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With a record of poor shareholder returns, why do the TBTF banks (JPM, C, BAC) even exist,...
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Friday, May 25, 2012, 9:05 AM ETWith a record of poor shareholder returns, why do the TBTF banks (JPM, C, BAC) even exist, writes Sheila Bair. Capital markets certainly wouldn't finance such "unstable behemoths" if it weren't for their de facto government backstop. Jamie Dimon can provide a better return to shareholders by recognizing his bank is worth more in smaller pieces.
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I will not defend JPM, however Bair's methodology seems to have spun round 180 degrees, or?
She called her buddy, Dimon and handed WaMu to JPM in an organized heist, (WaMu was more liquid than JPM at the time) and NOW they are too big....break them up?
When did she (Bair) get a dose of morality?
From what I understand, it was ONLY Dimon and Bair, uless of course he lied in this interview:
FDIC officials told the FCIC that they had known in advance of WaMu’s troubles and thus had time to arrange the transaction with JP Morgan.
JP Morgan CEO Jamie Dimon said that his bank was already examining WaMu’s assets for purchase when FDIC Chairman Sheila Bair called him and asked, “Would you be prepared to bid on WaMu?” “I said yes we would,” Dimon told the FCIC.
“She called me up literally the next day and said—‘It’s yours.’ " I thought there was another bidder, by the way, the whole time, otherwise I would have bid a dollar—not $1.9 BIL USD, but we wanted to win."
Quite clear, or?
Think about it. Do you really believe that Bair moved a bank the size of WAMU by herself? And with all the problems that were swirling around at the same time?
(Of course, we know there were other, "far more sinister" shadows lurking about at the time, point taken.)
I worked lead on a Class Action representing a group of European Investors, and am very well versed in the particulars. It was actually far worse than most think.
Washington Mutual had $307B in assets, $188B in deposits, 2239 branches, 4,932 owned and branded ATMs, and 43,198 employees at the time of seizure. They had multiple subsidiaries that were sold as well.
Although a review conducted by the Offices of Inspector General for the FDIC * and the U.S. Treasury Department concluded that WaMu failed because of its high-risk loan strategy, a strategy made worse by the bank’s liberal mortgage underwriting and poor oversight of its operations, they were indeed quite solvent when they were seized, or in exchange for no charges being filed against it's Officers, shall we say "surrendered"?
* (I called the OIG FDIC at the time to start an inquiry against Bair, and was told "they would not serve their boss up to ANYONE on a silver platter.", which then prompted a call to SEC. Never did get an answer, still waiting.)
See:
http://bit.ly/KIMJ7y
Officially decided, by the Court, that WaMu was indeed quite solvent, full stop.
Strange isn't it, how someone can secure $307 BIL USD in assets, for a fire sale price of under $2 BIL USD?
Bair at FDIC, decided that $1.888 Billion was a fair price for the bank., no comment.
* It is interesting to note that the auction offer presented by the FDIC permitted banks to bid $0.0 for the bank, and also totally ignored the stockholders and bondholders, as well as other liabilities of the bank.
* The FDIC required ONLY the administrative costs for the transaction, and held the bank for only a few hours before ownership was transferred to JPMorgan.
* Washington Mutual Bank was forced to file Chapter 11 the following day. They lost $26 Billion in stock of WAMU (WMB) due to the bank seizure.
SO.....due to the bank’s "liberal underwriting" and "poor oversight of its operations"?
HANG ON!,........ that sounds just like JPMC............or ?
Will JPM now also be seized following this logic?
If not, why not?
Short answer - JPM is not deemed to be "critically under-capitalized" as was WAMU at the time it was seized/sold.
The FDIC may legally compel a bank's chartering authority to revoke a bank's charter, even while the bank is technically solvent.
This is one of but several critical risk factors that are unique to bank common stock investments. Complacency with respect to such risk is not limited to European investors, but is wide-spread here in the U.S., even among certain highly regarded pros.
