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.
The fall of South Korea’s biggest container line Hanjin Shipping Co. is similar to the 2008 collapse of Lehman Brothers Holdings Inc. and has materially impacted the shipping industry, Seaspan Corp. Chief Executive Officer Gerry Wang said. Seaspan, the Hong Kong-based container-ship leasing company that has three vessels chartered to the distressed line, is evaluating all options and examining systemic risks resulting from Hanjin’s bankruptcy filing, Wang said in an interview with Bloomberg Television. In June, Wang had rejected Hanjin’s requests for charter-rate cuts before the shipping line filed for court receivership last month. ‘The fallout of Hanjin Shipping is like Lehman Brothers to the financial markets,’ Wang said. ‘It’s a huge, huge nuclear bomb. It shakes up the supply chain, the cornerstone of globalization.’
Eight years ago Wednesday, Lehman Brothers collapsed into bankruptcy. To stem the panic, the feds launched the biggest bailout the world has ever seen. In rewarding failure, America allowed a broken, corrupt financial system to flourish – and, yes, has invited populists like Donald Trump to take the stage. The latest example of how greed is not good, especially when it’s backstopped by government guarantees: Last week, federal regulators revealed that Wells Fargo, the country’s third-largest bank, had opened 1.5 million bank accounts and 565,000 credit-card accounts without customers’ permission over the past five years. How could that happen? At least 5,300 workers engaged in what the government calls ‘abusive’ acts: using a customer’s personal information from one legitimate account to open another one, and then taking money from the real account to put it into the fake one. Workers went so far as to create fake e-mail addresses and PIN numbers. And why would this happen? Wells Fargo wanted to grow – and so it rewarded workers who opened new accounts. Employees were ‘spurred by sales targets and compensation incentives,’ the government notes.
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 $2.08 trillion wiped off global equity markets on Friday after Britain voted to leave the European Union was the biggest daily loss ever, trumping the Lehman Brothers bankruptcy during the 2008 financial crisis and the Black Monday stock market crash of 1987, according to Standard & Poor’s Dow Jones Indices. Global markets skidded following the unexpected result from the June 23 referendum, in which Britons voted to withdraw from the EU by a 52 percent to 48 percent margin. Markets in mainland Europe were hit the worst, with Milan . FTMIB and Madrid . IBEX each down more than 12 percent for their biggest losses ever. Britain’s benchmark FTSE 100 . FTSE was down nearly 9 percent at one point on Friday, but rallied to close down 3.15 percent. The route started in Asia, with the Nikkei . N225 down 7.9 percent, and carried over into Wall Street as the S&P 500 fell 3.6 percent. Mohit Bajaj, director of ETF trading solutions at WallachBeth Capital LLC in New York, said the severity of the sell-off was partly due to investors misreading the outcome and betting the wrong way.
A little noticed 2008 email from former Federal Reserve Chairman, Ben Bernanke, raises serious questions about his official narrative on the collapse of Lehman Brothers. We’ll get to the email in detail, but first some necessary background. A lot of eyes rolled on Wall Street last October when Ben Bernanke, who chaired the Federal Reserve in the lead up to and during the financial collapse in 2008, released his memoir of the financial crisis with the title: ‘The Courage to Act: A Memoir of a Crisis and its Aftermath.’ Many Wall Street observers felt the title would have more correctly captured the facts on the ground had it read: ‘The Lack of Fed Courage to Supervise Mega Banks Led to an Epic Collapse.’ (In the leadup to the crisis, the Fed allowed Citigroup CEO Sandy Weill and JPMorgan Chase CEO, Jamie Dimon, to sit on the Board of its Federal Reserve Bank of New York, among numerous other conflicts of interest.) Throughout his memoir, including Chapter 12 titled ‘Lehman: The Dam Breaks,’ Bernanke goes to great pains to paint a portrait of the Fed and himself as being intensely on top of the situation at Lehman Brothers from March 2008 forward, following the Bear Stearns collapse and its absorption by JPMorgan Chase.
