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September 30, 2011 by John Jay

The Federal Housing Finance Agency (FHFA), the conservator of Fannie Mae and Freddie Mac, recently announced that Freddie Mac used faulty analytical methodologies relating to mortgage buybacks in its US$1.35 billion settlement with Bank of America. In effect, FHFA contends that Freddie Mac underestimated questionable 2005 to 2007 Countrywide-originated mortgages and did not take into account teaser-rate loans, whose credit risks differ from more traditional mortgage products. The FHFA senior examiner concluded that the settlement was inadequate and that Freddie Mac had done so in order to preserve its relationship with Bank of America, a large underwriter of loans used in Freddie Mac’s production pipeline.

Apparently, the odd man out is the U.S. taxpayer.

September 30, 2011 by Kunal Pandya

This week we learned that health insurance premiums have increased by around 9% over the past year, most of which is currently covered by employers. This increases the burden of healthcare costs on employers, and on smaller employers in particular. Further, the constant rise in premiums raises red flags about how coverage is going to be handled by smaller employers already teetering on the edge of being unable to provide insurance coverage for their employees. The rise will likely shift momentum toward more employers opting to provide cheaper plans with higher deductibles and fewer benefits. The consumer-directed healthcare plan market, which grew around 15% to 20% in 2010, will also see a spike in adoption under these changed circumstances.

September 28, 2011 by Bob McDowal

One the key recommendations within the U.K. Independent Banking Commission’s report of retail-banking ring-fencing in the U.K. focused on encouraging retail-banking competition in the U.K. As one of the conditions of its receipt of public money during the financial crisis, Lloyds Banking Group (LBG) committed to divesting a retail banking business by November 30, 2013. This business, known as “Project Verde,” is composed of 632 branches, approximately 5.5 million customers, around GBP 64 billion in assets (around GBP 16 billion in risk-weighted assets), and GBP 32 billion in liabilities. The cost of the disposal will depend on the nature of the buyer, but could be up to GBP 1 billion.

September 26, 2011 by John Jay

With much fanfare, the supposed bank risk-reduction proposal named after former U.S. Federal Reserve Chairman Paul Volcker has bumped up against market realities. As originally envisioned, this bank regulation was supposed to make proprietary trading a thing of the past (i.e., impermissible for banks to use bank capital to make risky trades on their own behalf). The rationale behind this was that depository institutions that had government-related guaranteed deposits (i.e., FDIC) should not have the ability to take risk positions as principal.

September 21, 2011 by Clark Troy

Some three years ago AIG became a household name on account of the antics of AIG Financial Products -- antics that were most inconveniently overlooked by a senior management seemingly incapable of understanding what was going on there, regulators who were equally incapable of doing so, and derivatives market counterparties who should have understood what was going on, but apparently found it amusing to pass the buck all the way to the edge of the precipice only to be made whole  by the sanctity of contract under the Troubled Asset Relief Program (TARP).