Kinabalu

Ultimately, Who Benefits from Too-Big-To-Fail

A review of FRB staff studies reveals a 1994 review of Merger Performance Studies in Banking, 1980-93, and an Assessment of whether bank mergers actually yielded any effeciency gains.

www.federalreserve.gov...

Conclusions? "findings indicate consistently that bank mergers do not generally result in gains in efficiency or general operating performance."

Ultimately, Who Benefits from Too-Big-To-Fail

"Given the technological advances that were occurring in the 1990s, it is very possible that much of the productivity experienced across all industries had more to do with a secular movement in technology as opposed to efficiencies realized by managerial acumen."

We have a winner!! Give the man a Kewpie Doll. The FDIC promoted bank mergers for 2 decades because they thought that larger banks had lower loss ratios. They never tried to claim that larger banks were more efficient because all of American industry was experiencing productivity improvement.

TooBigToFail has refuted the loss ratio concept but now someone is trying to ascribe broad productivity gains to merger activity? Except for monopolistic situations, mergers have traditionally been shown to have ineffective results across industries. Banking is no exception.

Debunking the 'Too Big to Fail' Myth Once and for All

"Indeed, some very smart people say that the big banks aren't really focusing as much on the lending business as smaller banks."

One of the few real nuggets in the article. Unfortunately there is also some real dreck like:

"The Obama administration could break the "too bigs" up in a heartbeat if it wanted to, and then justify it after the fact using PCA or another legal argument."

The thought that the government could easily, or effectively, fix the TBTF problem is really delusional.

Should You Invest in Banking Stocks?

The biggest banks, C, JPM, GS, and BAC, have much higher exposure to derivatives than the rest of the banking industry. The recent ruling in the Lehman bankruptcy that throws out the counterparty netting provision of the ISDA master derivative agreement substantially increases the risk exposure of those agreements and those banks.

Are Banks Being Naughty Again with Derivatives? Could Be Good

"Of the $600 trillion in derivatives market, the amount at risk is currently about $555 billion, a less shocking number, but still a large amount"

The OCC, in its second quarter, 2009 report on bank derivative activities, reported that net current credit exposure, the primary metric the OCC uses to measure credit risk in derivatives activities, DECREASED $140 billion, or 20 percent, to $555 billion.

While the fact that a significant decrease occurred is important it should also be noted that the OCCs metric reflects counterparty netting where the bank has a legally enforceable bilateral netting
agreement, a common provision in the ISDA master agreement that most derivative contracts are based on. In that event contracts with negative values may be used to offset contracts with positive values with the same counterparty. This assumption is explicitly counter to the recent landmark ruling in the Lehman bankruptcy which throws out that provision.

Derivatives Datapoint of the Day

Notional amounts are highly irrelevant to risk exposure of an individual company OR to systemic risk. This is because for certain types of derivatives the actual risk may be 1-2% of the notional amount (fixed rate/floating rate swaps) while for other derivatives the actual exposure may be as much as 60-70% of the notional amount (the protection side of certain Credit Default Swaps). The types of derivatives are much more important than the notional amounts. Anyone who argues that increasing notional exposure increases systemic risk is missing the point.


On Sep 28 02:17 PM Roger Knights wrote:

> "Notional amounts are completely irrelevant."
>
> To risk exposure, maybe. But that's not what Felix was talking about.
>
>
> And Karl Denninger (I think it was him) has argued recently that
> increasing notional exposure increases systemic risk, because if
> one major participant goes bankrupt, the market for all derivatives
> seizes up and all participants are impacted. This, I think, is what
> Felix is worried about.

Derivatives Datapoint of the Day

Derivative exposure is made much more important by the recent ruling in the Lehman bankruptcy that throws out a material provision of the ISDA master agreement.

www.financeasia.com/ar...

The International Swaps and Derivatives Association master agreement governing most derivatives transactions says that a counterparty does not need to make payments if the other party suffers an event of default and, needless to say, bankruptcy is classed as such an event.

The court ruling would prevent the solvent counterparty from avoiding its out of the money obligation to an insolvent counterparty. This could significantly increase the potential obligations of a major derivative holder.

High Frequency Trading: We Fear What We Do Not Understand

"People who understand equity trading know that this is just the culmination of technology advancement and competition for spreads, which has resulted in equity bid/ask spreads being narrowed to their lowest levels ever."

However there is more to market liquidity than bid-ask spreads. Liquidity also requires an orderly market. While bid-ask spreads are down the VWAP (Volume Weighted Average Price) in the last two years is far more volatile than ever. The only possible explanation for that is HFT. These programs are highly effective at finding market participants upper buy limits and lower sell limits. Speeding up that discovery process eliminates the markets historical price smoothing function.

