Shahien Nasiripour

Too-Big-To-Jail Dogs Obama's Justice Department As Government Documents Raise Questions

2013-05-22T22:04:30-04:00

The U.S. Department of Justice appears to have neither conducted nor received any analyses that would show whether criminal charges against large financial institutions would harm the economy, potentially undermining a key DOJ argument for why the world’s biggest banks have escaped indictment.

Testimony by a top Justice official and fresh documents made public on Wednesday during a House financial services committee hearing revealed that financial regulators and the Treasury Department did not provide warnings to prosecutors weighing the economic consequences or fallout in the financial system of criminal indictments against large financial groups. DOJ also could find no records that would substantiate its previous claims that it weighed potentially negative economic or financial impacts when considering criminal charges, said Mythili Raman, acting assistant attorney general for the criminal division.

Wednesday’s revelations are likely to increase criticism of the Obama administration, which has been accused of a lackluster enforcement record against big banks in the financial crisis and other matters.

It also may put further pressure on the Justice Department to strengthen future prosecutions. Recently, instead of filing criminal charges against large financial groups, federal prosecutors have begun to file criminal cases against subsidiaries. Observers including lawyers at Weil, Gotshal & Manges LLP, a top defense firm, have warned that Justice may expand its limited use of criminal indictments in part due to public pressure.

Leading Democratic and Republican lawmakers, including Sens. Sherrod Brown (D-Ohio), Jeff Merkley (D-Oregon), Elizabeth Warren (D-Mass.), Carl Levin (D-Mich.) and Rep. Patrick McHenry (R-N.C.), have pilloried the administration for its approach, which they allege has been focused on settlements at the expense of justice.

The lawmakers, and others, may be encouraged to apply even more public pressure on efforts to crack down on big banks. Past missteps by the Obama administration and by big banks have added momentum to efforts to forcibly break up large financial groups.

The hearing comes as DOJ, Treasury and financial regulators battle perceptions that they consider some large financial institutions are either too big or too important to the economy to fail. Congressional Republicans and some leading current and former regulators have claimed that the 2010 law overhauling financial regulation known as Dodd-Frank failed to end “too-big-to-fail.” The Obama administration and most regulators insist that if the problem has not yet been solved, it soon will be.

Attorney General Eric Holder told Congress in March that some banks were “too large,” impeding attempts to bring criminal prosecutions. Holder's comment is perhaps the most explicit public admission of concern by a senior Obama administration official regarding big banks.

Though Holder has since attempted to walk back those comments, at the time he said that the size of large financial institutions “has an inhibiting influence -- impact on our ability to bring resolutions that I think would be more appropriate.” He further told lawmakers: “And I think that is something that we -- you all -- need to consider.”

DOJ officials have previously defended the lack of criminal charges against banks suspected of wrongdoing in large part by pointing to the so-called “collateral consequences” associated with filing a criminal indictment against a leading financial institution.

Two examples occurred in December, when HSBC, the U.K. banking giant, settled allegations that it violated U.S. sanctions and facilitated the movement across the U.S. financial system of tainted money by Mexican drug cartels, and UBS, the Swiss bank, settled claims it manipulated world interest rates.

At the Justice Department’s news conference to announce the HSBC settlement, Lanny Breuer, then-assistant attorney general for the criminal division, was asked why the agency did not pursue a criminal indictment.

“If you think that by doing a certain thing you risk either a charter being revoked, you think that counterparties in a massive financial institution may go away, you think that there is a risk that many, many innocent people will be harmed from a resolution,” Breuer said, “and by another resolution you think you can mitigate the risk of innocent people suffering, the economy being affected, and you can hone in on those and the institutions and address the issues underlying. To the Department of Justice, that's a very real factor, and so it is a factor you consider.”

Asked whether jobs were a factor in DOJ’s decision, Breuer replied: “Collateral consequences were absolutely a factor.”

Criminal charges in the financial services industry can be the equivalent of a corporate death sentence. The failure of Arthur Andersen, one of the five largest accounting firms in the U.S., was due to a criminal indictment related to accounting fraud at Enron.

During a separate news conference to announce the UBS settlement, Breuer said: “In the world today of large institutions where much of the financial world is based on confidence, one of the things we want to ensure as we come forward to a right resolution is to ensure that counterparties don't flee an institution, that jobs are not lost, that there is not some world economic event that is disproportionate to the resolution we want.”

Holder then stepped in and quickly added: "The impact on the stability of the financial markets around the world is something we take into consideration. We reach out to experts outside of the Justice Department to talk about what are the consequences of actions that we might take, what would be the impact of those actions if we want to make particular prosecutive decisions or determinations with regards to a particular institution."

In letters to Congress from the Treasury Department, Federal Reserve and Office of the Comptroller of the Currency, made public by McHenry, top financial policymakers said they could find no records of such analyses that had been shared with DOJ.

In one letter, Tom Curry, OCC chief, said that Breuer had contacted him prior to the agency’s settlement with HSBC, but all he did was explain to Breuer during a single phone call how the agency revoked banks’ charters, or their legal license to operate.

In another, Ben Bernanke, Federal Reserve chairman, said that in the HSBC case, all that the Fed and DOJ discussed was how to “better coordinate information sharing”.

“This meeting did not include discussion of the views of the Federal Reserve on collateral consequences of prosecuting any institution, either specifically or as a general matter,” Bernanke added.

Alastair Fitzpayne, Treasury assistant secretary for legislative affairs, told Congress: “We have not identified any analyses prepared by the Department of the Treasury for the DOJ regarding the potential prosecution of large, complex financial institutions.”

During a March hearing, David Cohen, Treasury undersecretary for terrorism and financial intelligence, said that DOJ had asked Treasury for “guidance” on the potential impact a criminal charge against HSBC could have on the financial system.

Cohen said Treasury told DOJ it was “not in a position to offer any meaningful guidance.”

Treasury documents obtained through the Freedom of Information Act by Public Citizen, an advocacy group, appear to show that the agency made no attempt to conduct any such examination internally.

The letters, testimony and documents obtained by Public Citizen and shared with The Huffington Post, appear to undermine a separate May letter to McHenry from Peter Kadzik, Justice principal deputy assistant attorney general, in which he told McHenry that DOJ has “contacted relevant government agencies to discuss such issues.”

“Those government agencies include domestic regulators, as well as foreign regulators where the financial institution is multi-national or is otherwise based,” Kadzik wrote.

DOJ's Raman said Wednesday that the agency had not found any internal records concerning threats to the economy or the financial system when weighing criminal indictments against big banks in past cases. She also said the agency could not locate any such documents from U.S. or foreign regulators.

Breuer did not return a call seeking comment.

DOJ representatives declined to comment beyond Raman’s testimony.

Arne Duncan Signals Worry Over Student Debt Levels

2013-05-21T18:57:28-04:00

U.S. Secretary of Education Arne Duncan on Tuesday expressed concern at record student debt levels, signaling growing worry within the Obama administration and perhaps adding momentum to efforts meant to alleviate debt burdens.

At an estimated $1.1 trillion, according to the Consumer Financial Protection Bureau, student debt has surpassed auto loans and credit cards as the largest source of household debt behind home mortgages. Officials in Washington and some analysts on Wall Street are worried that the amount of borrowings and the relatively high interest rates the loans carry may inhibit economic growth as a growing share of household budgets are devoted to servicing college debt.

"The fact that that debt surpasses a trillion dollars, there's no upside there,” Duncan said during testimony before the House education committee.

It appears to be one of the first times Duncan has so explicitly signaled concern about student debt levels. His warning comes as policymakers at agencies ranging from the Federal Reserve to the Treasury Department and the CFPB have been warning for months about the economic risk associated with spiraling student debt and the negative consequences for household spending, car buying and home purchases.

The collection of regulators entrusted with guarding the financial system known as the Financial Stability Oversight Council warned last month about the possible economic danger of growing student debt levels in its latest annual threat report.

A small contingent of Washington lawmakers in recent years including Sens. Sherrod Brown (D-Ohio) and Jack Reed (D-R.I.) have introduced proposals designed to ease debt burdens, whether by stimulating refinancings of high-rate loans or increasing the amount of loan modifications for distressed borrowers.

“Students shouldn't have to mortgage away their futures when enrolling in college,” Brown said Tuesday. “More debt means that graduates have less career choices and less ability to buy a home, start a business, and contribute to their communities.”

Sen. Kirsten Gillibrand (D-N.Y.) this week will propose legislation that would force Duncan (or a possible successor) to automatically refinance most government loans carrying interest rates above 4 percent into fixed, 4-percent loans. Roughly nine of 10 federally backed loans would be affected, saving nearly 37 million borrowers billions of dollars in annual interest payments.

"I deeply share Secretary Duncan's concerns about the trillion dollars in student loan debt,” Gillibrand said. “Considering that almost $900 billion of this debt is owned by the federal government, we can do something about it. And I believe we should not wait any longer to take action.”

The proposal targets loans funded and owned by the Education Department through the Direct Loan program, as well as government-guaranteed debt owned by the government and the private sector under the Federal Family Education Loan program. The bill calls on the Education Secretary to devise a process that would refinance FFEL loans owned by private lenders and investors.

