When there is an epic financial crash in the U. S. that collapses century old Wall Street institutions and brings about the greatest economic collapse since the Great Depression, one would think that the root causes would be chiseled in stone by now. But when it comes to the 2008 crash, expensive corporate media real estate is happy to allow bogus theories to go unchallenged by editors. What is happening ever so subtly over time is that the unprecedented greed, corruption and unrestrained manufacture of fraudulent securities by iconic brands on Wall Street that actually caused the crash are getting a gentle rewrite. The insidious danger of this is that Wall Street is never reformed or adequately regulated – that it remains a skulking financial monster with its unseen tentacles wrapped tightly around every economic artery of American life, retaining its ever present strangulation potential. On August 10 of this year, Wall Street Journal reporter James Mackintosh penned the following astonishing sentence: ‘The global financial crisis began 10 years ago this week, when a French bank suspended three money-market funds. What savers thought was money turned out to be merely credit, and the realization rapidly trashed U. S. money-market funds and the global banking system.’
Apparently the Banks have been lobbying heavily, and expending significant amounts of money again, leaning on their Congressmen and pressuring regulators, saying that their capital standards need to be relaxed so that they can make more loans to stimulate economic growth. But that, according to the FDIC Vice-Chairman, is utter nonsense. “Hoenig, who was a high-ranking Federal Reserve official during the crisis, cautioned Senate Banking Committee Chairman Mike Crapo and the committee’s senior Democrat, Sherrod Brown, “against relaxing current capital requirements and allowing the largest banks to increase their already highly leveraged positions.” Using public data to analyze the 10 largest bank holding companies, Hoenig found they will distribute more than 100 percent of the current year’s earnings to investors, which could have supported to $537 billion in new loans.
On Wednesday, Janet Yellen testified before the House Financial Services Committee. Though the hearings lost much of their appeal when Dr. Ron Paul retired from Congress, the House Republicans have maintained a reputation for being far more hostile to the Federal Reserve than their colleagues in the Senate – managing to generate some worthwhile moments. While little news was made, with Yellen maintaining her support for generally low interest rates, there were some points made today worth noting. 1) Republicans Continue to Push on the Fed’s Subsidy to Wall Street Starting in 2008, the Federal Reserve has paid interest on excess reserves parked at the Fed. While this had never been done prior to the financial crisis, this policy has now become a vital tool for the Fed in setting short-term interest rates. As the Fed has increased the Federal funds rate, so too has it increased its ‘Interest On Excess Reserves’ (IOER), now paying 1.25% on the over 2 trillion banks hold at the Fed. This policy has drawn increasing criticism from House Republicans, and Yellen faced criticism from both Committee Chairman Jeb Hensarling and Rep. Andy Barr, who hold Dr. Paul’s old position as chairman of the monetary subcommittee. Accurately, both men highlight that this policy means the Federal Reserve – and by extension the US Treasury that would otherwise receive these interest payments – are directly subsidizing large Wall Street and foreign banks. Considering these IOER payments are projected to be $27 billion this year, it’s good to more attention be brought to this obvious example of Wall Street cronyism.
We have frequently called out the New York Times for running sycophantic articles on the big, mean, untamed Wall Street banking behemoths which just happen to be one of its home town’s largest industries and source of the biggest paychecks, which, in turn, boost its real estate markets, restaurants and retail sales – not to mention its own ad revenues. According to the Federal government’s Bureau of Labor Statistics, financial activities represented 468,600 jobs in New York City as of April 2017. According to a report from the New York State Department of Labor on New York City’s largest industries, as of 2014 the ‘average annual wage ($404,800) paid in the securities and commodity contracts industry is nearly five times the all-industry average annual wage ($84,752) for 2014.’ But today, the New York Times’ Editorial Board has joined Wall Street On Parade in expressing skepticism about the Federal Reserve giving a green light on the stress tests for 34 banks last week. After sounding the alarm about the Trump administration’s plans to roll back Obama-era reforms of Wall Street, the New York Times editorial raises the following concerns: ‘It’s entirely possible that the system is more fragile than the Fed’s stress tests indicate. By the Fed’s calculations, capital held by the nation’s eight largest banks was nearly 14 percent of assets, weighted by risk, at the end of 2016. ‘Alternative calculations of capital, including those that use international accounting rules rather than American accounting principles, put the capital cushion much lower, at 6.3 percent. The difference is largely attributable to regulators’ differing assessment of the risks posed by derivatives, the complex instruments that blew up in the financial crisis and that still are a major part of the holdings of big American banks.