And as mentioned elsewhere JPM has a lot of capital.
Obviously you did not bother to read the Court document in my comments which state WaMu was indeed far better capitalized than you personally may think.
They (WaMu) had double the capitalization at the time of their seizure, than JPM has now.
I find it quite strange why so many blindly trust and defend JPM at this time? Personally, I prefer the pragmatic approach, i.e.,"show me".
See for yourself.
Please check JPM balance sheet: (will suffice for general purposes)
http://bit.ly/KHkbeX
Assets: $2.3 TRIL USD
MINUS
Liabilities: $2.1 TRIL USD
______________________
Net Worth $ 190 BIL USD
Something is wrong here.
Check cash flow.
I smell trouble. Word here in London this morning, total exposure to Iskil's CDX IG 9 trades = $100 BILLION USD
Can you say "bank run"?
Show us a spreadsheet.......?
Exactly.
We have all the information we need here from regulators to support our side. EBA will back our claim, as they ARE the authority if you are:
A. a bank
B. doing business in Europe
You see, I don't do this for fun, I do it under European Supervisory Authority. (EC / EBA / ESRB) at Admin. Level 16.
Rather than continuing to torment us all with your blind defense of JPM, just simply provide us with the basis for your viewpoint, regards this particular issue at hand, JPM's pseudo "capitalization", with a simple spread sheet.
Out with it, c'mon.
Instead of jumping all over the page, JUST answer the question at hand.
You just pulled this with SDNS, when she called you out on changing the TBTF argument to suit your opinion.
This isn't rocket science, if you are an Economist, it should be a walk in the park. Show us your document in support your claim of JPM's "alleged" capitalization adequacy.
You can't, because here are the facts.
JPM has failed to meet CRD IV requirements to date, common knowledge. According to the Official Report:
- Failure to meet minimum Tier 1 Capital requirements
- Shortcomings in liquidity risk management, including stress
testing
- Asset and liability maturity mismatches; catastrophic failure
* Funding liquidity risks arise because inflows and outflows of funds at banks are not synchronized. A bank is ONLY deemed to be liquid, as long as at each point in time outflows of funds are smaller or equal to the sum of inflows and its stock of liquid assets.
Summary:
- Certain capital instruments did not fulfill loss absorption, permanence and flexibility of payments criteria
- List of regulatory adjustments incomplete or applied not to a
relevant layer of regulatory capital
- Lack of harmonization in application of regulatory adjustments
- Tier 1 capital ratios reported by banks and, thus, their capital is not reflective of their capacity to absorb losses on a going-concern basis, chiefly among them, JPM.
As the crisis deepened and banks faced growing losses and writedowns, their fundamental solvency was called into question, leading to broader financial instability and necessitating extensive public sector support.
CONCLUSION:
Current Tier 1 capital ratios reported by banks are not reflective of their capacity to absorb losses on a on going-concern basis, chiefly among them, JPM.
Inform yourself:
http://bit.ly/Kpyd5k
http://slate.me/KCg0jh
http://bit.ly/Kpye9j
Either you are short JPM or just have a burr in your saddle about JPM. I have no position just to be clear. Your "bank run" bit in another post is entirely ridiculous which makes me think you are short the stock.
I am fine with your analysis on capital which is a little less than $200 Billion. If you have more losses than that then fine we have a problem. If you don't then time to go back to work.
WAMU was a dead man walking. And I have never seen anyone post a spreadsheet on SA in a comment because it is text only.
$307B in assets sold for $1.9B, sickening...
The $307 Billion in assets casts off an earnings stream or a loss which is what primarily drives the company's valuation. WAMU had a ton of problem loans on the books and it was getting worse. Troubled companies are bought for their assets plus premium if they are healthy but when they are not healthy then look out below.
Your denial cannot change the facts.
I included a Court document supporting the fact that USG admitted, that WaMu was indeed solvent at the time of it's seizure, and there were no subsequent grounds for this action.