The Center for American Progress, a policy and advocacy group with deep ties to the Obama administration, estimates that Gillibrand’s proposal in its first year would save borrowers about $14.5 billion off their student loan payments, boosting U.S. economic activity by $21.7 billion.

Gillibrand said her proposal would be a “big step in the right direction.”

“We should all be able to agree that this massive debt is a significant drag on the rest of our economy and it's time that Congress stand up for these graduates and let them refinance these loans,” she added.

Sen Elizabeth Warren (D-Mass.) has introduced a separate proposal to allow some undergraduates the opportunity to borrow from the federal government for the next year at less than 1 percent interest on some of their loans.

“As Secretary Duncan pointed out today, student loan debt is crushing America's young people who are already struggling to make ends meet in a difficult economy. We shouldn't add to the burden students face,” said Lacey Rose, a spokeswoman for Warren.

Washington’s interest in student loan issues has increased as the Education Department is forecast to generate a $51 billion profit this year from lending to college students and their families, a figure higher than the 2012 earnings of Exxon Mobil, the nation’s most profitable company, and roughly equal to the combined net income of the four largest U.S. banks by assets.

The department is estimated to have recorded roughly $120 billion in profits off lending to students and their families over the last five years, budget documents show.

The Obama administration’s profits are due to the historically high gap between what it costs the U.S. government to borrow and what students and their families pay to borrow from the Education Department. Interest rates are set by Congress. About three-fourths of all federal student loan dollars disbursed this year carry interest rates of either 6.8 or 7.9 percent.

The rates were set in 2007 by a Democratic-controlled Congress and signed into law by then-President George W. Bush, a Republican. Though the rates on a subset of loans have decreased in recent years, overall they have not moved in tandem with borrowing costs across the economy.

During the Tuesday House education committee hearing, Rep. John Tierney (D-Mass.) lamented the economic effects of growing student debt burdens. After asking Tierney whether he was worried about student debtors being able to purchase homes or similar big-ticket items, Duncan appeared to validate his concerns.

“Trying to buy a home, trying to buy a car, you know, trying to start a life -- we always joke but it’s not really that funny for most families -- trying to get them out of their parents’ house," Tierney said.

Duncan, acknowledging the worries that have been growing in Washington over the last few months, quickly responded: “That’s real, that’s real.”

Jamie Dimon Survives Shareholder Vote

2013-05-21T12:16:21-04:00

Jamie Dimon overwhelmingly defeated a referendum on his leadership of JPMorgan Chase on Tuesday, beating back a proposal that garnered less than a third of votes to strip the chief executive’s chairman title as investors backed Dimon against an insurrection by public union-led shareholders.

Shareholders led by the AFSCME pension fund, New York City pension funds, and Connecticut retirement plans sponsored a proposal put to all of JPMorgan’s investors that called for the bank’s board to remove the chairmanship from Dimon. Though the proposal was non-binding, majority support for it would have dealt a devastating blow to Dimon, who jointly holds both the chairmanship and chief executive titles at the bank. A similar proposal to split the roles last year garnered 40 percent of the vote.

This year, about 32 percent of shareholders voted for the split. The lopsided tally is likely to be seen as an endorsement for Dimon.

The vote was seen as a test of shareholder power over the operations of large financial institutions. Dimon, the longest-serving chief executive at one of the nation’s six largest banks, worked feverishly with his key lieutenants to defeat the proposal -- pointing to the company’s profitable track record, its stock price, leading market share in financial services and Dimon’s experience in steering the company through the financial crisis.

Some investors sought to split the role of chief executive and chairman at JPMorgan, the nation’s largest bank by assets and its most profitable last year, in response to a flood of regulatory issues that have engulfed JPMorgan since the bank revealed it lost at least $6 billion due to wrongway bets on credit derivatives by a group of traders led by the so-called “London Whale.”

Considered by some to be Washington’s favorite banker after absorbing failing financial groups Bear Stearns and Washington Mutual in 2008 during the height of the financial crisis, Dimon has experienced a surge in negative headlines in recent months. Whale losses exposed failures in risk management and oversight, and called into question his ability to effectively oversee a $2.4 trillion financial institution.

Dimon had previously touted his ability to manage risk. Critics argued that if strong banks like JPMorgan could suffer such a loss, then any bank active in capital markets was susceptible to trading blowups.

The embarrassing episode led to a management shakeup and heightened scrutiny of JPMorgan’s operations. It also helped to reignite a broader debate in Washington over whether large financial groups should be forcibly broken up.

Regulators at the Federal Reserve and the Office of the Comptroller of the Currency, which supervise JPMorgan, have since placed a greater emphasis on robust corporate governance at big financial groups. Financial supervisors view strong, independent boards of directors as an effective counterweight to bank management.

Corporate governance experts have said that Dimon, as chairman of the board and chief executive, effectively serves as his own boss.

Some JPMorgan executives have said that Dimon was unfairly targeted. Shareholders supporting the proposal have tried to make the vote less about Dimon and more about proper corporate governance, which generally calls for different people to occupy the chairman and chief executive positions.

News reports in recent weeks have raised the possibility that Dimon may have left JPMorgan had investors voted to strip his chairmanship. The chance that Dimon may have simply left the bank may have been too much of a risk for some shareholders who considered voting for the proposal.

Kirsten Gillibrand Aims To Jumpstart Student Loan Refinancings With New Bill

2013-05-19T18:23:51-04:00

Debtors with high interest rates on their federal student loans would refinance into cheaper loans under proposed legislation to be unveiled this week, in a move that would lower borrowers’ burdens and potentially hurt private lenders and investors.

The plan sponsored by Sen. Kirsten Gillibrand (D-N.Y.) would force the U.S. Secretary of Education to automatically refinance most government loans carrying interest rates above 4 percent into fixed, 4-percent loans. Roughly nine of 10 federally-backed loans would be affected, saving nearly 37 million borrowers billions of dollars in annual interest payments.

“At a time when corporations, homeowners and even local governments are refinancing at historically low interest rates and saving millions of dollars, students and families who take out loans to pay for college are getting left behind," Gillibrand said. "Ensuring that our graduates are not saddled with unmanageable debt by keeping interest rates low is just common sense."

The proposal targets loans funded and owned by the Education Department through the Direct Loan program, as well as government-guaranteed debt owned by the government and the private sector under the Federal Family Education Loan program, an initiative that was ended as part of President Barack Obama’s healthcare overhaul. The bill calls on the Education Secretary to devise a process that would refinance FFEL loans owned by private lenders and investors.

If passed, the legislation would immediately aid borrowers who cumulatively hold nearly $1.1 trillion in student debt. Financial regulators and Obama administration officials in recent months have warned that record student debt levels risk undermining economic growth, as burdened households are likely to reduce consumption and other types of borrowings that would be used to finance big-ticket items such as houses and new cars.

The bill may hurt companies like Sallie Mae, the nation’s largest student loan company, which owns about $119 billion in FFEL debt and derives most of its income from that program, according to securities filings. Investors in securitized FFEL debt also may suffer as the loans underlying their securities would be repaid, denying them the interest income they had been counting on.

Sallie Mae estimated in its most recent presentation to investors that the Education Department owns $494 billion in Direct Loans and $147 billion in FFEL loans. The student loan company estimates private lenders and investors own about $291 billion in FFEL debt.

The Center for American Progress, a left-leaning policy and advocacy group, estimates that Gillibrand’s proposal in its first year would save borrowers about $14.5 billion off their student loan payments, boosting U.S. economic activity by $21.7 billion.

Her bill would help struggling debtors such as Alex Newman, a 2009 graduate of the State University of New York at Plattsburgh who joined Gillibrand at a Sunday news conference. Newman, a Harlem teacher, said he has about $20,000 in federal student loans and little money left over after monthly expenses and debt payments to plan for his future.

“I hope to one day have a family, buy a house, and pay for my child's education -- but with interest rates where they are, I have no ability to save,” Newman said.

It’s unclear how much taxpayers would lose in forgone interest income if tens of millions of borrowers had their high-rate debt refinanced into cheaper loans. Gillibrand’s aides said they will ask the Congressional Budget Office to estimate the proposal’s price tag, and would then figure out how to pay for it.

Her legislation does not yet have any cosponsors, though she aims to rally support for the bill by this fall, when Congress is expected to reauthorize the Higher Education Act.

The New York Democrat joins a growing list of lawmakers who have proposed legislation in recent years to help borrowers refinance student loans carrying record relative interest rates, including Sens. Jack Reed (D-R.I.) and Sherrod Brown (D-Ohio).

Washington’s increased interest in student loan issues comes as the Education Department is forecast to generate a $51 billion profit this year from lending to college students and their families, a figure higher than the 2012 earnings of Exxon Mobil, the nation’s most profitable company, and roughly equal to the combined net income of the four largest U.S. banks by assets.

The Obama administration’s profits are due to the historically high gap between what it costs the U.S. government to borrow and what students and their families pay to borrow from the Education Department.

Interest rates are set by Congress. About three-fourths of all federal student loan dollars disbursed this year carry interest rates of either 6.8 or 7.9 percent, according to Education Department budget documents.

