Banks

  • 03 Jan 2013 at 2:03 PM

Turns Out Wells Fargo Doesn’t Just Keep Your Deposits In A Stagecoach Full Of Gold Ingots

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There’s a huge article by Frank Partnoy and Jesse Eisinger in the Atlantic today about how banks are so horribly complicated that even sophisticated investors, meaning basically Bill Ackman, don’t trust them any more. I suppose this provides an excuse for me to trot out a toy theory that’s been congealing in my head, which is roughly that you can have two of the following in a publicly traded financial company, but not three:

  • “banking,”
  • “market making,”
  • “investibility.”

Like: you could, or someone could, make some educated guesses about what goes on at a bank that takes deposits and makes mortgage and commercial loans, and decide whether or not it’s a good business that you should invest in. You could even make such guesses and decisions about what goes on at an old-school broker-dealer that trades securities for a living. (Maybe? I’m less confident of this leg.) But for universal banks I’m kind of with Ackman – and Partnoy and Eisinger – that you have to give up on making intelligent decisions, or failing that have your intelligent decision be “I’m gonna need a 50% discount to book value before I invest in this thing.”

You can attribute the opacity of modern banking to like “bankers are eeeeeeevil,” which I don’t particularly believe, or “regulators are weeeeeeeak,” which seems sort of lame. Me I tentatively like “banking + market-making = insoluble complexity.”

The heart of the Atlantic article is an attempted deep dive into Wells Fargo’s financials, which ends up splattering against the rocks that guard those financials. Here is where things start to get alarming, for some value of alarming: Read more »

  • 21 Dec 2012 at 2:04 PM
  • Banks

JPMorgan’s Regulators Plan To Ask Some Pointed Questions About … Sorry, Was It The London Quail? Something Like That.

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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 »

  • 19 Dec 2012 at 11:50 AM
  • Banks

UBS Traders Convinced Brokers To Give Other Banks Fake Estimates Of Those Other Banks’ Fake Estimates Of Libor

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The UBS Libor settlements are really a garden of infinite delights; there are many semi-literate, fully criminal emails and IMs and you can read them here or here or here or here or in the FSA Final Notice. It is hard to pick a favorite thing but here’s a quirky one from the FSA:

58. Certain [interdealer] Brokers also routinely disseminated their views about where LIBOR would set based on their market knowledge, including information about transactions in the relevant cash markets. These market views, commonly referred to as “run throughs”, were of assistance to market participants, including Panel Banks when determining their JPY LIBOR submissions. A number of Panel Banks relied on run throughs and on occasions some of them simply adopted them when making their submissions.

59. In addition to asking Brokers to make specific requests of Panel Banks for specific submissions, Trader A also asked Brokers to tailor their run throughs to benefit UBS’s JPY positions.

So: Trader A, the yen swaps trader who seems to have been the worst1 Libor manipulator at UBS, sometimes asked his brokers to lie when they wrote down their guesses of the rate that other people would guess those other people could borrow at. UBS in general, and Trader A in particular, seem to have been all-around horrible, granted, but it’s worth taking a step back to notice the oddity of the system they lived in:

Trader A manipulated a second derivative of borrowing rates: not a rate, not a guess of a rate, but a guess of a guess of a rate. David Enrich finds this troubling: Read more »

  • 13 Dec 2012 at 1:26 PM

On The Bright Side, European Banking Bonuses May Be A Lot More Predictable

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It’s probably good news that “European Union finance ministers reached a landmark deal early Thursday that would bring many of the continent’s banks under a single supervisor,” but of course it wouldn’t be Europe without some self-evidently bad ideas for financial regulation, so today we also get this:

Bankers’ bonuses in Europe would be capped at two times fixed salary under a tentative EU agreement that would mark the most severe crackdown on pay since the 2008 financial crisis.

The European parliament and negotiators for member states drafted a deal in Strasbourg on Thursday that imposes a 1:1 bonus to salary ratio, which can be increased to 2:1 with the backing of a supermajority of shareholders.

