CautiousInvestor

Big Banks: The Consensus Is Cracking

I wish King had gone further and observed that most of the policies advocated by this administration are delusional: financial reform, healthcare reform, environmental reform and pending educational reform.

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

If we put aside the arguments put forth by Charles Calomiris and concentrate upon the author's headline question, it is immediately apparent in the most narrow sense its the management and the equity stakeholders of too-big-to fail institutions that most immediately benefit the doctrine. Knowing their firm is backstopped by the US Treasury, management of TBTF institutions will be inclined to take outsized risks to generate profits that will increase their bonuses and the equity values of their firms. If the risks are kept within bounds, all is well; if the risks are too great and deals fall apart, the losses will be socialized. As Volcker and Mervyn King have noted, this mentality can not be regulated away.

New Era of Wall Street Wealth, In Part Courtesy of Washington D.C

This uniquely focused and distorted era of wealth is a product of misguided policies that have allowed a select few to prosper, made things worse for most, destabilized the economy and concentrated wealth in ever fewer hands. Failing to correct underlying problems or broadly stabilize the economy, government has made things worse by broadening gaping income disparities and (as noted by Washington's blog) by:

(1) Throwing trillions of dollars at the "too big to fails", instead of admitting that many of them are insolvent

(2) Undermining trust of nations all over the world in the American economy

(3) Failing to restore Glass-Steagall, reign in credit default swaps, or do anything else necessary to stabilize the financial system

(4) Attempting to restart high levels of leverage and securitization

(5) Failing to take real measures to decrease employment and increase manufacturing

(6) Creating an enormous debt overhang and trashing our currency

BofA and Stating the Obvious About Bank Profits

"Shown above are securitized AAA securities backed by 2007 vintage (that is, bottom of the barrel) subprime home-equity loans Why is their price so high? Because the Federal Reserve continues to buy huge amounts of mortgage backed securities, and because the Treasury and Fed are providing ultra-cheap, non-recourse financing for banks (through Public-Private Investment Partnerships) to buy these securities."
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We have socialized banking system losses through Fed purchases and there is now discussion of extending this program of purchases of MBS which will invariably leave the Fed with losses. ( no wonder they oppose an audit ) It's incredible the lengths we have gone to satisfy the demands of the banking oligarchy: TARP, accounting changes, payment of interest on reserves, a fraudulent bank examination disguised as a stress test, delays in financial reform, preservation of the too-big-to fail doctrine and allowing banks to recapitalize by renting Treasury's balance sheet under FDIC guarantees.

Diana Farrell And The White House Theory Of Bank Size

In addition to the too-big-to fail doctrine and regulatory capture, the real reaon there will not be meaningful reform, including reducing size and concentration, is that the bankers/brokers effectively control the administration through ownership of congress. From Washington's Blog:

Lobbyists from the financial industry have paid hundreds of millions to Congress and the Obama administration. They have bought virtually all of the key congress members and senators on committees overseeing finances and banking.

This is easy to confirm in black-and-white. See for yourself: here, here, here, here, here and here.

Manhattan Institute senior fellow Nicole Gelinas says:

The too-big-to-fail financial industry has been good to elected officials and former elected officials of both parties over its 25-year life span

And economic historian Niall Ferguson says:

Guess which institutions are among the biggest lobbyists and campaign-finance contributors? Surprise! None other than the TBTFs [too big to fails].

No wonder two powerful congressmen said that banks run Congress.

No wonder two leading IMF officials, the former Vice President of the Dallas Federal Reserve, and the the head of the Federal Reserve Bank of Kansas City have all said that the United States is controlled by an oligarchy.

With the exception of a handful couple of Congress members who have the American people's interest in mind, Congress is bought and paid for.

Why Is Goldman a Bank Holding Company?

Andrew Sorkin does a good job of painting the turmoil roiling markets just before the decision to allow Goldman to become a bank holding company; there was a pervasive crisis of confidence marked by a rush for cash. After being approved as BHC Goldman had acces to liquidity provided by the New York Federal Reserve, received TARP monies and rented the Treasury's balance sheet through issuing debt with FDIC guarantees.