The rates have not been reduced despite the broader decrease in borrowing costs across the economy. For example, when Congress set today’s rates in 2007, the average new 30-year, fixed-rate mortgage could be had for about 6.3 percent, according to Freddie Mac, the government-backed mortgage financier. This month, the average new 30-year, fixed-rate mortgage carries a 3.5 percent interest rate.

Thanks to efforts by the Federal Reserve, it’s never been cheaper for homeowners, car buyers, businesses or investors to obtain financing. Students who borrow from the federal government, however, have not benefited from the historically low rate environment.

"Corporate entities, homeowners, and many others have been able to refinance debt at quite low rates, and student loan borrowers are wondering why they can't do the same," Rohit Chopra, the Consumer Financial Protection Bureau’s top student loan official, has said.

The CFPB has noted the dearth of refinancings for student loan borrowers and is working to increase debt refinancings and loan modifications for those who are struggling. Policymakers reckon that high-rate student debt may be having a "domino effect" on the U.S. economy, causing younger Americans to purchase fewer homes.

In a report this month, the consumer bureau suggested a refinancing program that could rely on the Federal Financing Bank, a government corporation that borrows from the Treasury and lends to agencies and borrowers with government guarantees, to provide funding.

Obama Student Loan Policy Under Scrutiny As Congress Tackles Student Borrowing Costs

2013-05-17T15:32:24-04:00

WASHINGTON -- Congressional Democrats have pounced on a nonpartisan government report showing the Department of Education this year is forecast to earn a record $51 billion profit off student borrowers, denouncing the Obama administration and urging for structural reforms.

Members of the House of Representatives including George Miller (D-Calif.), John Tierney (D-Mass.) and John Yarmuth (D-Ky.) cited news reports in The Huffington Post that highlighted the Tuesday estimate by the Congressional Budget Office, which showed that the Education Department was forecast to report higher earnings this year than Exxon Mobil and nearly as high as those of the four biggest U.S. banks by assets combined.

"We don't see students or their parents as profit centers, and we don't think it's an appropriate concept to be acting like a market-driven bank here," Tierney said.

Miller criticized a policy that is leading to "immense profit being extracted from students and families that are struggling."

The critical comments have alarmed policymakers in the Obama administration, who along with lawmakers are racing to avert a scheduled doubling of interest rates on some new federal student loans that is set to occur on July 1.

Miller said the CBO report “totally changed the conversation around here.” On Wednesday, the Republican National Committee tweeted a link to the HuffPost story to its more than 213,000 followers.

Tierney said the profit figure prompted him to meet with Under Secretary of Education Martha Kanter and other agency officials to discuss the issue.

The House Education Committee on Thursday approved Republican-led legislation that would tie student loan interest rates to the U.S. government’s borrowing costs. Two Democrats voted for the bill. The full House is expected to vote on the measure soon, as rates on subsidized Stafford loans for future borrowers are scheduled to double to 6.8 percent.

“While we welcome action by the House on student loans, we have concerns," the White House said in a statement.

Some Republican senators have introduced similar legislation, as has the White House. President Barack Obama’s plan, however, features lower rates than the House Republicans’ plan, though unlike the Republicans’ plan it does not cap interest rates in case the U.S. government’s borrowing costs rapidly increase.

The president's plan would expand a program signed into law by George W. Bush that would tie monthly repayments of federal student debt to borrowers’ income. That part of Obama’s proposal was not seriously pursued during the education committee meeting.

Leading Republican and Democratic bills do little for current borrowers, potentially worrying financial regulators. The Consumer Financial Protection Bureau, for example, has warned that the cumulative $1.1 trillion in outstanding debt carried by today’s borrowers may impede economic growth.

Most Democrats slammed the Republican bill during the education committee meeting. They claimed a report from the Congressional Research Service showed the Republican measure would lead to higher borrowing costs for students and their families than current law.

The CRS report, however, assumes that the U.S. government’s cost to borrow for a 10-year term will more than double in three years.

Virginia Foxx (R-N.C.), one of the cosponsors of the House Republican measure, said: “This legislation offers predictability, simplicity, and will ensure interest rates are immediately in line with the free market -- a need particularly acute in today’s jobless economy.”

Miller, who for years has tried to lower college borrowing costs for households, said policymakers need to revamp the federal student loan program. Roughly three-fourths of all federal student loan dollars disbursed this year carry interest rates of either 6.8 or 7.9 percent. A quarter of them carry 3.4 percent interest, according to Education Department budget documents.

The rates are fixed by Congress, though they have not been updated to reflect the present near-record low interest rate environment. For example, when Congress set the rates in 2007, the average new 30-year, fixed-rate mortgage could be had for about 6.3 percent, according to Freddie Mac, the government-backed mortgage financier. The average new 30-year, fixed-rate mortgage now carries a 3.5 percent interest rate.

The increasing gap between what students and families pay to finance a college education and what the U.S. government pays to borrow has led to record profits for the Treasury.

“This profit that's being squirreled away at the expense of families and students -- you have to ask, is there a better use for that money?” Miller said.

He added: “We have to think about modernizing the program and making it relevant for students and taxpayers. This current model has run out of gas. We’re getting less and less return.”

Miller is pushing for legislation that would feature substantially lower interest rates and debt forgiveness for struggling borrowers. Such a bill “may be a better fix for this economy, this country and our future," he said.

CLARIFICATION: A quote in an earlier version of this story mistakenly attributed Miller's criticism of government profits derived from student loan programs to the Education Department. Miller was criticizing the policy, not the department.

Andy Haldane Praises Brown-Vitter Bill To End 'Too Big To Fail'

2013-05-16T20:15:51-04:00

A senior Bank of England official influential in global policy debates has praised proposed U.S. legislation that would forever end the perception that the biggest banks are too big to fail, providing support for a bipartisan bill that forces the biggest American banks to either make themselves safer or shrink.

Andy Haldane, Bank of England executive director for financial stability, said legislation introduced by Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.) "has attractions" that may have long-term appeal. The bill, dubbed the "Terminating Bailouts for Taxpayer Fairness Act" and introduced April 24, would force banks with more than $500 billion in assets to fund at least 15 percent of their balance sheets with equity capital. If implemented, the largest U.S. banks would have to raise more than $1 trillion in fresh capital, on top of the tens of billions of dollars in capital they've raised over the past year to meet impending requirements.

The proposed legislation and Haldane's cautious support comes as policymakers in Washington and around the world target the phenomenon known as "too big to fail," or the perception that some banks are either so large or so important that government officials would never allow them to default on their obligations.

Three years after President Barack Obama heralded the Dodd-Frank overhaul of U.S. financial regulation as ending "too big to fail," policymakers ranging from Ben Bernanke, Federal Reserve chairman, to Tom Hoenig, Federal Deposit Insurance Corp. vice chairman, have conceded that "too big to fail" remains and that the largest banks continue to benefit from the perception.

"Despite enormous progress in developing policy proposals, too big to fail is an itch that remains unscratched," Haldane said in a paper dated April 9 that was made public on Thursday.

Community banks, represented by the Independent Community Bankers of America, have supported the Brown-Vitter bill as a way to end "too big to fail." Former regulators have publicly backed it, while some current U.S. regulators privately support it as well.

The level of support for the bill has alarmed the biggest U.S. banks, which vehemently oppose the legislation.

The U.S. Treasury has avoided publicly weighing in on the debate, though officials privately have said they oppose the bill because Dodd-Frank eventually will end "too big to fail." Most of the Dodd-Frank Act has yet to be implemented.

Haldane said the Brown-Vitter bill "is one of the most radical proposals to date."

"From a simplicity and robustness perspective, it has attractions," Haldane said. "At the same time, the Brown-Vitter proposals clearly raise a host of practical questions."

The bill's capital requirements are "sufficiently far north of existing capital standards that they are perhaps at best seen as a (possibly distant) long-term resting place, not a practical near-term objective," Haldane said.

His tepid support for the legislation, however, was paired with his support for proposals that would raise capital requirements for the world's largest financial institutions.

"It is entirely right that the official sector should continuously assess whether the financial system has adequate capital insurance to deal with too big to fail problems," Haldane said. "The emerging consensus, within academia, officialdom and among market participants, is that it has not."

Sarah Bloom Raskin: Inequality May Hurt Economic Growth

2013-05-16T16:11:16-04:00

WASHINGTON -- A top Federal Reserve policymaker has raised the possibility that rising inequality may restrain economic growth for several years in a sign the central bank may be worried about the increasing gap between the rich and poor.

“In my view, the large and increasing amount of inequality in income and wealth, which has been an ongoing development for decades, may have exacerbated the crisis,” Fed governor Sarah Bloom Raskin said Thursday in a speech delivered in Washington. “More research is required to determine whether it may also pose a significant headwind to the recovery from the crisis for years to come.”

Home values rising at their pre-recession pace may help alleviate some of the wealth gap, Raskin said, but “some of the restraints on the recovery may be quite long-lasting.”

Raskin’s comments are among the most forceful to date from any current member of the Fed’s seven-person Board of Governors regarding wealth, income inequality, and how dynamics in household wealth may be impeding growth and prolonging the realization of a full-fledged recovery for millions of struggling U.S. families.

“Overall wage growth has been anemic, and many households have not seen their circumstances improve materially,” Raskin said of the current economic recovery, which began in 2009 after the so-called “Great Recession” officially ended.