Transparency International whacks at a central bank. The European Central Bank has found itself in the rare position of having to defend itself in the public arena following the release of a scathing report on its perceived lack of political independence. The report, published by anti-corruption watchdog Transparency International, argues that the institution has accrued new power and influence in the wake of the financial crisis but its code of conduct has not kept up with that newfound clout. It even suggests that the ECB should withdraw from the Eurozone’s Troika of creditors, precisely at a time that calls are rising for the creation of a European Monetary Fund. ‘The extraordinary measures taken by the ECB since 2008 have tested the ECB’s mandate (to ensure price stability) to breaking point,’ Transparency International EU said. ‘The ECB’s accountability framework is not appropriate for the far-reaching political decisions taken by the Governing Council.’
This post was published at Wolf Street on Mar 29, 2017.
In many other countries, excluding the United States, corrupt bankers are often brought to task by their respective governments. The most recent example of a corrupt banker being held accountable comes out of Spain, in which the former head of the International Monetary Fund (IMF), Rodrigo Rato was sentenced to four years and six months behind bars. According to the AFP, Spain’s National Court, which deals with corruption and financial crime cases, said he had been found guilty of embezzlement when he headed up Caja Madrid and Bankia, at a time when both groups were having difficulties. Rato, who is tied to a slew of other allegations was convicted and sentenced for misusing 12m between 2003 and 2012 – sometimes splashing out at the height of Spain’s economic crisis, according to the AFP. The people of Spain were outraged over the scandal as it was discovered during the height of a severe financial crisis in which banks were receiving millions in taxpayer dollars. Bankia was eventually nationalized and given 22 billion in public money.
This post was published at Zero Hedge on Feb 27, 2017.
The biggest banks on Wall Street, both foreign and domestic, have been repeatedly charged with rigging and colluding in markets from New York to London to Japan. Thus, it is natural to ask, have the big banks formed a cartel to rig the prices of their own stocks? This time last year, Wall Street banks were in a slow, endless bleed. The Federal Reserve had raised interest rates for the first time since the 2008 financial crisis on December 16, 2015 with strong hints that more rate hikes would be coming in 2016. Bank stocks never do well in a rising interest rate environment because their dividend yield has to compete with rising yields on bonds. Money gravitates out of dividend paying stocks into bonds and/or into hard assets like real estate based on the view that it will appreciate from inflationary forces. This is classic market thinking 101. Bizarrely, to explain the current run up in bank stock prices, market pundits are shoving their way onto business news shows to explain to the gullible public that bank stocks like rising interest rates because the banks will be able to charge more on loans. That rationale pales in comparison to the negative impact of outflows from stocks into bonds (if and when interest rates actually do materially rise) and the negative impact of banks taking higher reserves for loan losses because their already shaky loan clients can’t pay loans on time because of rising rates. That is also classic market thinking 101. Big bank stocks also like calm and certainty – as does the stock market in general. At the risk of understatement, since Donald Trump took the Oath of Office on January 20, those qualities don’t readily come to mind in describing the state of the union. Prior to the cravenly corrupt market rigging that led to the epic financial crash in 2008 (we’re talking about the rating agencies being paid by Wall Street to deliver triple-A ratings to junk mortgage securitizations and banks knowingly issuing mortgage pools in which they had inside knowledge that they would fail) the previous episode of that level of corruption occurred in the late 1920s and also led to an epic financial crash in 1929. The U. S. only avoided a Great Depression following 2008 because the Federal Reserve, on its own, secretly funneled $16 trillion in almost zero interest rate loans to Wall Street banks and their foreign cousins. (Because the Fed did this without the knowledge of Congress or the public, this was effectively another form of market rigging. Had the rest of us known this was happening, we also could have made easy bets on the direction of the stock market.)