Your second question is perhaps more interesting:

-Why is Goldman Sachs allowed to maintain leverage ratios significantly higher than the large legacy bank holding companies like Wells Fargo, Bank of America (BAC), JPMorgan (JPM) and Citigroup (C)?

-Why is Goldman allowed to operate like a private equity company, holding large stakes of foreign non-financial corporations? (I should note that Financial Holding Companies do have ten years in which to sell their stakes)

-Why is Goldman (and other large banks) allowed to operate like a hedge fund and take outsized risks with capital via large proprietary trading operations. Most of Goldman’s profits are coming from this area. At least Deutsche Bank (DB) has offloaded these bets onto hedge funds in which it invests. Given the fact that the large too-bog-to-fail financial institutions have received a large backstop from the taxpayer, the fact that they are loading up in prop trading shows that regulation in the U.S. is non-existent.

-Why is Goldman allowed to have an interest in the failure of other financial firms? We now hear that Goldman has an interest in the failure of CIT (CIT), a major lender to small-and medium-sized businesses. These perverse incentives are everywhere in the derivatives world and were an enabler of the financial meltdown and the principal reason AIG was bailed out with taxpayer money.

I think the answer to that question lies in the dark corridors connecting Wall Street, Treasury and the Fed, whose identities are becoming increasingly blurred. It is also seen in the unwillingness to (1) institute meaningful financial reform, (2) reinstate Glass Stegall and (3) abolish the too big to fail doctrine.

Too Big to Fail - Everyone but Washington Knows What Needs to be Done

Jamie Dimon is being a bit disingenuous when presssing for resolution authority to wind down a massive bank holding company when twenty five or so holding companies, including JP Morgan, have been deemed systemically vital and too big to fail. Plus, to wind down a large holding company with international operations is a beast of another color. If the resolution is passed, its significance will be largely symbolic. Curbing casino activities, however, along with other measures is real reform.

If the FDIC Is Broke, Why Are They Still Issuing Guarantees?

The banks are being asked to prepay three years of premiums and to prevent banks from taking a hit to earnings they will be able to expense the premium in accordance with the calendar year or quarter; the rest will appear as an asset in the form of prepaid expenses. The flip side of this, which is hilarious to those that have grown jaded, was explained in Time:

The problem with the FDIC's solution is it does nothing to keep its fund officially out of the red. That's because the same accounting that allows banks to hide the costs will prevent the FDIC from marking up its own assets. Just as the banks get to add an asset to their balance sheet for the money they are prepaying, the FDIC has to book a liability for the money that it has received from the banks but is not actually entitled to yet. That liability will lower the balance of the FDIC's fund by the same amount that it is boosted by the prepayment. That means, at least on the books, the net effect of the prepayment for the FDIC fund will be nada. So even with the $45 billion coming to it, the FDIC will look broke, and probably stay that way until sometime in late 2012. And that raises the question as to how much a boost in confidence the prepayment plan will be to the banking system. "Does it really spook people that the FDIC has a negative number?" says Miller. "To the public, I think, it is less spooking than borrowing from the Treasury. That's why they are doing it. It's a p.r. thing."

If the FDIC Is Broke, Why Are They Still Issuing Guarantees?

Since they will not impose actuarially sound standards, the FDIC has become a link in a chain of insolvency. Ultimately they will borrow from Treasury who, in turn, will reach to global financial markets to borrow monies that will never be repaid.

The Coming Consequences of Banking Fraud

If we look back at recent economic history and look for bubbles that have imploded, we quickly come upon the S&L crisis, the commercial property bubble (Japan), the emerging market bubble (we helped fuel it), the dot.com bubble and most recently the housing crisis.

In each case, successive bubbles were fostered through irresponsibly loose monetary policy that distorts normal market signals, encouraging speculation and consumption. And in each case the bubbles collapsed through tightening of credit to address imbalances and speculative excesses but well after the fact.

