OH GOSH LET’S GET REAL ANGRY ABOUT THE EU BONUS CAP, which is moving forward and would limit bankers’ bonuses to 1x base salary, or 2x with shareholder approval. It is super dumb.1 England hates it, what with having a functioning banking industry and all. Bankers hate it, being bankers.2 This guy thinks it makes total sense, being a Belgian lawmaker for the Green Party:
“If I have to judge from the reaction of the [banking] industry, this will impact them. And this will also impact the overall amount of remuneration,” said Philippe Lamberts, a Belgian lawmaker for the Green Party who was one of the leading negotiators for Parliament. “I think it will really hit them.”
Feel free to vent in the comments, you’ve earned it. But this Lex column strikes me as the only worthwhile thing to say about it: Read more »
The story so far is that a few days ago Bloomberg View claimed that the ten biggest U.S. banks got an annual subsidy of $83 billion from being too big to fail. That claim seemed silly to me, and I said so, and this weekend Bloomberg responded to that post saying, and I quote, “we weren’t kidding.” Apparently the people who keep the blogging rulebook believe that I now have to write a post in response to their response to my response to their original claim, and so this is that post. Actually this is that footnote, whatever.1
Up here let’s be super super naïve and just ask: how much do too big to fail banks pay to fund their balance sheets, and how much would they pay if they were smaller and failier and less government-supported? One dumb way to go about answering that is to actually just look at the cost of funding of some banks. We can start with the big five that Bloomberg uses – JPMorgan, BofA, Citi, Wells Fargo, and Goldman – and compare them to some smaller banks. Since Bloomberg seems to believe that Fitch believes that the TBTF banks would be rated around BBB- were it not for their TBTF-ness, we can compare them to some banks rated BBB- by Fitch. I chose five BBB- rated bank holding companies pseudorandomly from Fitch’s web page: Associated Banc Corp, TCF Financial Corp., First Horizon National Corporation, First Niagara Financial Group, and Zions Bancorporation.2 Then I just looked at how much those banks paid for their funding (interest expense, preferred dividends), compared to how much the big five banks pay.
Here are some average numbers: Read more »
One lazy but fun thing to do as a financial blogger is to find two publications saying the opposite thing on the same day, and then be all “haha, dopes.” Business Loans Flood the Market, the Journal informed us this morning, while Bloomberg tells us that by another measure loans are at a five-year low, though being Bloomberg the way they put it is JPMorgan Leads U.S. Banks Lending Least of Deposits in 5 Years. So is there a flood of loans, or a least of loans? Which is it, guys?
Well, both, obviously; “haha, dopes” would not be fair here. Loans are up, relative to the last couple of years, but loans as a percentage of deposits are at a low – 84% for the top 8 commercial banks, per Bloomberg, as opposed to 101% in 2007. Bloomberg acknowledges this tension:
Falling ratios don’t mean banks have shut the lending spigots. Measured in dollars, total loans rose in the fourth quarter for the biggest eight lenders to $3.9 trillion.
As does the Journal, which notes that “The push comes at a time when many banks have been flooded with deposits as slow economic growth and low interest rates crimp investment.”
The way I think about banks is that they do two somewhat separate things, which are:
- satisfy some people’s demand for money claims (short-term, safe, exchangeable-for-fixed-amount-of-cash bank liabilities),1 and
- satisfy other people’s demand for loans.
It’s not entirely obvious why those things would move in lockstep: Read more »
Bank earnings season is always a little surreal, I guess because there’s an inherent surrealism about banking. Deutsche Bank reported earnings today,1 and those earnings had an up-is-down quality that Bloomberg’s summary captured in this amazing sentence:2
Deutsche Bank AG, Europe’s biggest bank by assets, exceeded a goal for raising capital levels as co-Chief Executive Officer Anshu Jain focused on bolstering the firm’s finances rather than limiting losses.
So there’s one way of running a business where you bolster your finances by making money. And then there is global banking. Here is another, possibly even more astonishing line from the same article:
Deutsche Bank “took pain” in the quarter by booking a loss to boost its capital ratio without selling shares, Jain said.
Booking a loss to boost its capital ratio. Losing money, in the regular universe, should reduce your capital: capital is mostly retained earnings. Everything here is backwards.
Here is how Deutsche Bank boosted its capital ratios without (1) raising capital from the market or (2) making money: Read more »
Do you have an opinion on whether JPMorgan is too big to manage and should be broken into its constituent bits? You do? Hey, that’s great, good for you. Here’s what you can do about it, in roughly descending order of effectiveness:
- Be Jamie Dimon, do what you want.
- Be a board member, try to convince others to do what you want.