The Fed thus far has focused on stimulating overall growth by keeping borrowing costs near record-lows and incentivizing investors, businesses and households to take risks, in hopes it will lead to increased purchases and investment. Fed policy tools such as lowering interest rates and purchasing U.S. Treasuries and mortgage securities, however, may be ineffective in alleviating inequality.

Raskin's comments, similar to previous speeches she delivered on inequality in March and April, may signal a growing concern within the Fed over rising wealth and income disparities. Raskin has previously said that the Fed should study how income and wealth inequality may impact monetary policy.

Between 1979 and 2007, inflation-adjusted, pretax income for households in the top 1 percent more than doubled, while middle-income households experienced earnings growth of less than 20 percent, according to Congressional Budget Office data. A recent survey by the Fed found that households in the top fifth of annual income owned 72 percent of the total wealth in the economy in 2010, while those in the bottom fifth owned just 3 percent.

In 2010, Fed chairman Ben Bernanke called America’s income gap a "very bad development."

“It's creating two societies,” Bernanke said, attributing the disparity to differences in educational achievement. “It leads to an unequal society, and a society which doesn't have the cohesion that we'd like to see."

On Thursday Raskin repeated a specific point she's made twice in previous speeches this year: That the economic recovery has created too many low-wage jobs and that people who've been laid off have been unable to find jobs as good as the ones they lost.

Raskin said that while average wages have increased for people who have remained employed through the recession and recovery, the average wage for new hires has actually declined since 2010. Research by the Labor Department has found that in the past few years, most workers who found new jobs after losing long-held positions made less money than they used to.

A big reason for the downgrade is that the economic recovery is creating jobs that are not as good as the ones the Great Recession destroyed.

"About two-thirds of all job losses in the recession were in middle-wage occupations -- such as manufacturing, skilled construction, and office administration jobs -- but these occupations have accounted for less than one-fourth of the job growth during the recovery," Raskin said, citing a 2012 study by the National Employment Law Project, a worker advocacy group.

Raskin is the only current Fed governor to ever cite the National Employment Law Project in prepared remarks, according to a review of past speeches, in a signal the central bank is paying more attention to the plight of low-wage workers.

"By contrast," she continued, "lower-wage occupations, such as retail sales, food service, and other lower-paying service jobs, accounted for only one-fifth of job losses during the recession but more than one-half of total job gains during the recovery."

Congressional leaders and the Obama administration haven't been helping, Raskin said, noting that since 2011 lawmakers' obsession with reducing deficits has been a drag on growth. In particular, the December expiration of a temporary 2-percentage-point reduction in payroll taxes hurt workers, many of whom saw wage gains from increased state minimum wage laws wiped out by the higher tax.

The economy added 165,00 jobs in April, a majority of them in retail, temp services, and hospitality, according to the Labor Department. In a March speech, Raskin discussed the plight of the low-wage workers who comprise a quarter of the workforce and earn less than $11.06 per hour.

“They are sanitation workers, office receptionists, and nursing assistants; they are single mothers of three who worry: How will I be able to send my children to college? What if my landlord raises the rent this year?” Raskin said. “Tens of millions of Americans are the people who ask themselves these questions every day.”

CFTC Waters Down Derivatives Rule In Victory For Wall Street

2013-05-15T23:38:01-04:00

The U.S. regulator overseeing the derivatives market is set to retreat from an ambitious proposal that would have increased competition in the swaps market, handing victory to large banks including JPMorgan Chase and Goldman Sachs.

The Commodity Futures Trading Commission will vote Thursday on final rules that will govern a large portion of transactions in the $633 trillion swaps market. Some derivatives are known as swaps because they “swap” risk from one party to another.

The impending regulations will determine how many prices buyers of swaps must solicit when trying to enter into a derivatives contract, the minimum size of large transactions that can be traded outside transparent trading platforms, and how trades can occur on derivatives marketplaces known as “swap execution facilities,” according to officials and agency documents.

Roughly five years after previously unregulated derivatives helped fuel the downfall of large financial institutions and led to a global financial crisis, the rules to be voted on by the five-member commission, led by Gary Gensler, Democratic chairman, represent a big portion of the government's response to rein in risky activities under the Dodd-Frank overhaul of U.S. financial regulation, while also helping to determine the profitability of swaps trading for dealers such as Citigroup and Bank of America.

After failing to persuade a majority of his commission, Gensler conceded on the price solicitation proposal, known as “requests for quote,” or RFQ, officials said. Gensler had originally proposed that buyers of swaps such as institutional investors solicit a minimum of five quotes before entering into a swap.

But the largest global banks, including Deutsche Bank, Barclays and Morgan Stanley, fiercely objected to the five-quote minimum, according to comment letters filed with the agency. The proposal was intended to increase price transparency and encourage wider participation beyond the small number of dominant dealers in a bid to diffuse risk and lower prices for institutional investors and companies that purchase swaps to offset risk.

Tens of billions of dollars in annual revenues at the world’s largest banks are at stake, analysts have estimated. Some of the world’s biggest asset managers also objected to Gensler’s proposal, and argued for flexibility.

Opposition from the two Republican commissioners -- Scott O’Malia and Jill Sommers -- and Mark Wetjen, Democratic commissioner, led Gensler to compromise on the final RFQ rule, according to people familiar with the matter. The three commissioners had settled on a two-RFQ minimum, these people said.

The agency internally considered a number of compromises, including one that would have determined the RFQ minimums based on how often certain types of swaps were traded. Traders of illiquid swaps were thought to suffer in a regime in which buyers had to solicit five quotes, based on the theory that the market would turn against them once it became known that they were looking to make a transaction. A compromise that called for a lower RFQ minimum for illiquid instruments was thought to have a chance.

In the final rule, swaps buyers will be able to solicit only two prices through swap execution facilities trading platforms for the first year after the rule is in effect, with the minimum requirement increasing to three quotes thereafter, officials said.

Gensler’s term expires this December. A future chairman could keep the RFQ minimum at two solicitations before the three-RFQ rule goes into effect.

The agency will allow voice brokers -- middlemen that facilitate trades between buyers and sellers over the phone -- to operate swap execution facilities. The voice brokerage business was once thought to be among the bigger losers of the government’s overhaul of the swaps market, as officials emphasized electronic trading.

The CFTC also is poised to vote on a rule that will finalize proposals governing so-called “block trades,” or large transactions that allow market participants to strike deals in private and report details after a delay.

Agency officials led by Gensler have pushed for a high threshold, in hopes of pushing more transactions onto transparent trading platforms.

Obama Student Loan Policy Generates $51 Billion Profit, Causing Democrats To Lash Out

2013-05-15T16:36:39-04:00

Two members of the Senate banking committee on Wednesday criticized excess government profits generated off loans made to student borrowers and their families, increasing pressure on Congress and the Obama administration to reform student lending programs.

“Wall Street, student loan servicers, and now the government are reaping profits at the expense of students,” said Sen. Sherrod Brown (D-Ohio). “When everyone is benefiting from student loan policy except students and graduates, we have a problem.”

“The fact that the government is now expected to profit $51 billion off student loans this year -- more than the annual profit of any Fortune 500 company and about five times the profit of Google -- is just plain wrong,” said Sen. Elizabeth Warren (D-Mass). “We should put an end to the practices that generate Fortune 500 profits off of our students.”

The Congressional Budget Office forecast on Tuesday that the federal government will turn a record $51 billion profit this year from student loan borrowers, a sum greater than the 2012 earnings of the nation's most profitable companies and roughly equal to the combined net income of the four largest U.S. banks by assets.

The nonpartisan agency increased its 2013 fiscal year profit forecast for the Department of Education by 43 percent to $50.6 billion from its February estimate of $35.5 billion. Most of the profit figure reflects projected lifetime earnings off loans made this year, though a small portion of the profits are from loans originated in recent years. The increase in estimated profits is due to the government's revision of interest rate expectations.

By comparison, Exxon Mobil Corp., the nation's most profitable company, reported $44.9 billion in net income last year. Apple Inc. recorded a $41.7 billion profit in its 2012 fiscal year, which ended in September. JPMorgan Chase, Bank of America, Citigroup and Wells Fargo reported a combined $51.9 billion in earnings last year.

[See UPDATE below for the Education Department's comment.]

Over the last five fiscal years, the Education Department has generated nearly $120 billion in earnings off higher-education loans to student borrowers, according to budget documents, as congressionally mandated interest rates have not moved in line with the broader market. Inaction in Washington, meanwhile, suggests that Democratic and Republican policymakers are content with the status quo.

Brown and Warren denounced the profit figures and urged policymakers to improve the federal student loan system.

“It's wrong that our students are being saddled with high interest rates and a lifetime of debt, and it's time that we give our children and grandchildren a break,” said Brown, a leading candidate to take over the Senate banking committee.

The Consumer Financial Protection Bureau estimates there is $1.1 trillion in outstanding student debt. Roughly 85 percent of the loans are guaranteed by the federal government. Millions of students and families who took out federal loans in recent years are paying record relative interest rates as borrowing costs across the economy have fallen for nearly everyone but student debtors.

Warren recently introduced legislation that would reduce rates on some new federal loans to match the interest rate that banks pay to borrow from the Federal Reserve. Her “Bank on Students Loan Fairness Act” would use funds the Fed has earned off its recent investments in mortgage securities and government debt.

