Bloomberg has this sort of surreal article today about Deutsche Bank basically quoting a bunch of people saying “we are way way too big to fail and it is awesome.” Like:
Banking consolidation “sadly” will be “one of the many potential unintended consequences of regulation,” [co-CEO-in-waiting-whatevs Anshu] Jain said in a Bloomberg Television interview on Jan. 26. When asked about the systemic risks posed by bigger banks, Jain said that “you have the tradeoffs of too-big-to-fail on the one side and the benefits of diversification on the other.”
So on the one side, if we screw up we’ll be saved by diversification, and on the other, if we screw up really bad we’ll be saved by you. Those tradeoffs are not exactly tradeoffs for DB. Or even better:
At the end of 2010, Deutsche Bank was ranked the world’s most systemically important financial institution by Japan’s Financial Services Agency and central bank, based on estimates about the impact a failure would have on the global financial system, according to Mainichi newspaper.
“On the one hand, it made us proud, but on the other hand, of course, we’re aware of the responsibility,” [current lame duck CEO Josef] Ackermann said at an earnings press conference in February 2011 when asked about being deemed the world’s most systemically important bank.
I imagine that Japan’s Financial Services Agency was not ranking “most systemically important financial institution” with the intention of giving them a prize, but I do love that Ackermann took it that way. “Yay we were voted #1 most likely to blow up the Western financial system.” Read more »
Matt Taibbi wrote today about this Bloomberg story describing how JPMorgan’s munis business is booming despite maybe screwing a few muni clients over the years here and there. You can read Taibbi for a rundown of the shenanigans but his basic question is why, after said shenanigans, does JPMorgan still dominate muni finance? His answer is sort of unconvincing:
The news about Chase and Bank of America continuing to dominate a market they’ve already admitted to feloniously rigging says a lot about the state of modern finance.
Sure. But what does it say?
Bloomberg offered a telling quote from a state official justifying the decision to continue to do business with these criminal banks:
“I haven’t found an investment bank that hasn’t had some problem in the last three years,” California Treasurer Bill Lockyer said in a telephone interview. “We do business with them all. I think they provide good service. I think they’ve been highly ethical with us.”
This is coming from an official whose state, California, has seen multiple bid-rigging cases in recent years, from Riverside to San Mateo to Sacramento to Los Angeles to Santa Barbara, for starters. So a quote like that is pretty sad. It tells you that the system works fine for state officials and banks — and no one is representing the people who actually lose out.
Erm … it doesn’t really. Maybe evil Bill Lockyer is in the pocket of giant banks who are screwing The People, or maybe he’s an idiot, or maybe he’s, y’know, basically right about the whole providing-good-service thing. Hard to tell from that quote. Here is what seems to be the real reason, per Bloomberg, that California stood by its JPMorgan: Read more »
We’ve talked about the fact that Citi “failed” the Fed’s stress tests in the sense that its plan to return capital was Too Big, and so it got whacked by markets. Bank of America passed with flying colors, so, tiny yaaaaay, but the Journal puts that in context:
The situation at Citigroup [what with the failing and such] was reminiscent of a similar setback suffered last year by Bank of America Corp. when the Fed denied its request for a dividend increase. CEO Brian Moynihan had earlier hinted raising the dividend was likely. This time around, Bank of America didn’t seek a increase of its quarterly dividend, currently one penny.
In fact! BofA seems to have some capital raising in mind:
I’m not going to like do math or anything crazy, but assuming that, but for their optimism/pessimism around capital return/raising, Citi and BofA are exactly the same, what could possibly go wrong, 20bps is $2bn of new capital, which I’m going to guess comes from BofA paying its cash bonuses in things other than cash?* Read more »
The Federal Reserve has this new paper out about TARP that does a bit of highly suggestive eyebrow raising about some banks that shall remain nameless. They start from the awkward fact that TARP wanted everything in one bag but didn’t want the bag to be heavy, or as they put it:
The conflicted nature of the TARP objectives reflects the tension between different approaches to the financial crisis. While recapitalization was directed at returning banks to a position of financial stability, these banks were also expected to provide macro-stabilization by converting their new cash into risky loans. TARP was a use of public tax-payer funds and some public opinion argued that the funds should be used to make loans, so that the benefit of the funds would be passed through directly to consumers and businesses.
So you might reasonably ask: were TARP funds locked in the vault to return the recipient banks to financial health, or blown on loans to risky ventures, or other? Well, here is Figure 1 (aggregate commercial and industrial loans from commercial banks in the U.S.):
So … not loaned then. But that’s not important! The authors are actually looking not primarily at aggregate amounts of loans but at riskiness of loans and here’s what they get: Read more »
My favorite thing about the Libor scandal is that it’s an obvious outgrowth of what Libor is. Like:
(1) Banks signed a kajillion contracts with people to the effect of “we will [lend | swap | whatever] you some money at Libor + xxx%.”*
(2) Libor is a number that a private data provider calculates based on numbers that a bunch of banks make up and tell to a trade organization.
(3) Everyone knows that.
The latest news is, basically, that some people think that’s kind of a bad idea and are going to band together and stop it, which strikes me as vaguely sad in a passing-of-a-more-genteel-era kind of way, but whatever. This is what jumped out at me: Read more »
There are so many good stories in Jesse Eisinger’s piece in ProPublica about how the Fed let banks return capital to shareholders that they somewhat obscure the central non-story:
In early November 2010, as the Federal Reserve began to weigh whether the nation’s biggest financial firms were healthy enough to return money to their shareholders, a top regulator bluntly warned: Don’t let them.