- Be a big activist1 hedge fund, call up the board and management and try to make them do what you want.1
- Be a sell-side analyst, regulator, politician, former bank CEO, pundit, blogger, or person; write down what you want JPMorgan to do and why you want them to do it; and hope that they read it.
- Same, but with Twitter.
- Keep it to yourself and go about your business like a human.
- Be a troublemaking shareholder activist2 and submit a shareholder proposal asking the board to include in the proxy an advisory vote on whether JPMorgan should form a committee to look into doing the thing you want or something else like it or not like it.
This is sort of a non-thing: Read more »
I feel like this exchange did not go well for Jamie Dimon:
[Elliott Capital's Paul] Singer said the unfathomable nature of banks’ public accounts made it impossible to know which were “actually risky or sound”. … Mr Singer noted that derivatives positions, in particular, were difficult for outside investors to parse and worried that banks did not always collateralise their positions. Mr Dimon said the bank did for all “major” clients. Mr Singer retorted: “Well, we’re a minor client then.”
Whoops! Guess someone else doesn’t know what positions banks collateralize. I suspect someone at Elliott is already on the phone with JPMorgan to renegotiate their CSA. Also so many other people; I count about $50 billion of uncollateralized (fair value) derivative exposure at JPMorgan, suggesting that it fully collateralizes a little under two-thirds of its trades.1 Perhaps those are the two-thirds with the major clients, but if so that seems a little irrelevant. That’s a lot of minor-client money.
Why does Singer care? Well I guess he wants better collateral terms from JPMorgan? More seriously … there is whatever incentive to say things that always exists at Davos sessions, which I guess is a thing, ugh.2 Then there is the broad question of whether banks are too opaque to invest in. Singer is not alone in thinking that the answer is no; we talked a while back about how a lot of smart people get kind of freaked out by bank financial statements; derivatives, as well as other buzzwords like prop trading and opacity, play a role in their conclusions as well. Also here is a funny article about how 60% of Bloomberg subscribers are basically commie anarchists: Read more »
How should one read JPMorgan’s Whale Report? I suppose “not” is an acceptable answer; the Whale’s credit derivatives losses at JPMorgan’s Chief Investment Office are old news by now, though perhaps his bones point us to the future. One way to read it is as a depressing story about measurement. There were some people and whales, and there was a pot of stuff, and the people and whales sat around looking at the stuff and asking themselves, and each other, “what is up with that stuff?” The stuff was in some important ways unknowable: you could list what the stuff was, if you had a big enough piece of paper, but it was hard to get a handle on what it would do. But that was their job. And the way you normally get such a handle, at a bank, is with a number, or numbers, and so everyone grasped at a number.
The problems were (1) the numbers sort of sucked and (2) everyone used a different number. Here I drew you a picture:1
Everyone tried to understand the pool of stuff through one or two or three numbers, and everyone failed dismally through some combination of myopia and the fact that each of those numbers was sort of horrible or tampered or both, each in its own special way. Starting with:
VaR: Value-at-risk is the #1 thing that people talk about when they want to talk about measuring risk. To the point that, if you want to be all “don’t look at one number to measure risk, you jerks,” VaR is the one number you tell the jerks not to look at. Read more »
Here is an important cultural difference between the US and the UK that you should, like, stick in the boot of your lorry or whatever: in the UK, it’s apparently not socially acceptable to put off paying bonuses by two months to save your employees five percentage points in taxes. In America, it’s considered perfectly reasonable to die to avoid a tax increase.1
I was not aware of this difference and it seems neither was Goldman Sachs:
Goldman Sachs has backed down from a plan to delay UK bonus payments until after the new UK tax year, which would have allowed bankers to benefit from a cut in the top rate of tax from 50 to 45 per cent. … The idea – first reported by the Financial Times on Sunday – would have seen the payment of the deferred portion of bonuses from prior years delayed from February until after April 6.
News of the plan prompted a flurry of criticism from lawmakers and even from within the banking industry.
Addressing the House of Commons Treasury select committee earlier on Tuesday, Sir Mervyn King, governor of the Bank of England, had criticised the idea.
“I find it a bit depressing that people who earn so much find it would be even more exciting to adjust their payouts to benefit from the tax rate, knowing that this must have an impact on the rest of society, which is suffering most from the consequences of the financial crisis,” Sir Mervyn told MPs. “I think it would be rather clumsy and lacking in care and attention to how other people might react. And in the long run, financial institutions do depend on goodwill from society,” he added.
You can sympathize with Goldman’s misunderstanding here, no? Read more »
Bank earnings season kicked off today with Wells Fargo’s announcement, and since I have nothing really to say about Wells Fargo earnings I figured the least I could do was put up some charts instead. Not on earnings – they’re up! net interest margin is down! on balance, gnash your teeth a little! – but on what Wells Fargo is doing with all the money it’s got.