Goldman’s former President and COO, who was recently picked to be Trump’s chief economic advisor as head of the National Economic Council, will recuse himself from any matters directly involving his former employer, the White House told the Financial Times. The topic emerged when the FT learned that the former “#2” at Goldman was spearheading Goldman’s lobbying at the US derivatives regulator on rules prompted by the role swaps contracts played in the 2008 financial crisis. As president of Goldman Sachs, Cohn attended four meetings in 2015 and 2016 with top officials at the CFTC to discuss the swaps rules mandated by the sweeping Dodd-Frank reforms, according to meeting records. As the FT adds, Cohn’s most recent CFTC meeting as a Goldman representative was on February 19 2016, according to the records. On the same day Trump was campaigning in South Carolina, where he mocked Ted Cruz and Hillary Clinton by saying Goldman Sachs had ‘total control’ over them. He ended his campaign by airing an anti-Wall Street ad that displayed an image of Goldman chief executive Lloyd Blankfein as Mr Trump talked of ‘a global power structure that is responsible for the economic decisions that have robbed our working class’.
This post was published at Zero Hedge on Feb 23, 2017.
This week the 115th Congress was sworn in, and there are some indications that Fed reform may be on the agenda. The combination of populist anger fueled by Ron Paul’s Presidential campaigns and the 2008 financial crisis coupled with the repeated failings of the Federal Reserve to meet their projections has created a rare window for monetary policy to be both politically advantageous, as well as so obviously needed that even politicians can see it. The question now is what sort of reform is on the table. Congressional Reforms Last Congressional session saw proposals from both the House and the Senate. From the House we have the FORM Act, which would require the Fed to adopt a monetary policy rule and explain to Congress whenever they deviate from that rule. The FORM Act also calls for an annual GAO audit of the Federal Reserve, doubles the number of times the Fed Chairman testifies before Congress, and makes some other tweaks to the makeup and protocol of the Federal Reserve Board. Since the FORM Act passed the House in 2015, there is a good chance we will see it resurrected in 2017. On the Senate side, Banking Committee Chairman Richard Shelby has pushed for the Financial Regulatory Improvement Act. Not only does it lack a catchy acronym, but its reforms to the Fed are far more modest than the FORM Act. The meat of the bill focuses on changes to the Fed board. The head of the New York Fed would no longer be appointed the banks board of the directors, but would instead be nominated by the President and confirmed by the Senate – just like the Federal Reserve Chairman. It would also grant powers to the Fed’s regional presidents that currently only reside with the board of directors. Though early drafts of the Senate bill called for the Fed to adopt rules-based monetary policy, this ended up being stripped from the final proposal due to Democratic opposition – largely because much of the Hill focus has been on the Taylor rule, which many Fed advocates fear is too restricting.
In the coming year, the United States will remain the overwhelmingly dominant geopolitical power in the global system, and President-elect Donald Trump will be at the helm. His presidency will mark a turning point as the first significant shift towards nationalism at the center of the US political system. As explained in our 2017 forecast, this rise in nationalism is a global trend, and one of three critical consequences of the 2008 financial crisis that will play a pivotal role in shaping geopolitics in 2017. (The other two are economic stagnation and instability in export-dependent countries.) Its rise stems from the rejection of the internationalist model that has dominated international relations since the end of World War II. In places like Europe, it is easy to see why internationalism is losing favor. It is less obvious for the US. The European Union (EU) put in place policies and regulations that prioritized the Union’s survival over national interests, and this inherently creates conflicts of interest between the bloc and member states. This was exacerbated by the 2008 financial crisis. Member countries saw their economies crash while their hands remained tied by Brussels, which was slow to act and offered a narrow range of Band-Aid solutions.