In 2015, equity investors looking for yield suffered death by 394 cuts. Last year, the number of dividend reductions far surpassed 2008, according to Bespoke Investment Group, citing data from Standard & Poor’s. The ratcheting down of payouts to shareholders is a function of weak commodity prices, sluggish growth dampening corporate profits, and a tightening of credit conditions. This combination – and in particular the stingier lending – could exacerbate the carnage already seen this year in financial markets, further dampening economic activity. The number of payout cuts enacted was almost 100 more than at the outset of the Great Recession – a time when the implosion of Lehman Brothers Holdings Inc. caused equity markets to plummet in the later stages of the third quarter:
Since Lehman Brothers went bankrupt in September 2008, the world’s central banks have injected more than $12 trillion under QE (Quantitative Easing) programs into financial markets. More than $26 trillion of government bonds are now trading at yields of below 1% with over $6 trillion currently yielding less than 0%. These policies, according to policy makers, have been crucial to the ‘recovery.’ Stock market valuations have increased but remain reliant on low rates and abundant liquidity. The effect on the real economy is less clear. Policy makers argue that without these actions to support growth, employment and investment would have been weaker. It is a proposition that is, of course, impossible to test. Whatever the initial benefits, low rates and unconventional monetary policy are increasingly counterproductive. And now there is increasing confusion about future interest rate policy. Markets expect that stronger U. S. employment numbers will drive a rate rise in December. Puzzlingly, Federal Reserve Chair Janet Yellen has also hinted that more QE or negative interest rates are also possible, should conditions dictate. There is little agreement among Fed governors about the appropriate policy path for the U. S.. Meanwhile, other central banks are cutting rates.
Suddenly, many of my students are reading Michael Lewis’ ‘The Big Short.’ Even in a real estate development class! Having read Lewis’ book (I can’t wait for the movie with Christian Bale and Brad Pitts!), I thought I would explain the subprime crisis in a few, colorful charts. First, Lehman Brothers declared bankruptcy on September 15, 2008. But Lehman knew they were in trouble before that date (hint: Bear Stearns was sold to JP Morgan Chase in a fire sale in March 2008). Here is what was going on. First, subprime loans helped boost the housing bubble, at least until home prices started to fall.
The average American, scraping to get by, put food on the table, pay the mortgage, has no time at all to drill down and root out the real facts that would enable him or her to separate propaganda from the economic reality facing the U. S. and the rest of the globe. That’s why we created Wall Street On Parade. It’s a labor of love for our fellow citizens to give you a meaningful jungle guide to survive this era of unprecedented corruption and hubris with a roof still over your head and a shirt on your back. In a few years, when you look back, you’ll realize ‘jungle guide,’ if anything, was a serious understatement. This morning stock markets around the globe are flashing red. The perceived wisdom is that the news driving stocks lower is a report out of China that its imports plunged 17.7 percent year over year in September, the 11th straight decline. Make no mistake about it, just as Lehman Brothers was set up to take the fall for triggering the 2008 collapse, China is being groomed as the new scapegoat for the coming crisis. But China’s economic slump is only a symptom, not the disease. In reality, the dark, gathering, economic storm clouds are merely the second leg of the 2008 financial collapse, set in motion on November 12, 1999 when President Bill Clinton, surrounded by Wall Street sycophants, signed the Gramm-Leach-Bliley Act (also known as the Financial Services Modernization Act of 1999) which repealed the Glass-Steagall Act of 1933, legislation which had kept our financial system safe for 66 years. A short 9 years later, the U. S. financial system collapsed in the greatest upheaval since the Great Depression.
I have a thing against people in ivory towers. At best, they make incredibly boneheaded decisions, and often do. Or at worst, they entirely fail to see the iceberg before the ship crashes. All the while they hide behind their fancy degrees, spouting a ton of jargon to make themselves look a lot smarter than they actually are. Ben Bernanke is one such person. The man really gets on my nerves. As the former Chairman of the Federal Reserve, he headed up the Fed during the worst crisis of most of our lifetimes. And not only did he not see it coming… he made it worse by pursuing reckless policies that have led to the worst economic recovery in 70 years. Just before the huge collapse in 2008 that took down everyone from Joe Six-pack to the Lehman Brothers, the Federal Reserve was touting ‘green shoots’ recovery propaganda. Prior to that it was the ‘Goldilocks Economy.’ Neither too hot nor too cold. Then wham!! Stock prices collapsed and people were forced out of their homes. Didn’t see it coming, did you, Ben? So when earlier this week Bernanke penned a piece for the Wall Street Journal called ‘How the Fed Saved the Economy,’ I wondered: Does this guy live in the real world?