Still being negotiated, can change, etc. One could perhaps imagine that once there’s a single eurozone banking supervisor, the warm glow of supervision will shield eurozone banks from this sort of chaotic meddling from the European parliament. Or not, who knows.1

This is mostly bad for the usual reasons: keying bonuses to base salary, without capping base salary, increases fixed costs and thus risk, while reducing bankers’ incentives to actually do a good job at whatever they’re supposed to be doing. A first-best comp scheme would probably involve huge bonuses to reward bankers for doing the things you want them to do; smaller bonuses is perhaps a better scheme than huge bonuses to reward bankers for doing the thing you don’t want them to do, but it’s not a particularly impressive approach. Read more »

  • 12 Dec 2012 at 9:55 AM
  • Banks

Receiving Government TAF Funding Was Just The Wakeup Call Banks Needed To Get Their Acts Together

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While we’re celebrating successful bailouts I suppose it’s worth looking at this VoxEU post and related paper from two Swiss economists about the Fed’s Term Auction Facility, which provided short-term secured funding to U.S. banks who might otherwise have trouble getting such funding between December 2007 and March 2010. The authors ask the questions that we’ve seen asked before about a variety of bailouts, roughly:

  • Were the bailed-out banks worse than the non-bailed-out-banks, pre-bailouts?, and
  • Did they stay worse after the bailouts?

The answer to the first question is always yes, which you could figure out a priori.1 The answer to the second question is usually yes too. As I said about a previous study, “bank bailouts are designed to let banks keep getting up to their old tricks; if you wanted them to stop doing that you’d let them go bankrupt.”

But here it’s no, so, yay! The authors are looking specifically at interactions of TAF funding and liquidity risk; the idea is something like “a lot of banks did too much short-term funding of long-term assets, and when the funding markets blew up they were in trouble, and TAF was designed to save them, and it did, but did they learn any lessons?” And they did:

In words: Read more »

  • 12 Nov 2012 at 3:23 PM
  • Banks

Surprisingly, Treasury Purchases Of Goldman Sachs Preferred Stock Did Not Increase Small Business Lending

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Why would you bail out a bank? Theories abound; perhaps you want to keep the capital markets functioning, or prevent contagion to other systemically important financial institutions, or perhaps you just like banks and bankers and would be sad if there were fewer of them or they had less money. Somewhat less likely, you could think to yourself “I want there to be more lending to small businesses, and the best way to go about that would be to buy preferred stock in a bunch of banks.” If that was your goal, and TARP was your bailout, then you failed:

A new report commissioned by the Small Business Administration confirms what a lot of business owners felt in the four years since the financial crisis: The government bailouts for banks did little to relieve the credit crunch for Main Street companies.

In fact, banks that took taxpayer money during the financial crisis of 2008-09 cut their lending to small businesses more than other banks did, according to the paper by Rebel Cole, a DePaul University economist. … TARP banks cut their lending to small businesses by 21 percent in that period, compared to a 14 percent drop at other banks, according to the paper.

Here’s the paper and here is a sad little chart from it:

Other not-quite-epiphanies abound: Read more »

  • 24 Oct 2012 at 2:28 PM
  • Banks

Bank Of America’s Countrywide Acquisition Gets 2.5% Worse

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Bank of America bought Countrywide Financial in 2008 and it’s fair to say that went poorly; the Wall Street Journal totted up total Countrywide losses at about $40 billion but that was in July so they’re probably, like, $80 billion by now. If you were trying to figure out the maximum past and future losses you might start with the fact that Countrywide Financial originated about $2.2 trillion of mortgages between 2003 and 2007; ignoring anything before that you might ballpark the upper bound at $2.2 trillion. Let me draw you a Venn diagram, because this is now that kind of blog:

Eventually that yellow circle can grow to the size of the blue circle, but no bigger: the absolute highest number of fraudulent mortgages that Countrywide could have written is “all of the mortgages it wrote.” Right? No, wrong, of course: Read more »