Toxic loans as a result of corruption, political kickbacks, fraud, and abuse. The Bank of Italy’s Target 2 liabilities towards other Eurozone central banks – one of the most important indicators of banking stress – has risen by 129 billion in the last 12 months through November to 358.6 billion. That’s well above the 289 billion peak reached in August 2012 at the height of Europe’s sovereign debt crisis. Foreign and local investors are dumping Italian government bonds and withdrawing their funding to Italian banks. The bank at the heart of Italy’s financial crisis, Monte dei Paschi di Siena (MPS), has bled 6 billion of ‘commercial direct deposits’ between September 30 and December 13, 2 billion of which since December 4, the date of Italy’s constitutional referendum. Italy’s new Prime Minister Paolo Gentiloni, who took over from Matteo Renzi after his defeat in the referendum, said his government – a virtual carbon copy of the last one – is prepared to do whatever it takes to stop MPS from collapsing and thereby engulfing other European banks. His options would include directly supporting Italy’s ailing banks, in contravention of the EU’s bail-in rules passed into law at the beginning of this year. Though now, that push comes to shove, the EU seems happy to look the other way. While attention is focused on the rescue of MPS, news regarding another Italian bank, Banca Erturia, has quietly slipped by the wayside.
This post was published at Wolf Street on Dec 18, 2016.
Some climate scientists, concerned with the warming impact of rising levels of carbon dioxide and other greenhouse gases in the atmosphere, have proposed that to keep temperatures cool what is needed is more pollution. More specifically, they suggest that more particulate pollution in the upper reaches of the atmosphere would reflect the sun’s radiation back into space and thereby have a cooling effect, as has been demonstrated in the past when large volcanic eruptions have led to years without summers. In a similar way, policymakers across much of the developed world, concerned about rising inequality, are recommending the introduction of a guaranteed minimum income. However, just as it appears senseless to send soot into the air to correct the atmospheric damage wrought by over a hundred years of fossil fuel burning, so too is it senseless to expect easy money for the poor to correct the damage caused by over 30 years of easy money for the banking system and the rich. The creation of money by central banks and the banking system has predictable consequences. As the economic thinker Henry Hazlitt wrote in his 1965 book, ‘What You Should Know about Inflation’ (keeping in mind that for Hazlitt, inflation refers not to an increase in prices but rather to an increase in the quantity of money): ‘Inflation makes it possible for some people to get rich by speculation and windfall instead of by hard work. It rewards gambling and penalizes thrift. It conceals and encourages waste and inefficiency in production. It finally tends to demoralize the whole community. It promotes speculation, gambling, squandering, luxury, envy, resentment, discontent, corruption, crime, and increasing drift toward more intervention which may end in dictatorship.’ From the early 1970s onwards, the ability of central banks and the banking system to create money from nothing has distorted the incentives upon which healthy market economies depend. While the reasons for expanding the quantity of money in circulation always seem benign, be they ‘to avoid a financial crisis’ or ‘to reduce unemployment’ the truth is that every dollar so created increases inequality while simultaneously sapping productivity.
This post was published at Mises Canada on OCTOBER 19, 2016.
Too big to fail is about to get tested once again. Deutsche Bank – Germany’s largest, and in many ways the embodiment of the global financial system – as you may have heard, is in a spot of bother. The U. S. government is considering imposing a fine of around $14 billion on the bank for selling faulty mortgage-backed securities in the run up to the financial crisis. That’s on top of the fact that Deutsche and other European banks have been struggling with negative interest rates, which are squeezing profits. In all, Deutsche Bank’s DB 6.79% market cap has now shrunk to nearly its proposed fine, provoking fears that the bank might have to be helped out the German government, or be wiped out. So far, Germany’s Chancellor Angela Merkel has said that there will be no bailouts for Deutsche Bank. But while Germany says it won’t stop a Deutsche bank failure, how worried should the U. S., and investors, be about it? Ultimately, the new regulations put in place since 2008 to contain Too-Big-To-Fail banks should mean that there will be no direct impact on the average American. But here are a few reasons why you should still keep an eye on it. Too Big to Fail was always a bit of a misnomer. What really makes a bank a risk to the financial system as a whole is the degree to which it is interconnected with other institutions, i.e., its ability to spark chain reactions of non-payment if it should ever default. By this measure, Deutsche is frighteningly indispensable. It’s a counterparty to virtually every major bank in the world, in virtually all asset classes. This illustration from an IMF report in June gives you some idea. This is why I argued yesterday that the German government, which together with the European Central Bank is responsible for supervising Deutsche, would be highly unlikely to let it fail in a disorderly manner la Lehman Brothers.