The Japanese experience is eerily similar to our recent crisis as that it was brought on by a high rate of domestic savings (we had China) easy money, loose oversight, an influential cartel and lax underwrting standards. Their response was to raise interest rates and then lower them when the scope of damage became apparent; the stock market cratered as did commercial and residential real estate prices.

The Japanese economy stagnated for the next decade and for a variety of reasons, including demographics and aging population, it is only a shadow of its former self. Most of this is a result of a farrago of poor policy responses to the crisis and a stubborn unwillingness to force the zombie banks to writedown indisputably bad assets.

Despite our unwillingness to force the banks to writedown bad assets, the unprecedented scale and scope (global) of current monetary and fiscal policy clearly has the potential to create the next bubble and I believe it will. Understanding that the effects of our monetary policy is not restricted to our shores, the massive injections of liquidity do not have to remain within the US and will trickle towards the next puddle of speculative excess.

If I am correct in where I think it will be.....and its just speculation on my part though alarm bells have already been heard.....it will be a big one. But that's part of the process; each bubble gets bigger, each inflicts ever more damage and each new bubble requires ever greater amounts of liquidity.

U.S. Government Needs to Take Heed as Banks Re-Submerge

From the article:

"Wait, coaxing banks to lend in the most inadvisable of enviroments? That's just the brutal spiral of a pyramid-scheme: tomorrow's continual growth is necessary to cover yesterday's liabilities."

A nice summary of current policy direction but thus far the banks are not biting because they carry too much baggage in the form of impaired (toxic) assets. These were politely overlooked at the last meeting of the G20 where platitudes take precedence over original thinking and where form trumps substance.

America: A Bona Fide Plutonomy

While we have inordinate concentrations of wealth, current strife turns upon politics and visions for the state.

Obama wants to turn the country into some type of communitarian state envisioned by the Jacobins at the time of the French revolution; the idea is no more workable today than it was then.

We have abandoned many free market principles, allowing the state to grow uncontrollably and invade every nook and cranny of our lives. This bloated monstrosity, at all levels, employs workers loyal to the current political apparatchik and will vote accordingly. Their interests are aligned with unions and ever growing government.

In addition to expanding this loyal base of support, Obama want to create a new middle class stemming from state sponsored healthcare and "green" jobs with the proviso that these new members, who are likley to be unionized, follow the party line. His aim is to create a one party system.

As these new middles class are created and the existing middle class snuffed out, so much the better.

Bailouts: Revisionist History

While I prefer some of the more extreme measures, maybe Treasury could have engaged in some long-term planning(several forward looking weeks) by making CAP (TARP) monies available simultaneously with a hastened version of the soap opera viewed on CNBC as the stress test. Instead,we gave them the money only wind up negotiating with the oligarchs after we had given away the store. As to the underlying financial soundness of the program it is not profoundly shocking the most credit worthy institutions with the best business models were the first to repay CAP monies. Before we break out the bottles, lets see what happens with GM, Chrysler, AIG, the agencies and other black holes.

Post Traumatic Crash Disorder?

A number of the technicals were starting to scream sell; a strong sell came from the McClellan (AR) Oscillator which has been descending and was just touching zero (sell at zero when the signal line comes from ablove) late last week.

Your comments on the traders playing out the sentiment and momentum play are interesting because there are in for a day on a day trade or a couple of days on a swing. This is is exactly why the four junk stocks have acounted for 30% or so of recent volume.

Without delving into the fundamentals of this market, which in a manner of speaking do not exist or are either weak, the moves since the 666 lows of March have been characterized by low volume, imbalances between large cap and small cap, low grade issues enjoying big moves and serious and unrestrained excesses in valuations.

Key Factors Driving the Market

While not disagreeing with anything said, what I have observed is broad, alternating themes of (1) reflation which is accompanied by strength in commodities and equities and (2) deflation which is accompanied by strength in the dollar and US Treasuries.

These relationships can be see here:

stockcharts.com/charts...