This seems like a popular question to ponder, since it’s got rather a lot of money. So today brings the Journal‘s vividly headlined “Wads of Cash Squeeze Bank Margins”, and earlier we had Frank Partnoy and Jesse Eisinger’s attempt to find out where Wells is hiding all its fraud. The main thing is:
- Banks have lots of deposits because everybody’s scared of everything so they put their money in the bank.1
- Banks aren’t making lots of loans for some reason, with the reason ranging from “banks are a bunch of scumbags” to “you’re all a bunch of deadbeats.”
- So they have money left over.
- So they put it somewhere.
A natural question is “where is the somewhere?” and here is where Wells puts it:
That’s just various bits as a percentage of total deposits. You can see loans have decreased as a percentage of deposits since the crisis; other risky-type assets – trading assets and available-for-sale corporate and mortgage bonds, etc. – have increased a bit but not enough to make up for that drop: Read more »
On Monday, as a bevy of banks were settling a zillion dollars of mortgage lawsuits and putting themselves on a path to (1) certainty and (2) giving money back to shareholders, Goldman released a research note with the results of a survey of investors’ expectations of bank capital return.1 Here is what some sample of investors expect:
Total payouts are expected to increase to an average of 58% post-CCAR/CapPR from 43% in 2012. … The survey results suggest the biggest increases in dividend payout ratios will be for Citi and Capital One, while PNC and Morgan Stanley are unlikely to meaningfully move higher. For buybacks, investors expect the biggest increase for BB&T and JP Morgan (vs. their actual buyback, not vs. 2012 approval levels), while there is little change expected for Morgan Stanley, Bank of New York and Northern Trust. … Many of the banks with the most variability of responses are those that are coming off subdued capital deployment levels in 2012, including Capital One, Bank of America, Citigroup and Regions. Given the lack of consensus, it seems that regardless of the announcement, the market is likely to be “surprised”.
I too prefer to order my life so that I’m surprised by everything.2
Anyway the interesting/disappointing part for me is what investors thought about what GS calls the “Mulligan rule.” This refers to the fact that, in the 2012 bank stress tests, banks asked regulators for approval to return an amount of capital, and if the regulators said no then the banks basically couldn’t do anything (ex regular dividends etc.) for another year, but in the 2013 tests if the regulators say no the banks can go back and ask once more for another, lower amount of capital return. I was pretty bullish on this: the do-over gives you a chance to be more aggressive once, and scale back if regulators say no, so you’d think that at least some banks would be aggressive and get away with it, while others will be too aggressive and have to cut back to a more moderate capital return but still no harm no foul. Or so I would think. I am in the minority:
And here, conveniently, is why banks wouldn’t be aggressive – because their own shareholders would get mad at them for being too aggressive: Read more »
I didn’t really understand this morning’s Journal headline – “Regulatory ‘Whale’ Hunt Advances” – since the whale in question, JPMorgan’s Bruno Iksil, has been caught, harpooned, killed, flensed, picked clean by sharks, and his skeleton mounted in the American Museum of Unfortunate Trades. So the OCC’s hunt is … somewhat late no?
The Office of the Comptroller of the Currency, led by Comptroller Thomas Curry, is preparing to take a formal action demanding that J.P. Morgan remedy the lapses in risk controls that allowed a small group of London-based traders to rack up losses of more than $6 billion this year, according to people familiar with the company’s discussions with regulators.
The OCC, the primary regulator for J.P. Morgan’s deposit-taking bank, isn’t expected to levy a fine, at least initially.
I submit to you that:
- JPMorgan has at the very least talked a good game about remedying the lapses in risk controls that led to the Whale’s losses, insofar as it’s wound down the trade, fired everyone involved, appointed new risk managers, changed the models, moved the relevant portfolio out of the division that used to house it, and otherwise done everything in its power to make its chief investment office a no-cetaceans zone, and
- If the OCC disagrees, and thinks that JPMorgan hasn’t taken commercially reasonable risk-management steps to remedy the lapses that led it whaleward, then there may be bigger problems than can be fixed by a notice saying “oh hey you might want to look into that.”
Anyway. Yesterday the OCC also released its Semiannual Risk Perspective for Fall 2012; December 20 is technically fall but the document has data through June 30 so that too seems a bit behind the times. The OCC: your time-shifted banking overseer.
But it’s an interesting, and broadly encouraging, read in a circle-of-life way. Things are, or were in June, pretty good, or at least improving, credit-wise:1 Read more »