Solid evidence.
Recorded facts.
"And I have never seen anyone post a spreadsheet on SA in a comment because it is text only."
That's almost cute, we will simplify it for you.
For beginners:
http://bit.ly/KHkbeX
http://bit.ly/MYlDM6
We know you refuse to read the "balance sheet" (also a spreadsheet).
A modern "spreadsheet" file consists of multiple worksheets (usually called by the shorter name sheets, eg. BALANCE SHEET).
Key to healthy debate = Cogency
I fear you will have to Google that as well.
The point is now mute.
Cheers.
Always watching and listening!
Hope the markets are treating you well.
Watch: (WTI Crude) short down to around 82.00
(EUR/USD) short down to around 1.20
Indications are strong, but caution a must, as always.
Shalom
-Lawrence B. Lindsey, economic advisor to George W. Bush
(This statement seems to contradict your assertion)
2012 - 23
2011 - 89
2010 - 157
2009 - 140
1994 - 15
1993 - 50
1992 - 181
1991 - 271
1990 - 382
1989 - 534
1988 - 470
1987 - 262
1986 - 204
1985 - 180
1984 - 106
I don't think 2009-2011 were all that bad. Aren't there something like 8000 banks in the US?
It is You that has missed the point. The TBTF Ivy brains are rewarded to take ever larger risks...with your money. This is a system that will continue to fail when risky gains produce bonuses and losses are SOCIALIZED. The corruption between WS and Congress is putrid and is contributing to our fall from empire.
Regarding risk, if a large bank is carrying $500 Billion of loans or 10,000 banks are carrying $500 Billion of loans the risk is the same to the system with the only caveat that the large bank may hedge the loan portfolio better than the small 1000 banks. Most other countries have a few large banks that dominate the space and they have not had the problems we have had in the US. So what is our problem?
Better root cause analysis needs to be done on the latest financial crisis and it is not TBTF. That is a red herring. And saying a large bank uses depositor funds is hyperventalion when the banks equity and earnings are what pay for losses and then the FDIC and other backstops. By that logic I could say that anyone taking a loan from the bank is using depositor funds as the loan is an investment by the bank.
I have smaller banking options if I desire. Just leave them alone (In good times and bad) and let depositors know that is your intent. They will then get smarter and choose the most prudent options for their deposits.
All of you big bank haters please remember this, Big Countries & Big Companies want to do business with equivalent banks. Do you think these giants want to go to the Spedunk Savings & Loan Company for their needs?
Get rid of JPM,C,Bac,etc. & in a year or 2 Shelia & all her fans will be doing business with a GIGANTIC Chinese or Russian Bank !
You are absolutely spot on. Other countries have huge banks and they help their economies function in the broader economy. And TBTF is really a smokescreen for the real issue which is when you have systemic failure of an industry like housing all banks will be hammered that participate. Small banks used real estate as their bread and butter and they got creamed. BofA bought CW which was absolutely stupid although the government was twisting their arm. JPM took on WAMU and the jury is still out on that acquisition. Wells Fargo was fine. Citi was the only really stupid large bank. AIG was an insurance company.
If we are going to carry out the TBTF logic then clearly our federal government is the worse offender as they are being bailed out by the Federal Reserve in keeping interest rates low to fund the debt. And what about GM and other large companies?
Sheila sees the world through a small bank prism because that is all she works with and she is likely miffed that the Federal Reserve really has oversight on the large banks and she is not a big player in that sphere. But she has done a pretty good job dealing with all the issues on her plate so she deserves credit for that.
Yes large corporations need large financial institutions to provide banking functions to global enterprises, but small individuals do not need JPM to establish branch banking and credit card functions. And real-estate owners do not need JPM or Goldman or MS in the residential real estate market.