Most new federal student loans carry fixed interest rates of either 6.8 percent or 7.9 percent. In recent years loans made to the neediest students have carried a 3.4 percent interest rate, though that rate on subsidized Stafford loans is scheduled to revert back to 6.8 percent in July.

About a quarter of new loans extended in 2013 had a 3.4 percent interest rate, according to Education Department budget documents.

President Barack Obama recently asked Congress to tie interest rates on new federal student loans to the U.S. government's borrowing costs. Leading Democratic senators this week proposed legislation that would keep existing rates on subsidized Stafford loans for another two years.

Neither proposal does anything for existing student debtors.

On Wednesday, the CFPB suggested that student borrowers should consider refinancing their high-rate federal loans into lower-rate private student loans.

“While today’s interest rate environment is at historical lows, federal student loan interest rates set by Congress have not gone down on the most common type of loan, the Unsubsidized Stafford Loan,” Rohit Chopra, the CFPB official overseeing student debt, wrote in a blog post on the agency’s website. “Some borrowers in repayment with excellent credit may be able to qualify to refinance their existing federal student loans with a new loan at a lower rate.”

Policymakers including those from the Federal Reserve and Treasury Department have grown increasingly alarmed at the possibility that outstanding student debt levels and record relative interest rates may be depressing economic growth.

UPDATE: 7:11 p.m. -- Daren Briscoe, Education Department spokesman, said: “Projections of student loan collections over the 40-year loan lifetime window are in no way comparable to annual profit turning by corporations. That said, the Obama administration understands the need to keep student loans affordable, which is why we’ve introduced repayment options like 'Pay As You Earn' and 'Income Based Repayment', and why the president has put forward a long-term solution that will help middle class students and their families afford college by lowering interest rates on July 1, without adding to the deficit.”

Due to government budget rules, the Education Department immediately books lifetime costs or earnings on loans at the time of origination. The estimated profits are similar to how corporations and other organizations report earnings. For example, businesses book future earnings at the time a product is sold. The Obama administration has sought to keep some student loans affordable, though interest rates on the loans remain at record relative levels. The July 1 deadline Briscoe referred to relates to subsidized Stafford loans, which agency budget documents show only constitute about a quarter of all federal student loans estimated to be made in the 2013 fiscal year.

Obama Student Loan Policy Reaping $51 Billion Profit

2013-05-14T23:18:09-04:00

The Obama administration is forecast to turn a record $51 billion profit this year from student loan borrowers, a sum greater than the earnings of the nation's most profitable companies and roughly equal to the combined net income of the four largest U.S. banks by assets.

Figures made public Tuesday by the Congressional Budget Office show that the nonpartisan agency increased its 2013 fiscal year profit forecast for the Department of Education by 43 percent to $50.6 billion from its February estimate of $35.5 billion.

Exxon Mobil Corp., the nation's most profitable company, reported $44.9 billion in net income last year. Apple Inc. recorded a $41.7 billion profit in its 2012 fiscal year, which ended in September, while Chevron Corp. reported $26.2 billion in earnings last year. JPMorgan Chase, Bank of America, Citigroup and Wells Fargo reported a combined $51.9 billion in profit last year.

The estimated increase in the Education Department's earnings from student borrowers and their families may cause a political firestorm in Washington, where members of Congress and Obama administration officials thus far have appeared content to allow students to line government coffers.

The Education Department has generated nearly $120 billion in profit off student borrowers over the last five fiscal years, budget documents show, thanks to record relative interest rates on loans as well as the agency's aggressive efforts to collect defaulted debt. Representatives of the Education Department and Congressional Budget Office could not be reached for comment after normal business hours.

The new profit prediction comes as Washington policymakers increasingly focus on soaring student debt levels and the record relative interest rates that borrowers pay as a potential impediment to economic growth. Regulators and officials at agencies that include the Federal Reserve, Treasury Department, Consumer Financial Protection Bureau and Federal Reserve Bank of New York have all warned that student borrowing may dampen consumption, depress the economy, limit credit creation or pose a threat to financial stability.

At $1.1 trillion, student debt eclipses all other forms of household debt, except for home mortgages. It's also the only kind of consumer debt that has increased since the onset of the financial crisis, according to the New York Fed. Officials in Washington are worried that overly indebted student borrowers are unable to save enough to purchase a home, take out loans for new cars, start a business or save enough for their retirement.

Policymakers also are worried about the effect that high interest rates on outstanding student debt may have on the broader economy. Congress sets interest rates on federal student loans, with rates fixed on the majority of loans at 6.8 and 7.9 percent.

But as the Federal Reserve attempts to lower borrowing costs for everyone from households and small businesses to large corporations and Wall Street banks, student borrowers have not been able to benefit.

Compared to a benchmark interest rate -- what the U.S. government pays to borrow for 10 years -- student borrowers have never paid more, increasing the burden of their student debt as wage increases and yields on investments and bank accounts fail to keep up with the relative increase in student loan interest payments.

President Barack Obama recently asked Congress to tie federal student loan interest rates to the U.S. government's borrowing costs. In a possible sign of congressional intent, leading Democratic senators on Tuesday proposed legislation that would keep existing interest rates on some student loans for the neediest households fixed at 3.4 percent, rather than allowing them to revert back to their original 6.8 percent rate.

The legislation, dubbed the "Student Loan Affordability Act" and proposed by Senate Majority Leader Harry Reid (D-Nev.), Sen. Patty Murray (D-Wash.), Sen. Jack Reed (D-R.I.), and Sen. Tom Harkin (D-Iowa), aims to help a small subset of future student borrowers who take out loans over the next two years. The bill does nothing for existing student debtors.

"Today's figures from the CBO underscore the urgent need for Congress to prevent the July 1 interest rate hike and address the crushing debt placed on students," said Tiffany Edwards, spokeswoman for Democrats on the House Education and Workforce Committee.

Rohit Chopra, the Consumer Financial Protection Bureau official overseeing the regulator's student debt efforts, has warned policymakers to not focus solely on future borrowers.

“The whole student loan problem is a problem that should be of deep concern to this body,” said Richard Cordray, CFPB director, during testimony last month before the Senate Banking Committee. “These are young people that we should care a great deal about.”

“They’re the ones with the ambition, aspirations and dreams, and they're getting saddled with debt that they don't understand,” Cordray said of student borrowers. “It's holding them back and it's making them unable to rise and succeed and become leaders in our society.”

He added: “It's a significant problem and we're going to be doing everything that we can to address it at the bureau.”

The CFPB has been focusing on helping existing borrowers refinance high-rate debt or modify the terms of their loans. In a report earlier this month, the CFPB lamented that borrowers are unable to refinance their obligations after they have graduated from college and secured well-paying jobs.

"Corporate entities, homeowners, and many others have been able to refinance debt at quite low rates, and student loan borrowers are wondering why they can't do the same," Chopra said.

The CFPB suggests that increased concentration in the student loan market may inhibit refinancings and debt workouts. Lenders and the Education Department profit when borrowers pay higher rates than they otherwise would in a normally-functioning market.

Unlike traditional lenders, though, the Education Department's profits are barely dented by loan defaults. For loans made in 2013 that eventually default, the department estimates it will recover between 76 cents and 82 cents on the dollar. Bankruptcy rarely discharges student debt.

The Education Department's collection efforts are aided by loan default specialists, including NCO Group Inc., a company owned by JPMorgan.

IMF Questions Regulators On Big Banks

2013-05-14T17:50:36-04:00

Top officials at the International Monetary Fund on Tuesday challenged financial regulators imposing far-reaching reforms on the biggest banks, arguing that the global benefits of reform efforts must outweigh their costs.

Officials including José Viñals, financial counsellor and director of the IMF’s monetary and capital markets department, said in a paper that initiatives such as the Volcker rule in the U.S. and similar proposals in Europe could impose significant costs on the global economy, such as reduced liquidity in financial markets. They could also increase the risk that financial activity will migrate to institutions, sectors or jurisdictions subject to less supervision, the paper said.

The warning comes as U.S. regulators attempt to finalize various proposals, including the one named after Paul Volcker, the former Federal Reserve chairman, which bans banks from trading for their own profit and significantly restricts their investments in risky ventures such as hedge funds and private-equity firms. Another pending rule threatens to raise costs for foreign banks by ratcheting up their capital requirements.

The IMF staff paper may buttress arguments made by foreign regulators and officials who have complained about proposals they say could harm foreign banks or drive up sovereign borrowing costs because leading U.S. banks may limit their activities.

But the IMF paper stops short of fully endorsing claims made by these authorities, including those from Germany and Japan. Instead, the IMF officials said that national proposals to restructure large banks, limit their activities or heighten requirements on foreign banks may be justified if regulators are unable to effectively supervise complex financial institutions or if foreign officials refuse to rein in banks considered to be “too important to fail”.

For example, IMF officials pointed to the $6 billion loss suffered by JPMorgan Chase last year due to a group of traders led by the so-called “London Whale” as an episode that “highlights the challenges supervisors continue to face in ensuring that their capability is not outstripped by financial sector complexity”.

