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The Fed is risking a second Depression by putting pressure on banks to raise more capital,...
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Tuesday, June 7, 2011, 4:47 PM ETThe Fed is risking a second Depression by putting pressure on banks to raise more capital, analyst Dick Bove writes in a scathing note that accuses the central bank of losing "all sense of reality." Banks must be allowed room to lend money and conduct business but are being handcuffed by onerous capital restrictions, Bove believes.
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If you are a business owner or self employed, there is no money available for you. From one extreme to another but this has been true for over 2 years now.
Whether I agree with his particular concerns or not, this is a great quote.
The banks could liberate a lot of capital for constructive purposes if they would just stop writing trillions upon trillions of derivatives on interest rates and foreign exchange, not to mention CDS.
When they will have freed up capital by stopping that nonsense, it will be available for their necessary social function as financial intermediaries. They can lend it out, rather than tie it up in speculation. And the economy will benefit accordingly.
Just a thought, but if these big banks would drop the derivatives, they would be far simpler, more transparent, and much easier to analyze from a risk management point of view. Maybe they would not need as large of a buffer.
Increasing capital in and of itself will not cause a depression,recession,or anything else,because the money would just be moving from where it is employed today to where it would be employed at a bank.
What could cause a depression/recession is if the regulators force the bank to hold that extra capital in a non-productive use. So if they lower the leverage ratios permitted to banks the total business the bank could do would be less with a given amount of capital, thereby reducing the overall amount of business activity in the economy. But in that case the recession/depression would be caused by the regulators,not by the banks,just as the Fed caused the Great Depression of the 1930's.
Exactly. This really nails the crux of the problem.
Two decades of financial "innovation" have revealed the man behind the screen to be focused on his pay package and not on the risks to the security of his employer or the tax-paying public.
These changes are likely to mean that the profits of the financial "industry" will no longer represent so significant share of GDP.
I personally welcome such a change. Never have so few been paid so much for such irresponsible behavior.
Just pay them a buck a year in salary like Jobs. Then tie their compensation back into stock options with an emphasis on loan losses as the central jewel of that compensation.
"This is a generational opportunity to buy (bank stocks) on the cheap."
Why does SA quote this idiot without revealing his clear conflicts of interest?
New banking has very little of this left. Today fee income drives profitability not "net interest margins". Hedging risk and financial derivatives produce large profits to support million dollar salaries. Lending to small and mid-sized companies requires some training, skill and knowledge. Banks no longer train "lenders" they only train "relationship managers", whatever they are.
The once simple business has become complicated and the many layers of existing government regulations do not lend themselves to institutions keeping expenses low. The answer is not simple because the cow is already out of the barn but it includes going back to basics if anyone can find their way.
Here's my question. If the banking business is such a great business and you can leverage 40 : 1 and do all kinds of cool things in derivatives, etc...why the heck wouldn't investors want to invest in these banks for the chance to make tons of money. I'm not a banker, but I suspect you can lend invested capital just as easily and with the same multipliers as deposits?
Higher rates of invested capital would lower FDIC premiums, improve the soundness of the banking system, decrease the risk of systemic failure, and give the banks interest free capital to lend.
So what's wrong?
All of them, or their legacy subsidiaries, have breached their representations and warranties made in order to sell or securitize mortgages. And few of them have credibly reserved for their putback liabilities.
Plus, while derivatives may be cool, they are not really very easy to understand. The balance sheets of these too big to fail banks consist of derivative liabilities and derivative assets, amazingly the derivative assets are always more than the liabilities. It's amazing because they keep passing the same risk around and around in a big round robin, and although it should be a zero sum game it is not. Everyone wins.
Until somebody has to be voted off the island. Last time it was Lehman Brothers and AIG.
Why would anyone want to invest in these banks?