Wall Street would have to come up with billions of dollars in additional capital in a proposed revamp of the Federal Reserve’s annual stress tests that could also scrap some provisions that lenders have criticized. As the Fed has signaled for months, it is considering changes that would raise the minimum capital that the biggest banks need for a passing grade, Fed Governor Daniel Tarullo said Monday. But the Fed is also mulling concessions that Wall Street has sought, such as eliminating its assumption that lenders would continue to pay out the same level of dividends and buy back shares during periods of financial duress, he said. The plan shows that even after a litany of new rules and capital demands imposed on the biggest banks in response to the financial crisis, regulators still aren’t satisfied that Wall Street is safe enough to endure another economic tsunami. Tarullo, the Fed’s point person on regulation, conceded that the proposal ‘would generally result in a significant increase in capital requirements’ for the largest lenders. The overhaul tries to incorporate all the new capital requirements into the stress tests, which already represent the highest hurdle that U. S. banks must clear to show they can survive a hypothetical crisis. A particularly heavy mandate for Wall Street giants is an extra surcharge each firm has to maintain based on their size and complexity. For JPMorgan Chase & Co., that surcharge means an extra 3.5 percentage points of capital.
Jesse Felder published an incisive bubble finance chart over the weekend. It is yet another reminder that Janet Yellen and her merry band of money printers are oblivious to the dangerous speculation and valuation excesses that their policies have implanted throughout the financial system. Relative to disposable income, the value of household financial assets now far exceeds the last two bubble peaks. And that has happened in an economic environment which suggests just the opposite. To wit, valuation multiples and cap rates should be falling owing the fact that the productivity and growth capacity of the US economy has been heading south ever since the turn of the century. *** What is even more striking about this chart is what’s hidden behind the denominator. Since the eve of the financial crisis in 2007, a rapidly increasing share of DPI (disposable personal income) has been accounted for by the explosive growth of transfer payments. Needless to say, transfer payments do not represent newly produced income that can be capitalized into the value of aggregate societal wealth. By definition, transfer payments are extracted via taxation from the incomes of current producers – – or via taxation of future incomes if they are funded with increased government debt.
China’s smaller banks have never been more reliant on each other for funding, prompting rating companies to warn of contagion risks in any crisis. Wholesale funds, including those raised in the interbank market, accounted for a record 34 percent of small- and medium-sized bank financing as of June 30, compared with 29 percent on Jan. 31 last year, Moody’s Investors Service estimated in an Aug. 29 note that analyzed central bank data. Shanghai Pudong Development Bank Co.’s first-half earnings showed its short-term borrowings and repurchase agreements surged by 75 percent in the past three years, while its consumer deposits rose just 24 percent. Policy makers have sought to sustain an economic recovery by keeping the seven-day repurchase rate at around 2.4 percent for the past year, a level that has encouraged borrowing for investment in property, corporate bonds or risky loans, often packaged as shadow banking products. China’s banking regulator told city banks last week to learn the lesson of the global financial crisis and get back to traditional businesses. CLSA Ltd. estimates total debt may reach 321 percent of gross domestic product in 2020 from 261 percent in the first half. ‘Contagion risks are definitely rising,’ said Liao Qiang, Beijing-based senior director for financial institution ratings at S&P Global Ratings. ‘The pace of the development is concerning. If this isn’t stopped in time, the central bank will lose some control and flexibility of its monetary policy.’