U.S. regulators have said they are concerned that large European institutions operating in the U.S. benefit from an unfair advantage because U.S. banks have tougher regulatory requirements, and their European peers refuse to make their banks safer.

Fed officials, under assault from foreign peers for suggesting more stringent rules for big banks, may find comfort in the note from the IMF. Fund officials cautioned in their paper that their views do not necessarily represent those of the IMF.

Separately, recommendations from the Bipartisan Policy Center, a Washington think tank, appeared to endorse U.S. initiatives to end the perception that some banks are considered either too big or too important to fail.

The BPC report, led by industry executives and former regulators, supported a Federal Deposit Insurance Corporation proposal to resolve big, global banks nearing failure. The agency’s approach involves taking over the parent company of a big bank, imposing losses on shareholders and parent-company creditors, and keeping the operating subsidiaries alive.

In the coming months the FDIC and the Fed will propose a rule requiring big banks to fund themselves with enough equity capital and parent-company debt to cover losses if the banks were nearing failure and needed to be taken over by regulators.

For the FDIC’s approach to work, the BPC said that banks should have enough capital and loss-absorbing debt to cover losses greater than those forecast under a worst-case scenario used by the Fed in its annual stress tests of banks’ balance sheets. The Fed estimates how banks would cope if U.S. unemployment rose to 12 percent, economic output fell by 5 percent, equity prices were slashed by 50 percent and home prices declined more than 20 percent.

The amount of loss-absorbing debt and equity that the BPC recommends may resemble a proposal by Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.), who introduced legislation to require banks with at least $500 billion in assets to fund themselves with at least 15 percent in equity capital.

Sallie Mae Profit Boosts College Endowments And Pension Funds As Students Pay More

2013-05-09T18:30:49-04:00

University endowments and teachers’ pension funds are among big investors in Sallie Mae, the private lender that has been generating enormous profits thanks to soaring student debt and the climbing cost of education, a Huffington Post review of financial documents has revealed.

The previously unreported investments mean that education professionals are able to profit twice off the same student: first by hiking the cost of tuition, then through dividends and higher valuations on their holdings in Sallie Mae, the largest student lender and loan servicer in the country, which profits by charging relatively high interest rates on its loans and not refinancing high-rate loans after students graduate and get well-paying jobs.

Sallie Mae is a former government-sponsored enterprise that was fully privatized in 2004 and now trades publicly as SLM Corp.

“It’s a conflict of interest,” said Barmak Nassirian, a longtime higher education analyst who most recently served as associate executive director of the American Association of Collegiate Registrars & Admissions Officers. “There is something inherently problematic about benefitting from the financing of the tuition you charge through investments in any lender.”

On average, the annual cost of education at public schools has risen 57 percent since 2005 to nearly $18,000, according to College Board figures Sallie Mae cites in its latest quarterly pitch to investors. Students at private schools are paying more than $39,000, or nearly 44 percent more than they did in 2005.

The so-called “cost of attendance gap”, or the difference between what a four-year degree will cost incoming freshmen versus the amount of government loan money available to them, has risen over the past 10 years by 59 percent to nearly $152,000 for the typical student who started at a private school in 2011, Sallie Mae tells investors. For public school students, the gap has increased 90 percent to about $69,000.

Sallie Mae loans, which are relatively more expensive now than they were before the financial crisis, help “bridge the funding gap,” the company says.

The funds’ investments in Sallie Mae come as Washington policymakers increasingly turn their attention to student debt burdens, weighing stimulative measures that could boost refinancings or increase loan modifications for distressed borrowers, in the face of increasing evidence that student debt is hurting the economy.

The highly profitable company -- it generated a 21 percent return on equity last year -- attributes its earnings in part to the lack of competition in a market in which borrowers’ need for credit is only increasing.

“The margins here are really a function of alternative financing opportunities,” John Remondi, Sallie Mae president and chief operating officer, told investors in January. “And if you think about our products, we're making loans to the parents and students, family education loans. Their alternatives are fairly limited.”

Sallie Mae reported $939 million in net income last year, its highest since 2006. The publicly-traded company, which enjoys a government guarantee on most of its $174 billion in assets, has been profitable in eight of the last 10 years, generating a cumulative $7.3 billion profit.

Its shares have risen 54 percent over the past year, outpacing the 19 percent gain in the Standard & Poor’s 500 Index, America’s benchmark equity gauge.

The endowments of Furman University, Harvard University, Mount Holyoke College, and University of Michigan all hold stakes in Sallie Mae through their investments in Highfields Capital Management, a hedge fund that manages more than $11 billion and is the second-biggest Sallie Mae shareholder. As of the end of last year, Highfields owned nearly 40 million shares of Sallie Mae, or 8.6 percent of the company’s common stock.

Highfield investors, according to securities filings, primarily consist of charitable foundations, endowments, pension plans, and governmental entities, among others. The hedge fund was founded by two top executives of the Harvard Management Co., the Ivy League university's investment arm, which kicked in $500 million to launch the fund.

Pension funds for teachers and other school employees such as the New York State Teachers’ Retirement System, State Teachers Retirement Board of Ohio, Pennsylvania Public School Employees Retirement System, New Mexico Educational Retirement Board, Teacher Retirement System of Texas and California State Teachers Retirement System (CalSTRS) also own significant chunks of Sallie Mae, as does asset manager TIAA-CREF, which oversees retirement funds for teachers, among others.

Highfields Capital declined to comment. The funds either declined to comment or said their ownership stakes were due to passive investments in index funds. Sallie Mae’s shares form part of the S&P 500 and the Russell 3000 Index.

Still, the funds are enjoying bumper returns thanks to their passive investments, aided by borrowers who may be paying more than they would if the student loan market was functioning properly, policymakers have said.

“The issue becomes whether maximizing returns should be tempered by additional concerns and ethical considerations,” Nassirian said of higher-education professionals who have holdings in Sallie Mae. “This form of ‘double-dipping’ can create a very dangerous loop, where you have incentives beyond what you claim in your public rhetoric -- namely to put students into deeper debt.”

“This is a much more subtle and much less mechanistic dysfunction than we have seen in the past,” he added.

In 2006 -- the last year Sallie Mae reported at least $1 billion in profit and enjoyed a return on equity above 20 percent -- student borrowers who took out private Sallie Mae loans that were then securitized were borrowing at interest rates that were about 4.4 to 5.0 percentage points above a benchmark borrowing rate for financial corporations known as the three-month commercial paper rate, according to a review of the company’s bond documents.

For private loans that were securitized last year, students were paying interest rates about 6.8 to 7.5 percentage points above the benchmark corporate rate.

In all, over the last three years the margin enjoyed by Sallie Mae and its investors on private loans the company securitized on average has been about 2 percentage points higher than it was in 2006 relative to the overall corporate borrowing rate.

“Sallie Mae’s private education loans are designed to help students graduate with less debt and pay off their loans faster than other private loan alternatives,” said spokeswoman Patricia Nash Christel. “In fact, we’ve lowered our interest rates three times in the last four years, eliminated origination fees, added borrower-friendly safeguards, and created variable and fixed rate choices as well as in-school payment options to save families money.”

However, the reduction in interest rates for students has not matched the decline in the cost of borrowing throughout the economy. In other words, students are not fully enjoying the benefits of today’s low-interest rate environment, a source of frustration to some government officials.

Martha Holler, another Sallie Mae spokeswoman, disputed the use of commercial paper rates to measure the company’s margins on private student loans. Holler said it would be more appropriate to use the company’s self-reported funding costs specifically related to its private student loan originations, which in the form of long-term equity and debt is more expensive than commercial paper. By that measure, she argued, the company’s margins have slightly decreased since 2006.

But such a measure would exclude the company’s overall cost of funds, which enables the company to finance a wide range of assets more cheaply, boosting earnings. Sallie Mae's cost of funds is substantially lower now than it was in 2006, the year before the credit crunch is widely acknowledged to have started.

Sallie Mae’s preferred measurement also neglects the relative interest rate paid by student borrowers, whose rates in a normally functioning competitive market would move in tandem with interest rates in the broader economy. The commercial paper rate measures the borrowing costs of financial corporations like Sallie Mae, and influences how they price loans offered to households.

In 2012, the company borrowed funds at an average interest rate of 1.45 percent. In 2006 it was 5.37 percent. Interest rates paid by its student borrowers on all of the company’s loan products have not dropped by a corresponding amount, enabling the company as a whole to record a higher spread between its cost to borrow and what it earns off loans to students.

Sallie Mae’s margins also benefit from its Utah-based bank, which since the beginning of 2006 has been responsible for originating and funding “virtually all” of its private student loans, according to the company’s most recent annual report.

The bank relies on deposits to fund student loans. According to Federal Deposit Insurance Corp. data, the bank's cost of funds last year was 1.11 percent.

Sallie Mae’s overall margins have increased to 1.78 percent, from 1.54 percent in 2006.

The Consumer Financial Protection Bureau said in a report on student loan affordability this week that high margins for private student lenders, such as those enjoyed by Sallie Mae, may be due to the lack of options for student borrowers.

“These excess credit spreads may be a symptom of insufficient competition,” the regulator said.

The company originated nearly half of all private student loans in the 2011-2012 academic year, according to a January investor presentation. In addition, it’s responsible for roughly half of all outstanding student loan securities.

