report

The U.S. economy added 206,000 jobs in June, according to the labor department.   On the other hand, the job growth in previous months was revised down significantly. Let’s discuss with Karen Petrou, co-founder and managing partner at Federal Financial Analytics.

2 07, 2024

FedFin: Taking Trump Still More Seriously

2024-07-02T16:24:40-04:00July 2nd, 2024|The Vault|

In the wake of last week’s debate, clients have asked that we advise about what a second Trump term might mean for U.S. mortgage finance.  We reviewed our forecast at the start of this year on exactly this point.  Much of it remains as before, but there are several areas where an update is warranted due to recent Trump fiscal- and monetary-policy trial balloons.  Our updated, complete forecast follows….

The full report is available to subscription clients. To find out how you can sign up for the service, click here.…

1 07, 2024

Karen Petrou: The Latest Faustian Fintech Bargain and How the Devil Gets Its Due

2024-07-01T11:51:54-04:00July 1st, 2024|The Vault|

The sums lost in Synapse’s debacle are small when it comes to the financial system as a whole.  But, as the American Banker described last week, small amounts of money judged in the grand scheme loom large to many households.  Who’s to blame for losses due to the latest fintech’s playing fast and loose with FDIC-insured deposits? The perpetrators of course, but also the regulators who didn’t stop banks from striking Faustian deals with fintech companies, deluding themselves that issuing supervisory guidance would stop ruthless, agile speculators from preying on vulnerable banks and the still more susceptible customers.

Synapse has a cool name, but it sported red-hot warnings well before its bankruptcy.  That banks were willing to do business with a firm this dubious is a sign of deep strategic trouble for many small companies.  This is sad, but corporate survival often forces high-risk choices.  That regulators allowed bets that endanger both banks and their customers makes clear yet again that supervisory agencies take far too long and then do too little.

Was Synapse a clear and present danger before it became disastrous?  Just for starters, Synapse’s founder had apparently never worked a day in his young life.  Banks are supposed to know their customers and regulators are supposed to be sure they do.  Thus, this deal from day one was a bad idea for banks that should know better or quickly be told so. Drinking from the devil’s cup of “accelerating innovation” may be bewitching, but it’s also very …

25 06, 2024

American Banker, June 25, 2024

2024-06-27T14:51:51-04:00June 25th, 2024|Press Clips, Uncategorized|

Derivatives pose thorny problem for banks, regulators in resolution plans

By Kyle Campbell

Federal regulators want large banks to get specific about their contingency plans for their derivatives holdings. The Federal Deposit Insurance Corp. and the Federal Reserve cited four of the country’s largest banks last week for weaknesses in their resolution plans related to derivatives — a broad and varied market of financial contracts that include swaps, options and futures. The move was the latest and most direct move by the agencies to encourage banks to step up their practices around the handling of these contracts…Yet because of their complexity and the role they play in financial markets, derivatives receive different legal treatment than other assets on a bank’s balance sheet, said Karen Petrou, managing partner at Federal Financial Analytics. Deemed “qualified financial contracts” by Dodd-Frank, derivatives held by systemically large banks — known as “covered entities” — are shielded from typical default provisions in cases of failure. This means that, unlike in a traditional bankruptcy process, when these banks fail, their counterparties cannot simply close out their derivative positions. This arrangement is meant to protect banks, the FDIC and broader financial stability by mitigating losses for large failed banks and preventing counterparties from having to quickly seek out hedging alternatives.But, because these contracts are treated differently under the special resolution regime than they are under the traditional bankruptcy code, Petrou said there is ambiguity and confusion about how they should be handled.”Without clarification of the bankruptcy …

17 06, 2024

Marketplace, Monday, June 17, 2024

2024-06-21T09:56:29-04:00June 17th, 2024|Press Clips|

Why are bond prices up right now? And what difference does it make?