That is an ongoing discussion/arguement that has its pros and cons. My sense is that derivatives are the heart of the discussion and in my mind if they don't all go on an exchange with transparency then anyone who wants to play in deriviatives opaquely can do it outside of the banking system. We need transparency in these FI's.
Further discussion about separating banks from IB's has to realize that IB's traditionally borrowed a lot of their funds from the banks so the separation is not a chinese wall so to speak. Maybe the ultimate truth is that any risk behavior in the economy can ripple across other sectors and entities regardless of legal structures so the real issue is how do we manage risk?
Putting that aside I think big banks are necessary.
I laughed out loud when I read: "Spedunk Savings & Loan"
I prefer "Podunk" myself, but "Spedunk" will do.
Hope the markets are treating you fairly.
The TBTF banks also were under governemnt pressure to make more loans to the less than prime borrowers. However, it grew out of control due to securitization of these loans with many banks utilizing this procedure to remove the weaker credits off their books via the bond market and believing the risk was gone while the fee income machine will go on forever minting what seemed like risk free income. This also led to loans being made on inflated values that the banks likely knew were moving too high too fast, but if they weren't going to hold the loan then if wasn't their problem.
I am reminded of the saying " I am from the government and I am here to help" as being a phrase that many misunderstand since the last word help really needs to be followed by "myself".
On another matter, taking "risks" is absolutely necessary for recovery and growth.
JYPD
We don't see a lot if any large banks failing for their own individual reasons we typically see a wave of failures tied to a specific asset category.
So who has been the largest player in RE the past 70 to 80 years? Our fabulous federal government that is only trying to help us all and then they wonder why so much is now on their balance sheet. Please stop helping.
at the expense of the BAC shareholders in Dec 2007 and 2008.
Frankfurt, Germany
The problems of the banks could not of happened without the agencies dedicated to oversight ignoring their jobs. Even today the Todd-Frank or ANY laws we have on the books will not suffice. There can still be another blackmail for bailouts.
One or two sentences can stop this in the future but no one is willing to put those sentences into law.
1. All personal assets will be forfeited if any abuse of funds is deemed to be inconsistent with the objectives of the institution goals. They will include, but not be limited to, cars, boats, houses, pensions, savings accounts, airplanes, etc.
2. All misappropriations of funds will carry a felony criminal indictment with jail time. There will no longer be a FINE without admitting guilt.
Pretty simple, huh???
I would also venture that if you add up all the losses from small to medium sized banks in the past 40 years you will be looking at a big number and perhaps larger than a supposed TBTF.
Now the conversation is getting goofy. What do you want them to insure? And how do you measure it?
Legislators are idiots just grandstanding to give the appearance they are doing something and trying to make us all believe it.
The issue is simple. How do you measure systemic risk? And how do you measure the system? What is the system? Insurance works on the premise that you can define something, measure it and then understand probable outcomes and then insure the infrequent outcomes that are undesirable.
More broadly the failures we have suffered in the past 40 years are from a failed industry, with government involvement at every level, namely home lending and that impacted banks regardless of size. Outside of Citi and likely Wachovia the largest banks did quite well and bailed out the government. The government's two largest agencies failed completely so 100% of the government involvement failed.
As a taxpayer I am looking for insurance against our TBTF Fed government.
I don't agree with your premise that large banks are the issue. And you don't understand my point. If we have let's say $500 Billion of bank real estate loans in the US I don't care if it is under 1 bank or 1 million banks. If the RE industry goes sour the taxpayer is the ultimate backstop if it is bad enough. Our wide spread bank problems thus far continue to be in RE so let's deal with the real world and not fight imaginary problems.
With the exception of Citi this has been our experience. Citi should have been shredded but Robert Rubin was a director so he likely held off the pitchfork crowd.
I see what you're saying but I don't agree that a particular investment sector (e.g. real estate) is going to have evenly spread risk. We saw exactly this in 2007-9, where some banks had really let risk get out of hand (Wamu, e.g.) while others such as JPM and BAC had mostly avoided that risk. (BAC jumped into Countrywide near the end, but had the good sense to stay away before then).