Sallie Mae’s low borrowing costs also are aided in part by a borrowing agreement it has with the Federal Home Loan Bank in Des Moines, a government-sponsored entity originally created to provide cheap financing to home mortgage lenders.

As part of its 2010 agreement, Sallie Mae can post government-backed education loans as collateral for credit. At the end of last year, Sallie Mae was able to borrow as much as $8.5 billion.

In the quarter ending March 31 of this year, Sallie Mae had borrowed $2.1 billion with an average interest rate of 0.30 percent. Holler said there was “no connection” between the company’s Federal Home Loan Bank credit facility and private student loans.

The CFPB said it was “worth noting” that Sallie Mae enjoys the use of the government-backed credit facility “at favorable terms,” despite the fact that it “does not originate a noteworthy level of mortgages.”

The CFPB highlighted Sallie Mae in its report, noting the company’s “extraordinary gains” on a federal program designed to aid student borrowers and its apparent reliance on cheap government financing.

For example, the consumer bureau’s report pointed out that a 2008 law called the Ensuring Continued Access to Student Loans Act helped Sallie Mae achieve gains of $284 million in the 2009 fiscal year and $321 million in the 2010 fiscal year off sales of student loans to the Education Department.

The company defended its actions in a statement, saying, “Given the dire circumstances the markets were facing at the time, this intervention afforded 6 million students to access higher education at an extremely low cost to the Department of Education."

The lack of competition for new loans means today’s borrowers are paying higher relative rates, and when they graduate there are fewer opportunities to refinance those loans into cheaper debt.

With increasing exceptions, a student borrower’s credit profile typically improves after graduation, as the borrower has secured a degree and likely a decent-paying job. In theory, an employed college graduate has a better credit score -- meaning he is less likely to default on his debts -- than when he originally took out his education-related loans.

Like a company that has become more profitable and is therefore less likely to default or homeowners who have gained equity in their home since first taking out their mortgage, experts reckon that borrowers with student loans should be able to refinance their high-rate debt as their credit profile improves.

But unlike borrowers with home mortgages, the CFPB has said that borrowers with student loans are unable to “take advantage of today’s historically low interest environment.”

Refinancings of high-rate student loans by Sallie Mae, the biggest student loan company, are scant. “There's not a whole lot of refinancing activity in the private student loan space,” Remondi told investors in January.

Stephen Burd, a senior policy analyst focusing on education at the New America Foundation, a Washington policy group, said that Sallie Mae’s status as an industry leader influences how the broader market operates and could help to explain why refinancings are so infrequent.

“Sallie Mae is the biggest player in this space and if they were doing refinancings, other companies would have to follow their lead to remain competitive,” Burd said.

During U.S. Senate testimony last year, Remondi told lawmakers that students with Sallie Mae loans are benefiting without refinancings because most of the loans are co-signed by parents, and their interest rates generally are dictated by their parents’ credit scores.

“So, to some extent, they're already gaining the benefit of the parental co-signing on that account based on the interest rate at that time,” Remondi said.

“Very rarely do we see interest rates or more loan products being refinanced because the credit profile of the obligor has changed in such dramatic ways that change the overall interest rate structure,” he added. “And I think because of those two reasons, you see a very limited marketplace for private education loan consolidation and refinancing activities.”

In fact, in securities filings the company warns investors that if policymakers provide refinancing opportunities for student borrowers, it could negatively impact earnings, as high-rate debt is paid off and the company’s servicing volumes shrink.

“The adoption and implementation of any such proposals, individually or in combination, could significantly increase our costs, affect our ability to service and collect loans, significantly alter whether or not we remain in certain businesses and the form in which we do so and materially and adversely impact our business, financial condition and results of operations,” Sallie Mae warns investors of potential policy emanating from Washington.

The CFPB suggested this week that policymakers could stimulate refinancing activity by creating a program that would provide lenders such as Sallie Mae with cheap loans that would be secured by newly refinanced student loans as collateral. Such a program could resemble Sallie Mae’s multi-billion dollar credit facility with the Federal Home Loan Bank in Des Moines, for example.

The lack of competition and the prevalence of high-rate loans is having a broader impact than on Sallie Mae’s bottom line. It’s depressing America’s economy.

Millions of student borrowers are paying record relative interest rates on their government loans, according to a HuffPost review, frustrating efforts by the Fed to reduce borrowing costs for households and businesses.

The panel of senior U.S. regulators charged with safeguarding the financial system known as the Financial Stability Oversight Council recently warned that education loans may hamper economic growth and limit home purchases as overly indebted households and young workers cut back on consumption and borrowing. The panel joined the Federal Reserve’s interest rate-setting panel, the Federal Open Market Committee; the Treasury Department’s Office of Financial Research; the CFPB; and the Federal Reserve Bank of New York in alerting about the possible danger student debt poses to either financial stability or the broader economy.

“The whole student loan problem is a problem that should be of deep concern to this body,” cautioned CFPB director Richard Cordray during testimony last month before the Senate Banking Committee. “These are young people that we should care a great deal about.”

Cordray’s agency estimates that Americans owe $1.1 trillion from loans used to finance higher education, exceeding credit card and car loans as the second-largest source of household debt behind home mortgages. About $150 billion of their education borrowings are private, non-government guaranteed loans, roughly a quarter of which are owned by Sallie Mae, according to CFPB data and Sallie Mae’s securities filings.

“They’re the ones with the ambition, aspirations and dreams, and they're getting saddled with debt that they don't understand,” Cordray said of student borrowers. “It's holding them back and it's making them unable to rise and succeed and become leaders in our society.”

He added: “It's a significant problem and we're going to be doing everything that we can to address it at the bureau.”

Some members of the Fed’s rate-setting committee said in March that they viewed “the high level of student debt” as a risk to aggregate household spending over the next three years, posing a downside risk to economic growth, according to meeting minutes.

It was the first time the FOMC, which sets interest rates that affect trillions of dollars of loans and securities, had ever mentioned student loans as a possible risk to the economy, according to a review of past meeting minutes.

New York Fed researchers said last month that younger workers with student debt are less likely than their unburdened peers to have home mortgages or auto loans -- the first time that has been observed in at least 10 years and a worrying development for government officials who have long associated student debt with college education and better-paying jobs.

As policymakers search for solutions to the burgeoning problem of an indebted generation of college graduates, some lawmakers are zeroing in on mandating loan modification schemes or allowing more troubled student borrowers to discharge their unpayable debts in bankruptcy.

Sallie Mae says it supports allowing borrowers to discharge student debt through bankruptcy, subject to certain conditions. A company spokeswoman said that Sallie Mae has modified more than $1 billion in private education loans since 2009 with interest rate reductions or extended repayment terms.

Sallie Mae has already engaged with lawmakers on the issue. Federal records show the company spent more than $1.4 million lobbying members of Congress last quarter.

CFPB Pushes Student Debt Relief

2013-05-08T20:23:10-04:00

Households struggling under the weight of student debt burdens moved one step closer to a lifeline Wednesday, after the federal consumer regulator suggested that Washington policymakers consider government-initiated loan workout and refinancing schemes for distressed borrowers.

The policy options, culled from more than 28,000 comments on a Consumer Financial Protection Bureau consultation regarding student loan affordability, may guide the Obama administration's approach to reducing student debt burdens, which have outpaced inflation and earnings growth and are untethered to broader borrowing rates.

“We are concerned that unmanageable student loan debt may be harmful to recovering consumer markets and may be dragging down borrowers’ lives,” said Richard Cordray, CFPB director, who likened the current student loan market to the subprime market for home loans that led to the financial crisis. “We learned a hard lesson in the wake of the mortgage meltdown. We cannot just sit by and watch this happen to people again."

The report comes on the heels of an increasing number of warnings from policymakers, ranging from the Treasury Department to the Federal Reserve Bank of New York, concerned that high student debt burdens are dampening consumption and borrowing and may pose a risk to financial stability or economic growth. Of consumer debt, only home mortgages exceed the $1.1 trillion in outstanding student loans, according to CFPB and Federal Reserve data.

The CFPB report, too, warned that high student debt levels are preventing a generation of borrowers from saving enough for retirement, starting businesses or buying a home.

“There needs to be a significant attention if you believe that there's a broader impact on the economy and society of borrowers who are dealing with this debt today,” said Rohit Chopra, CFPB student loan ombudsman, describing what he called the “student debt domino effect on the broader economy."

The potential programs outlined in the CFPB report could help borrowers like Katie McKenna of Seattle. A 32-year-old nutritionist, McKenna has $138,000 in outstanding student loans, with most of that debt carrying an interest rate exceeding 8 percent.

"Preparing for retirement is not really on my mind. It's hard to conceptually put money away when I have so much debt," McKenna said. "I'm not doing savings, I'm not doing retirement; I'm curious about buying a house, but I'm not sure if that's a good idea.”

“Personally I don't plan to have children," she added, "but my dad told me the other day, jokingly, 'You can't have kids, you have too much debt.'"

Millions of student borrowers are paying record relative interest rates on their government loans, according to a Huffington Post review, frustrating efforts by policymakers to reduce borrowing costs for households.