  • 23 Oct 2012 at 5:29 PM

Low Rates Squeeze Bank Profits To Record Highs

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I fell a little down the rabbit hole of this Journal article on “Low Rates Pummel Banks.” This has long been a mystery to me as there are two diametrically opposite narratives of banks and low rates in the world. In one, banks borrow for free from the Fed and reinvest at higher rates and print free money and spend it on parties where they beat up retirees. In the other, banks are, um, pummeled by low rates. Neither of those theories is absurd on its face, as you can tell from the Journal article:

Superlow U.S. interest rates are squeezing bank profits, complicating the industry’s nascent recovery from the financial crisis. … U.S. banks earned $114.39 billion last year, their best showing since 2006.1

Profits are squeezed, but to their best level since before the financial crisis, so.

The Journal’s thesis is basically that banks are getting screwed because net interest margin, specifically, is squeezed, as mortgage rates keep dropping, deposit rates are kind of floored and can’t drop any further, and other sources of revenue are drying up:

As higher-yielding loans and securities acquired before the crisis mature, the banks are forced to replace them with assets that carry much lower rates. With some sources of lucrative fee income such as debit card charges capped in 2010′s Dodd-Frank law, the margin squeeze has an outsize impact on the bottom line.

On the other hand, other other sources of revenue, like originating mortgages at record spreads to MBS rates, or just trading securities whose prices have been bolstered by declining rates, are still robust – but that business seems to be concentrated in big banks that also benefit from economies of scale. A Goldman equity research note yesterday came to the same place, noting that regional banks get ~58% of revenue from net interest while the big universal banks get only ~48% there:2 Read more »

  • 22 Oct 2012 at 7:36 PM

S&P Doesn’t Want Banks To Be Too Safe

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What is this S&P paper on how the Volcker Rule could force S&P to lower ratings on banks? One basic intuition you could have is that the earnings you get from prop trading are not particularly stable so shouldn’t count for much in your credit ratings; on this intuition things like highly levered hedge funds and Berkshire Hathaway should be bad unsecured credits so, y’know, shows what I know.1 But really if you had to choose purely from a credit ratings perspective between:

  • Thing A makes $1 billion a year on like investment banking fees and stock trading commissions, versus
  • Thing B makes $2 billion a year on prop trading some stuff, but it won’t tell you what stuff, but it’s all financed with repo,

You’d pick Thing A, right? To lend to? To some approximation the guys who’ve blown up their creditors are the guys with risk positions on their balance sheets (Lehman, MF Global); the guys who just run out of fee-based business mostly wind up their debts before expiring. Or don’t have many debts to begin with, because why would you incur massive unsecured debts to just execute client orders on commission?2 Anyway here’s S&P: Read more »

  • 09 Oct 2012 at 4:05 PM
  • Banks

Cure For What Ails Banks May Be Less Securitization And Trading, Or Much More Securitization And Trading

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There’s a lot of The Future Of Banking in the news today and we should talk about it but first a proposition. Where are you more likely to lose money on a mark-to-market basis: buying 5-year PIK-toggle holdco Petco bonds at 8.6%, or buying 30-year UPS bonds at 3.625%? I say your odds of losing on UPS are higher; if you disagree, you take Petco, and we’ll meet here in 30 years to settle up.

Here is a grab-bag of other numbers related to UPS:

Things to think here include:

  • lending money to UPS is not profitable for banks2;
  • underwriting UPS’s 30-year bonds isn’t exactly a bonanza either; and
  • UPS would be nuts to borrow from its banks – so it doesn’t, and borrows more cheaply in the market.3

Bank lending to high-investment-grade companies is (1) a loss leader, (2) used to attract not especially profitable business, and (3) not competitively priced. I feel like other industries do loss leaders better.

While you ponder that, also ponder this IMF working paper on banks and trading. A quick takeaway is “banks shouldn’t trade, urgh, trading bad,” and Mark Gongloff and Felix Salmon take that takeaway away, but as far as I can tell the more interesting bit is this: Read more »