Possibly the defining business trend coming out of the financial crisis has been a ‘startup boom.’ Everyone is building an app or starting their own business it seems. This image, however, may be just an illusion, according to Michelle Meyer, US economist at Bank of America Merrill Lynch. Both the formation of firms (for example, McDonald’s as a whole) and establishments (an individual McDonald’s restaurant), have dropped off precipitously since the financial crisis and remained low. This is important, according to Meyer, because new businesses typically hire faster and produce higher levels of productivity than firms that have been around for a while. Thus the decline in business formation can explain some of the labor market’s postrecession problems, and is at least part of the reason for the steep drop in productivity. Additionally, Meyer says, it can end up affecting the nation’s gross domestic product. Here’s Meyer (emphasis added):
Call bond-market veteran Bill Gross a ‘broken watch.’ He doesn’t care. His gripe about negative interest rates and a flood of debt, which he considers a risk, not a fix, for a global economy that’s still limping out of the financial crisis, is challenged daily by resilient demand for the bonds he’s bearish on. But even if being ‘right’ eventually is a hard sell right now, he’s not backing down, Gross said in his latest monthly commentary. ‘The problem with Cassandras, such as Gross and Jim Grant and Stanley Druckenmiller, among a host of others, is that we/they can be compared to a broken watch that is right twice a day but wrong for the other 1,438 minutes,’ Gross wrote. ‘But believe me: This watch is ticking because of high global debt and out-of-date monetary/fiscal policies that hurt rather than heal real economies.’ Germany, Switzerland, France, Spain and Japan are among countries that have negative yields on government-issued debt. Their hope is that cheap, even free, borrowing raises inflation and revives asset prices that can filter through economies; they argue extreme policies have been needed. Gross and others have argued that rates, including those at the Federal Reserve, at near zero or below won’t create sustainable economic growth and actually undermine capitalism.
THE most dramatic moment of the global financial crisis of the late 2000s was the collapse of Lehman Brothers on September 15th 2008. The point at which the drama became inevitable, though – the crossroads on the way to Thebes – came two years earlier, in the summer of 2006. That August house prices in America, which had been rising almost without interruption for as long as anyone could remember, began to fall – a fall that went on for 31 months (see chart 1). In early 2007 mortgage defaults spiked and a mounting panic gripped Wall Street. The money markets dried up as banks became too scared to lend to each other. The lenders with the largest losses and smallest capital buffers began to topple. Thebes fell to the plague. Ten years on, and America’s banks have been remade to withstand such disasters. When Jamie Dimon, the boss of JPMorgan Chase, talks of its ‘fortress’ balance-sheet, he has a point. The banking industry’s core capital is now $1.2 trillion, more than double its pre-crisis level. In order to grind out enough profits to satisfy their shareholders, banks have slashed costs and increased prices; their return on equity has edged back towards 10%. America’s lenders are still widely despised, but they are now in reasonable shape: highly capitalised, fairly profitable, in private hands and subject to market discipline. The trouble is that, in America, the banks are only part of the picture. There is a huge, parallel structure that exists outside the banks and which creates almost as much credit as they do: the mortgage system. In stark contrast to the banks it is very badly capitalised (see chart 2). It is also barely profitable, largely nationalised and subject to administrative control.
The simple fact of the matter is that 2012 wasn’t supposed to happen. By every orthodox prediction and theory about the set of tools deployed after the Great Recession (after it, the first clue) there was no reason to suspect anything but the usual cyclical occurrences. Sure, the recovery would be weak because the recession large, but retrenchment was never even considered. The recovery might be somewhat shallow, but there was no way it could be bent or durably altered. The first rebuke to the mainstream came from Europe. Though the European economy would fall right back into recession so soon after the ‘Great’ one, it was easily dismissed as a product of Greece, debt, and the demographics of Greek debt. So tantalizing was its allure, the European debt crisis of 2012 even made its appearance within excuses for China. China’s fixed-asset investment has already started to pick up and a jump in spending on railway construction would echo the expenditure on rail lines and bridges that was part of stimulus during the global financial crisis. A decline in foreign direct investment reported by the government today underscored the toll that Europe’s debt woes and austerity measures are taking on Asia’s largest economy. I honestly have no idea how Bloomberg News got from European ‘austerity measures’ to the vast Chinese slowdown other than to skim the surface of stories that just happened to be occurring at the same time. In other words, it is the same logical fallacy that pervades mainstream ‘understanding’ of how the world supposedly works; correlation doesn’t suggest causation.