The Financial Stability Oversight Council -- the collection of regulators charged with protecting the financial system -- recently cautioned Congress about the growth of education borrowings. Some members of the Federal Reserve's interest-rate setting panel, the Federal Open Market Committee, mentioned "the high level of student debt" as a risk to aggregate household spending over the next three years, posing a threat to economic growth, according to minutes from its March meeting.

Lawmakers are weighing legislation that could help borrowers reduce their debt burdens, either through bankruptcy, government-sponsored modifications or refinancing schemes. On Wednesday, Sen. Elizabeth Warren (D-Mass.) proposed legislation that would set interest rates on some student loans to the same rates enjoyed by banks that borrow from the Fed. Her bill would reduce rates from their current 3.4 percent to 0.75 percent for loans that would be funded by the Fed.

The CFPB report pointed to past government programs that benefited lenders, suggesting it may be time for an initiative that focuses instead on helping student borrowers. For example, a 2008 law called the Ensuring Continued Access to Student Loans Act (Ecasla) led to “some cases of extraordinary gains” when companies that owned student loans later sold them to the Department of Education.

Sallie Mae, the largest student lender and loan servicer, recorded gains of $284 million in the 2009 fiscal year and $321 million in the 2010 fiscal year off such sales, the CFPB said, citing Sallie Mae securities filings.

The company defended its actions in a statement, saying, “Given the dire circumstances the markets were facing at the time, this intervention afforded 6 million students to access higher education at an extremely low cost to the Department of Education."

The CFPB report also highlighted past government interventions in the student debt marketplace, such as programs by the Education Department and the Fed, as a basis for future action, and detailed a potential loan-modification scheme similar to an existing home-loan initiative run by the Treasury Department.

In addition, the consumer agency suggested a refinancing program that would rely on the Federal Financing Bank, a government corporation that borrows from the Treasury and lends to agencies and borrowers with government guarantees. Rural utility concerns are among the bank’s biggest beneficiaries, federal data show.

Cordray said a refinancing scheme “would make sense” because students who applied for loans were much riskier borrowers then compared to when they graduate and secure employment. “Given today’s historically low interest rates, there is a tremendous opportunity for lenders to take advantage of an underserved market,” he said.

Cordray also supported a loan modification program for borrowers with private student loans that tied monthly payments to “reasonable” debt-to-income ratios.

Ben Lawsky Weighs Crackdown On Private-Equity Firms

2013-05-07T17:24:13-04:00

New York's top financial regulator is drafting new regulations designed to crack down on private-equity firms that own insurance companies, a move that threatens firms such as Apollo Global Management LLC with restrictions that could curb earnings.

Benjamin Lawsky, Department of Financial Services superintendent, said Tuesday that he was "very concerned" about the increasing role of private equity-controlled insurers. Over the past year, private equity firms have roughly quadrupled their share of the indexed annuity market to about 30 percent and the fixed annuity market to about 15 percent, according to figures from his office.

Annuities are financial products that guarantee regular payments over a specified period of time. As the number of older Americans reaching retirement increases, annuities may gain in popularity as retired workers look to supplement their income with either fixed-rate products that deliver a steady amount of cash, or variable-rate annuities that fluctuate with the market.

The risk that a private-equity funded insurance company that has sold annuities may not be able to stand behind its commitments has state regulators worried, and Lawsky said his office is working on new rules designed to limit that risk.

"I'm not saying that a private equity company can never buy an insurance company, but we need to make sure we've thought through what that future looks like and what regulatory safeguards and guardrails we should put in place," Lawsky said in a speech in Albany, New York.

The Department of Financial Services is examining potential rules that could be modeled after regulations governing banking ownership, according to a person familiar with the matter. Banking rules typically require much more disclosure than current insurance regulations. The state regulator is also weighing whether to require the parent company of private-equity funds to guarantee the commitments of its insurance holdings, the source said.

Previously, Lawsky noted that private-equity firms rarely purchase banks because the "regulatory requirements associated with such acquisitions are more stringent than a private equity firm may like."

"These regulatory requirements in the banking industry are designed -- in part -- to encourage a long-term outlook, and ensure that the person controlling the company has real skin in the game," Lawsky said of banking rules.

Last month, Lawsky said he was scrutinizing what he called the “troubling role” of private-equity firms that were purchasing insurance companies.

In December, Apollo announced that its Athene unit would purchase Aviva Plc's U.S. annuity and life insurance businesses for $1.8 billion. The sale has not been finalized and awaits regulatory approvals.

During Apollo's quarterly earnings conference call with analysts and investors on Monday, Marc Spilker, the firm's president, dismissed analyst concerns over increased regulatory scrutiny of its insurance business.

"Athene is not an investment within a private equity fund," Spilker said. "And so, Athene has been primarily funded by a permanent capital vehicle. Athene is very well capitalized and it's very well positioned to take advantage of growth. It's led by a very, very experienced management team who is focused on creating safe, consistent long-term returns."

Lawsky said his office was concerned about firms such as Apollo because private-equity firms typically are focused on the short term, while the annuity business is "all about the long haul."

The risk is that "their focus is on maximizing their immediate financial returns, rather than ensuring that promised retirement benefits are there at the end of the day for policyholders," Lawsky said of private-equity firms entering the insurance market. "And -- because of their potential short-term focus -- there is a risk that these companies may not be delivering the level of compliance and customer service that we’d expect of them given the importance of this product to so many seniors on fixed incomes."

Private-equity firms that typically make high-risk, high-leverage investments aren't "necessarily a natural fit for the insurance business, where a failure can put policyholders at sigifnicant risk," Lawsky said. Insurance companies generally make conservative investments, he added.

With benchmark interest rates near record lows as the Federal Reserve attempts to stimulate borrowing and economic growth, companies and investors are having more difficulty finding relatively safe investments that generate attractive returns.

Lawsky said he's "very nervous" that as the so-called baby boomers near retirement the popularity of annuities will increase. Private-equity firms could be driven to generate higher returns on the pool of cash they collect from purchases of annuities by making aggressive investments.

Treasury Warns House Democrats On Derivatives

2013-05-06T17:42:38-04:00

The U.S. Treasury Department on Monday urged lawmakers to reject several proposals designed to roll back existing rules governing derivatives.

Jack Lew, the new Treasury secretary, made the recommendations in letters sent to the House financial services committee ahead of a scheduled Tuesday vote on the five bipartisan bills. Versions of some of the measures have been approved by the House in previous years, though none have passed the Senate.

Lew’s letters to Rep. Jeb Hensarling (R-Texas), committee chairman, and Rep. Maxine Waters (D-Calif.), ranking member, signal that the Obama administration intends to continue fighting efforts to amend the 2010 overhaul of U.S. financial regulation known as the Dodd-Frank Wall Street Reform Act.

“The derivatives provisions in the Wall Street Reform Act constitute an important part of the reforms being put in place to strengthen our financial system by improving transparency and reducing risks for market participants,” Lew said. “These reforms should not be weakened or repealed.”

Some had hoped that after President Barack Obama’s reelection in November, the administration would eventually come around to the view that the law should be modified. Lawmakers and industry executives have been waiting three years to weaken some of Dodd-Frank's most onerous provisions, particularly those related to derivatives.

The spate of proposed laws to be debated on Tuesday include measures put in place to restrict taxpayer exposure to derivatives-dealing banks and to limit the risk posed by swaps taking place overseas.

All five proposals enjoy bipartisan support. Lew’s letter could be interpreted as a warning to any House Democrats who are considering voting against the White House's wishes. “I urge members to oppose these bills and others like it that would weaken the important regulatory changes that Wall Street Reform has made to the derivatives market or in any way disrupt the ongoing rule-making process,” Lew said in the letter.

Though the measures face an uphill climb, they have been successful in pressuring regulators at the Commodity Futures Trading Commission, where officials face stretched budgets and limited resources in implementing rules designed to curb risk in the products that fueled the financial crisis.

For example, one House measure would exempt derivatives from several requirements if the contracts were between affiliates of the same company. Last month, the CFTC finalized a rule that would exempt some such contracts from some requirements that had been designed to limit risk.

“Regulators are already addressing many of the issues presented in these bills through their rule-makings,” Lew cautioned in the letter. “In many instances, legislation is premature and aspects would be disruptive and harmful.”

Another House measure would effectively kill the CFTC’s ability to apply its rules to U.S. affiliates of financial institutions operating overseas.

AIG, the bailed-out insurer whose derivatives activities brought the company to the brink of collapse in 2008, ran most of its swaps business out of London. Wrong-way bets on credit derivatives by a group of JPMorgan Chase traders led by the so-called “London Whale” caused more than $6 billion in losses last year and revived questions over whether some banks are “too big to fail”.

Gary Gensler, CFTC chairman, has warned repeatedly of the risks posed to the U.S. financial system if overseas branches and guaranteed affiliates of U.S. banks are not subject to the same rules as if they were located in the U.S. Losses that occur overseas would undoubtedly be borne by the U.S. parent, Gensler has warned, subjecting the U.S. to risks that would “come crashing back to our economy”.

Financial supervisors in Europe and Asia have decried Gensler’s approach, and have lodged their complaints in letters to Lew and his predecessor, Timothy Geithner.

Gensler has not been deterred, however, and Lew's letter may signal to foreign regulators that Gensler enjoys Treasury's support.

Read the letter below:

Hensarling Letter