“We remain concerned over their ability to withstand stress in an uncertain economic environment,” wrote Sheila Bair, the head of the Federal Deposit Insurance Corp., in a previously unreported letter obtained by ProPublica. …
Four months later, the Federal Reserve rejected Bair’s appeal. In March 2011, the Federal Reserve green-lighted most of the top 19 financial institutions to deliver tens of billions of dollars to shareholders, including many of their own top executives. The 19 paid out $33 billion in the first nine months of 2011 in dividends and stock buy-backs.
That $33 billion is money that the banks don’t have to cushion themselves — and the broader financial system — should the euro crisis cause a new recession, tensions with Iran flare into war and disrupt the oil supply, or another crisis emerge.*
Here’s one way to think about bank capital:
(1) Banks should have a minimum capital of X**
(2) If banks have less capital than X, they have to raise more until they have X
(3) If banks have more capital than X, they can get rid of some capital until they have X
There are various ways to get rid of capital; my favorite is the money-burning party but other good ones include paying outlandish bonuses, building trophy headquarters, lavishing gifts on your potted plants to make up for your previous callous behavior, and of course the old standby of losing fuckloads of money on bad trades. All have their adherents. Two that are particularly popular are dividends and share buybacks. These are popular in part because, if you think of capital as money that people were nice enough to entrust to you, then when you don’t need it any more it does kind of make sense to give it back to the people who entrusted it to you, though again the other options all have their points too. Read more »
The Wall Street Journal today discovered that universal banks that lend money to companies for cheap tend to want investment banking business in return for that lending and I guess that’s a scandal:
As the market for technology IPOs revs up and the biggest banks seek to capitalize on the size of their balance sheets, the practice of selecting underwriters that also provided loans is coming under focus, spurred by Facebook’s IPO process.
Critics of the practice say the choices aren’t accidental and reflect the “you-scratch-my-back-I-scratch-yours” way that Wall Street works.
Bankers, for their part, say they aren’t allowed to make loans on the condition that they receive other business, but borrowers can use the loans as a factor in choosing underwriters. Some bankers say that lending is just one of the many services they offer companies.
At Facebook, the credit line played a role in the batting order for underwriters, said a banker who worked on an underwriting pitch to the company.
When I was young and naive and pitching for underwriting business against banks that did lots of lending, I always thought that banks “aren’t allowed to make loans on the condition that they receive other business, but borrowers can use the loans as a factor in choosing underwriters” thing was ripe for a scandal. I still sort of think that: I just do not believe that no client coverage banker has ever said “we’ll be in your credit facility but only if you promise us underwriting or M&A business.” (Some people agree with me!) And, as the Journal notes, that would be a criminal violation of the antitrust laws, which is unspeakably weird but there you go.
But if you ask a banker who has been carefully and recently briefed on anti-tying regulations, he will probably tell you something like “we don’t demand underwriting business to provide a loan. Companies demand loans to get underwriting business.” And, as the Journal says, that’s not illegal. Read more »
If you’re a more or less regular consumer of efficient markets hypothesis Kool-Aid then a fun activity is to handicap the probability of various public policy things based on market reaction.* So for instance Obama’s budget is going to reduce the tax deductibility of munis! And the muni market didn’t care! So, no, Obama is not going to reduce the tax deductibility of munis. You heard it here first, or last, or whatever. (Exercise for the reader: is Obama going to raise the tax rate on dividends?)
Since today seems to be Volcker Day hangover it’s worth pondering this: Read more »
There’s a juicy pile of something going on over on Maiden Lane. Once upon a time, Goldman Sachs murdered AIG and stuffed its corpse with tons of shall we say “troubled” residential mortgage-backed securities. Like a cursed diamond, those securities then bounced around among owners who came to bad ends and ended up in a thing called “Maiden Lane II,” owned by the New York Fed and managed by BlackRock, with a mandate to sell them off over time at prices that “represent good value for the public.”
One day, Credit Suisse came to BlackRock with reverse inquiry for those Maiden Lane II bonds. The Fed via BlackRock solicited bids from five banks, CS, Goldman, Barclays, RBS and Morgan Stanley. The banks conducted some pre-bidding price discovery with their clients, though they were sworn to secrecy and had to get the clients to sign nondisclosure agreements before they could solicit them. Eventually the banks put in bids and Goldman won and bought the bonds, and is now selling them rather nonchalantly to clients, keeping most of them overnight after buying them from the Fed.
A simple story, but it raises two interlinked things to worry about:
(1) Why are you giving all those wonderful wonderful bonds to Goldman, huh NY Fed? HUH?
(2) Why are you keeping all those deadly deadly bonds on your balance sheet, huh Goldman? HUH?
For the first one, Bloomberg says: Read more »
When people who hate banks and love homeowners are full of wild rage about this here mortgage settlement, and when people who love banks and hate homeowners are full of equal and opposite rage, that is pretty good evidence that the mortgage settlement is sort of meh and compromise-y and not that interesting, so let’s not talk about it. Oh, fine, let’s. You could go read all sorts of explanations and FAQs and diagrams and “top n things to know” (n = 3, 5) but I will give you a list of only one most important thing to know about it, which is that it will not reduce my mortgage so it’s all just noise. When will politicians start sticking up for me?
There is one sort of interesting thing that is probably most cogently explained here: Read more »