September 2015 – GLOBAL ECONOMY – Brazil, which saw its credit rating downgraded to junk last week, is only the latest BRICs economy to crumble in the face of a strong dollar, a global trade slowdown and the prospect of higher US interest rates. Russia is already in recession; many economists believe China is heading towards a ‘hard landing’; and South Africa, which managed to append itself to the emerging-markets club in 2010, is on the brink of recession. Of the group once identified as the shining economic beacons of the future, only India has so far remained relatively insulated from what World Bank chief economist Kaushik Basu described last week as the ‘troubled’ state of the global economy. It wasn’t supposed to be like this. In 2009, as the rich western countries were surveying the chaos wrought by the financial-market crisis, China was cranking up an immense fiscal stimulus program to boost demand and kick-start growth. Beijing’s ability to muster financial firepower in the face of the crisis seemed to underline the shift of power towards the nimble emerging nations, with their rapidly growing middle classes, and away from the sclerotic Old World. ‘Decoupling’ became fashionable. Instead of being tethered to the fortunes of the mighty US (‘When America sneezes, the world catches a cold,’ went the old saw), emerging economies would break free, nurturing trade links across the developing world and fostering homegrown demand. But seven years on from the collapse of Lehman Brothers, the chaos wrought across financial markets in emerging countries by the prospect of a rise in US interest rates – which could come as soon as the Federal Reserve’s meeting this week – is a reminder of how closely tied the BRICs economies remain to the world’s biggest economy, and vice versa. The term BRICs was coined by former Goldman Sachs economist Jim (now Lord) O’Neill – George Osborne’s freshly ennobled Treasury minister. He never saw their rise as inevitable, but the acronym captured a widespread sense of optimism, and indeed China, India and Brazil in particular have made extraordinary strides in lifting their populations out of poverty.
This week, investors relived a nightmare. As markets from China to South Africa tumbled, they pulled $2.7 billion out of developing economies on Aug. 24. That matches a Sept. 17, 2008 exodus during the week Lehman Brothers went under. The collapse of the U. S. investment bank was a seminal moment in the timeline of the global financial crisis. The retreat from risky assets, triggered by concern over a slowdown in China and higher interest rates in the U. S., has taken money outflows from emerging markets to an estimated $4.5 billion in August, compared with inflows of $6.7 billion in July, data compiled by Institute of International Finance show.
Seven years after the financial crisis, private funds in the U. S. are extending their push into traditional banking. So-called shadow lenders – asset managers that operate outside the banking industry’s regulatory oversight – have been making an increasing number of leveraged loans to midsize businesses. Now their involvement is growing in commercial real estate, a market that scorched traditional lenders when it blew up after the 2008 financial crisis. Shadow banks are firms that act like lenders but don’t have depositors, federal bank regulations or access to the Federal Reserve’s discount window, where banks can borrow when money is tight. Their expanding role in the U. S. economy, hailed by some regulators, has been made possible by tighter lending restrictions imposed on banks after the crisis. But it comes with danger: thecollapse of nonbanks such as Lehman Brothers Holdings Inc. helped inflame the 2008 meltdown. ‘We clearly need to be very vigilant about monitoring risks that are migrating to that system, and certainly in the Federal Reserve we have hugely ramped up our attention to the shadow banking system,’ Fed Chair Janet Yellen said Wednesday in testimony to Congress. ‘We are thinking about regulations that might address – like minimum margin requirements that would apply not only to banking organizations but more broadly that might address some potential risks in the shadow banking system.’
Last week the government reported personal income and spending for April. After months of blaming non-existent consumer spending on cold weather, shockingly occurring during the Winter, the captured mainstream media pundits, Ivy League educated Wall Street economist lackeys, and Keynesian loving money printers at the Fed have run out of propaganda to explain why Americans are not spending money they don’t have. The corporate mainstream media is now visibly angry with the American people for not doing what the Ivy League propagated Keynesian academic models say they should be doing. The ultimate mouthpiece for the banking cabal, Jon Hilsenrath, who does the bidding of the Federal Reserve at the Rupert Murdoch owned Wall Street Journal, wrote an arrogant, condescending, putrid diatribe, directed at the middle class victims of Wall Street banker criminality and Federal Reserve acquiescence to the vested corporate interests that run this country. Here are the more disgusting portions of his denunciation of the formerly middle class working people of America. We know you experienced a terrible shock when Lehman Brothers collapsed in 2008 and your employer responded by firing you. We also know you shouldn’t have taken out that large second mortgage during the housing boom to fix up your kitchen with granite counter-tops. You should feel lucky you’re not a Greek consumer. Fed officials want to start raising the cost of your borrowing because they worry they’ve been giving you a free ride for too long with zero interest rates. We listen to Fed officials all of the time here at The Wall Street Journal, and they just can’t figure you out. Please let us know the problem. The Wall Street Journal was swamped with thousands of angry responses from irate real people living in the real world, not the elite, QE enriched, oligarchs living in Manhattan penthouses, mansions on the Hamptons, or luxury condos in Washington, D. C. Hilsenrath presumes to know how the average American has been impacted by the criminal actions of sycophantic Ivy League educated central bankers and their avaricious Wall Street owners.