The FDIC works. You keep saying insurance can't work but the fact is FDIC works well. Even with the meltdown, FDIC avoided taxpayer losses and was able to unwind the smaller banks that were in its purview. If we'd had a similar pool for TBTF, it's entirely plausible that TARP could have been mostly avoided and the unwinding wouldn't have needed to involve increasing the size and therefore the political influence of the largest banks and the distribution of taxpayer money as bonuses to those who helped crash the system. AIG would still have been a problem, because it's not a bank, so this isn't a perfect solution but it's still a more appropriate allocation of responsibility.
I also disagree that it was real estate that crashed the financial system. Financial instruments, derivatives, with unlimited leverage are what crashed the financial system.
Keep in mind that WAMU and CW chose RE as their specialty many years ago so they were already committed in that direction. Banks cannot change that quickly as their loan officers and distribution networks are specialized. The net of it is that they had more risk than say JPM because that was the industry they chose many years before the bubble hit.
I don't have a problem with the FDIC per se I just don't believe we separate large from small FI's and then spin our wheels on differences and try to figure out where that line lies. Risk is all over the sector and needs to be managed and anyone thinking it is in the large banks is not looking at the bank failure records very closely. Small banks are always very exposed because they don't have many tools to protect their investments from volatility.
TARP was not about insurance it was the bazooka saying the government was "in it to win it" and they put a floor under the industry without saying who was really in trouble.
RE would have crashed regardless of instruments because the bubble was induced by low rates, speculation and bubble fervor. Similar to the DOT.COM bubble around 2000.
Your point?
"TARP was not about insurance"
No one said it was. The insurance would be to avoid future replays of TARP. Hurricanes are not "about insurance" either. Risk sharing for the cost of hurricane damage IS about insurance.
"RE would have crashed regardless of instruments"
And again...your point?
You're making a lot of statements but they don't add up to anything. It was the enormous leverage on the financial derivatives that led to this being a financial crisis. If it weren't for that leveraged loss, we'd have had something closer to a commodities bubble, which would have been a much softer landing. Wamu could have been handled under FICA while Merrill, Lehman, and AIG wouldn't have become black holes of financial leverage capable of swallowing the entire global economy. Leverage was the problem, not real estate.
TBTF is indeed a macro policy.
Your explanation is spot on.
Marc Labonte shared this a few months back:
http://bit.ly/KMY5U8
You really don't understand root cause analysis.
TBTF is a red herring. Keep chasing it though as politicians have you by the nose pointing you in a direction that leads away from them.
As stated above BAC provided a huge assist to the government with the Merrill (good for BAC) and the Countrywide (very bad for BAC) acquisitions. For those good deeds, BAC is now essentially an operating subsiidiary of the Fed with no real leeway to do anything not approved by HQ in Washington (despite paying back all TARP money with interest as well as warrants). In case anyone doubts this, just look how BAC has reduced their size under the heading "New BAC" which is an ongoing effort to reduce the size of the bank and make them less problematic for the parent.
JPM had more leeway given their reputation and Dimon's image as the best of breed CEO of a large money center bank. Now that has changed, and JPM will likely be told to shrink the size of their presence in many derivative markets by HQ down in Washington ultimately impacting liquidity in the markets where they were the dominant player and furthering the de-leveraging trend by banks globally.
Finally, it should be noted that taxpayers MADE MONEY on the TARP funds to the TBTF banks and taxpayer money being spent outside the financial sector should now be the focus and an important issue for this year's election.
I would only quibble on one point and that is the Fed Government is what is TBTF not the FR. The FR is the last backstop behind all the downstream players doing stupid things and they are struggling with accommodating Congress and the President who are failing all of us.