Trading is a zero sum game. If these HFT programs are making a lot of money they are doing so at the expense of other market participants and increasing the volatility of the market at the same time. I'm not so sure that's a good thing.

Pandit's Loaded Gun

"Bair has stated publicly that Pandit should not be CEO of a bank. Her convoluted logic holds that people who are not bankers, and who do not understand either the business or the regulation of banking, should not be given free hand to own and operate banks.

I'm no fan of Sheila Bair, but if she can marshall the FDIC troops to take a similar stance on Goldman, I may reconsider. Goldman has repeatedly stated, since becoming a bank holding company, that they have not changed their business model, and that their 14:1 leverage ratio is low.

Who Watches over the New York Fed?

"the majority of views should be separate from Wall Street and ensure that Wall Street's actions are serving the interests of the entire economy"

I would agree with this conclusion. The problem is getting financial expertise on the Board and not political noise. My first reaction to seeing Denis Hughes on the board is negative. What does a journeyman electrician and union organizer know about the operation of a central bank.

Not Buying This Rally

"The leadership sectors of banking, insurance, REITS, retail and casinos have all started to roll over, and look like they are going lower."

This is a pretty broad statement. GSE mortgage REITs have, for the last six months been blessed with a license to print money. Current financing spreads, which are not likely to change soon, are an ideal environment for these companies.

A Bull Market That Few Are Buying

Wobatus -- don't feel bad. I got three negative votes for barely suggesting there might be some internal contradictions in Momintn's post. He probably has multiple sign-ins.


On May 13 05:47 PM wobatus wrote:

> OK, my 2 (thus far) negative recommenders, how is what i said wrong?
>
>
> Bear Stearns was just an investment bank. Same with LEH. Same with
> Merrill. None of them were hypbrid commercial/investment banks, yet
> they were the poster boy "fails."
>
> What did Morgan Stanley and Goldman do? become banks proper.
>
> How were Merrill and BSC "saved"? Shotgunned into mergers with banks.
>
>
> Not saying this helped said banks.
>
> But all the i-banks are gone. None of them were post-Glass-Steagall
> hybrids, but none exist as investment banks any more.
>
> And banks that had nothing to do with investment banking also tanked.
>
>
> So repealing Glass Steagall didn't cause their downfall. The answer
> to these questions, what caused the collapse, isn't "Glass-Steagall
> was repealed." There were a lot of factors.
>
> Further, there are investment bank/commercial bank hypbrids in other
> countries besides the U.S.
>
> I agree that commercial banks or that side of business, with insured
> deposits and now explicit government backstops, needs effective regulating.
> I just don't know that saying you can't do both is the be all answer.
> Does that imply that our i-banks can just be cowboy risk mongers?
>
>
> In any event, if you have pure investment banks and pure commercial
> banks both failing, and in fact representing the most glaring examples,
> it is hard to say repeal of Glass Steagall caused the problem. <br/>

A Bull Market That Few Are Buying

Interesting comment considering that the Glass-Steagall repeal bill was signed by President Clinton.


On May 10 10:10 AM Momintn wrote:

> The biggest mistake of all was made years ago by allowing commercial
> banks to become investment banks. Once you allow banks who are regulated
> by the government to trade in risky classes of investment products,
> then anyone could have foreseen the consequence of where we are today.
> And instead of holding these decision makers responsible and doing
> a proper investigation for possible fraud thereby at least removing
> them from their executive position, these same men are regarded as
> advisors to our most highly-elected office. If our government can
> investigate someone's sexual acts, you would think they could investigate
> the people who caused this demise of our stock markets and our economy.

What to Expect if GM Doesn't Learn from Chrysler

"GM cannot modify its stock exchange offer to bondholders because the company has been told by the Treasury Department that it cannot go above 10 percent of the company’s equity, Henderson said"

GM has to structure their own negotiations without the government talking to any of the parties behind their back. The FDIC totally undercut Wachovia and WaMu attempts to negotiate merger agreements by talking secretly with potential merger partners. Why would the UAW agree with anything GM management proposed if someone is telling them secretly, or openly, that the other parties (lenders, dealers, and government in this case) won't get more, and maybe even telling them what they can expect.

This is really starting to smell.

FDIC Regulation: Reason for Alarm

The primary problem in both the Wachovia and WaMu situations was the FDICs practice of negotiating secretly with the same potential acquirors that Wachovia and WaMu were openly pursuing. This display of bad faith by a protected governmental entity made it impossible for either bank to complete a transaction to protect its investors.