By Mitchel Hartman

We’re in the midst of a bond market rally. In the last eight weeks — barring Monday, when the bond market retreated a bit — bond prices have been going up, as their yields — the annual interest rate they pay — have been going down….The Fed’s got interest-rate-setting meetings in July and September. But here’s the thing: It met just last week: At that meeting, “they changed their forecast,” said Joanna Gallegos. “They said for the end of the year, we anticipate only making one rate cut versus three.” Basically, said Karen Petrou, a managing partner at Federal Financial Analytics, the bond market is saying to the Fed: “We can hear you. We’re just not listening.” “Even though [Chair] Jay Powell said, ‘We’re going to keep rates about where they are for a while. We don’t think we’ve beaten inflation yet,’ the market is essentially saying, ‘We think you have, and you’re going to be cutting rates as soon as September,’” Petrou said. Based on that belief, investors bid up bond prices, sending the interest rate on the benchmark 10-year Treasury note lower. “Traders think the Fed is overcautious, and the Fed will be able to cut rates. Indeed, it may have to cut rates because the economy will be softening,” she said. But Petrou pointed out that so far, the Fed has confounded market expectations, keeping rates higher for …

17 06, 2024

Karen Petrou: Why Synthetic CRT Isn’t the Crisis It’s Cracked Up to Be

2024-06-17T09:24:46-04:00June 17th, 2024|The Vault|

Last week, several press reports slammed synthetic credit risk transfers (CRTs) on grounds that the biggest U.S. bank in this sector which is of course the biggest global bank ever – JPMorgan – is creating new and serious risks when it scores SCRTs.  It’s easy to assume that anything “synthetic” is more dangerous than the “natural” way a bank absorbs credit risk, but this is simply not the case as a whole lot of financial crises make all too clear.  SCRTs are a rare example of a complex structured deal that gives the issuing bank a safe, sound way to reduce its capital requirements.  Regulatory arbitrage, yes, regulatory evasion, no.  The real risk SCRTs actually pose lies in the way some banks are using “natural” credit – i.e., loans – to lever up SCRT investors in ways dangerous to everyone but the SCRT issuer.

Let me explain.  FedFin laid out how SCRTs work in a September 2023 report following conditional FRB approval of the first of these deals since the great financial crisis.  One of the hard-learned GFC lessons was that structured financial instruments can be toxic due to opacity to regulators, counterparties, and even bank sponsors.  Given this, the regulator’s SCRT okay has several significant strings attached.

Most importantly, the bank making use of the credit-linked notes (CLNs) usual in these deals must issue the notes via a bankruptcy-remote vehicle and get cash or like-kind collateral to enjoy any regulatory-capital offset.  In short – and this is very short …

12 06, 2024

FedFin on: AI Implementation

2024-06-12T14:46:06-04:00June 12th, 2024|The Vault|

Although pressed by Congress to reach conclusions about AI’s risk in the financial sectors, Treasury is following up the worries in the most recent FSOC report with only a request for information (RFI) from the public.  The RFI follows an Executive Order (EO) from President Biden in 2023 instituting a “whole-of-government” program to identify best-use and high-problem aspects of AI from both a private- and -public sector perspective….

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

10 06, 2024

Karen Petrou: Private Capital Goes Retail

2024-06-10T09:27:24-04:00June 10th, 2024|The Vault|

Jamie Dimon recently said that there will be “hell to pay” when private credit gets the comeuppance common to businesses engaged in a race to the bottom.  But, who’ll pay it?  If the $1.7 trillion sector isn’t as systemic as many fear, then hell will be paid by institutional investors and, downstream, the policy-holders and pensioners who depend on them.  But, there’s more.  Typically, Wall Street opens high-return products to retail investors only when there’s so much to go around that pricing no longer reflects risk.  As smart money stands back, retail investors are enticed in order to, as one bank CEO memorably said in 2008, keep dancing until the music stops.  As we learned yet again the hard way in 2020, hell paid by retail investors can quickly turn into hell paid by taxpayers.

Last week’s news brought an announcement that one large adviser has opened a new fund for higher net-worth clients able to put $100,000 in funds comprised largely of private-credit assets.  So far, this is just one group of funds, but so far isn’t all that long and it’s very likely that growing fears about private-credit risk among institutional investors will open the retail spigot for private-equity lenders which still have loads of high-risk they hope to move into the waiting hands of a sector less learned about opacity and manifold conflicts of interest.

Despite growing alarm about private credit from both global regulators and institutional investors, the Fed’s most recent financial stability report essentially ignores …

6 06, 2024

FedFin on: Consumer-Finance Contractual Terms

2024-06-06T16:22:58-04:00June 6th, 2024|The Vault|

Deciding against finalizing a proposal to require a registry from nonbanks of their contractual terms,  the CFPB has instead issued a circular – i.e., a de facto rulemaking – telling both banks and nonbanks and their service providers that contractual terms and conditions may not require consumers to waive rights to which they are entitled under applicable state or federal law or which the Bureau believes likely to be “unenforceable.”  The scope of Bureau actions remains to be seen, but it has established a ….

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

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