\
#1 You can lose 100%(that is the best one)
#2 Infinite loss potential CDS shorting stock selling uncovered calls
Initnity is where Jamie is now and not out and now it is known the other side the trade will press him hard.Truly ironic that Bear was allowed to fail for doing this by the US Government(Ms. Blair) given by Jamie the "expert" who did the same thing.Government did this by delegating incorrectly Stay away until the dust settles much lower on Captitulation.The coast is NOT clear.
Agreed, it is the Federal government that is TBTF and despite the fact that Fed is supposely independent the two are very much linked. With the Fed's balance sheet near $3.0 trillion with treasuries and agency paper, the question is what happens if they hold all the paper to maturity (likely) and the Treasury pays/prints the dollars to the Fed? The Fed has already injected these dollars into the system, hence the potential inflation worries, although I believe the banks are using much of this liquidity to reserve and write off bad loans/mortgages which should reduce the concern over a hyper inflation cycle. However, once the Fed has cash from redeemed bonds/notes on their balance sheet, what do they do? The Fed by law remitts any profits they make to the Treasury every year, do they send the cash back to the Treasury? Is national debt reduced? Clearly, further so called reinvesting of the matured paper (either directly to Treasury or from the market) will be viewed as very inflationary and the dollar will suffer, although so far the world seems ok with the dollar and the Fed's POMO injection to the money supply. Sorry, to get off topic here, but to me this is the $3.0 trillion question.
The FDIC is unaccountable. This is a mark against Ms. Bair and something she did not adequately address during her tenure. The problem with financial institutions (and public companies) is lack or dearth of transparency and disclosure. Surprises and lack of transparent accounting always have adverse effects and perturb markets. Moral hazard is also an issue, made worse by implied government backstops that are unaccountable.
If the government continues unable to discipline them, then the label Too Big To Jail is justified - and the matter should be considered settled: They are too big.
Banks are paying heavily for various sins if you bother to notice.
Banks are paying heavily for their sins? Apparently, that doesn't include jail time for egregious, massive violations like fraud - or even potential murder (yes, murder - ask Andrew Maguire).
It's a very simple matter: if they are above the law as regards jailtime (or even prosecution, in many cases), then they are the government's superiors. They ARE the government, de facto.
Immunities are of two types.
1) functional immunity, or immunity ratione materiae. This is an immunity granted to people who perform certain functions of state.
2) personal immunity, or immunity ratione personae. This is an immunity granted to certain officials because of the office they hold, rather than in relation to the act they have committed.
As long as we can read, we certainly can dispel with the opinions of the Justices presiding.
Since the Constitution was written in an overly "user friendly" style (having been intentionally dumbed down), I feel quite confident in my comprehension of its contents, and their subsequent meaning, regards the law.
Add a Due Diligence Packet for Presidential Candidates. A Committee will convene to screen applicants BEFORE they are allowed to campaign, to make sure they meet or exceed the Constitutional requirements for a Presidential Candidate.
Hopefully, this will reduce the mudslinging and libelous tactics we must suffer through in the election process.
Thus....I would support your "pre-screening" strategy. And no one should be allowed to vote who pays ZERO Federal Income Tax. And, no corporation should be allowed to contribute to a candidate if they pay ZERO Federal Income Tax.
There, I said it.....I feel much better now. And it's not even Friday.
Correct.
They are chosen for their ability to take a caning in the Press as well as the history books, when blamed for whatever the shadow government decides to enact or enforce during their tenure.
Actually, it is ILLEGAL for POTUS to accept a foreign award.
Article I, Section 9, of the Constitution, the Emolument Clause, clearly stipulates: "And no Person holding any Office of Profit or Trust under them, shall, without the Consent of the Congress, accept of any present, Emolument, Office, or Title, of any kind whatever, from any King, Prince or foreign State."
If he REALLY went to all those prestigious schools, AND taught law, certainly it would have dawned on him, or at the very least the, people who concocted his background story and bio.
With of course all due respect, to the OFFICE, of the President of the United States.