“The fundamentals of the industry have never been better. It is only the unknown, unquantifiable, contagion risk which is keeping these stocks down,” Bove said in a nearly euphoric note to clients. “Take this issue away and investors may realize that banks are massively oversold relative to the power of their balance sheets and their earnings potential.” [NetNet]
Here is a fun thing we can do, which is put arbitrary numbers in a list and see how they look. Shall we? We shall.
First, here is how much various bank CEOs and assorted other miscreants made in 2011, if you don’t worry too much about what “made” and “in 2011″ mean*:
This list is, of course, inspired by this exercise by Bloomberg, ranking the top 50 highest paid financial institution CEOs. But if you’re Lloyd Blankfein or, I mean, really, Henry Kravis, you are probably not planning your retirement around your paycheck. Instead you could to some approximation view your job running your financial institution as keeping an eye on the people responsible for your private wealth, in the form of your share ownership in that institution, and Lloyd’s $16mm 2011 paycheck hardly makes up for the $155mm of lost value on his GS shares. Read more »
A stylized picture of a credit default swap is that it’s a way for a bank to offload to the market the credit risk of loans that it makes, while still funding those loans and making a profit on them. If you start from that stylized picture, you must at some point get comfortable with the stylized fact that this market is probably rife with insider trading. Turns out it is! Part of the reason for that is that it’s maybe legal,* part of it is just the general run of market-participant scumminess,** but there’s also the fact that the basic model sort of requires it. Here is the basic model:
- private side bank employees evaluate a company for a loan, using lender materials that contain nonpublic information and banker relationships that are all about nonpublic information,***
- private side bank employees negotiate and fund that loan with a company,
- [magic happens], and
- public side bank employees buy CDS on some but not all of the companies that the bank lends to in sizes that vary among companies.
So, I mean, I generally trust that most banks are over-compliant on this point and the magic happens behind a Chinese wall and so forth, but still, that sequence of events should make you a tiny bit suspicious if you’re anti insider trading in CDS.
Anyway, if you continue on with that stylized picture you’ll notice that, while the existence of traded CDS allows for a two-sided market of public-market speculators who buy CDS to bet against companies that they don’t lend to (or that they lend to only in public bond form), the origin of and net demand for single-name corporate credit protection comes largely from banks who do private-side lending and are probably hedging that lending. This is basically true.
That sucks for the CDS writer, doesn’t it? Read more »
I might have enjoyed this Andrew Ross Sorkin column, about how bringing back Glass-Steagall would have prevented neither the financial crisis nor l’affaire Whaledemort, more than most people.* Yes, the argument is pretty silly – like saying we shouldn’t have speed limits because they probably wouldn’t have prevented the Columbine massacre – but it contains an essential point that can’t be made often enough about the Volcker Rule:
But [bad sh]it often starts with banks making basic loans. Making loans “is one of the riskiest businesses banks engage in and has been a major contributing factor to most financial crises in the world over the last 50 years,” Richard Spillenkothen, former director of the division of banking supervision and regulation at the Federal Reserve, wrote in a letter to Politico’s Morning Money on Monday.
Lending: it’s proprietary! It’s risky! And yet! You can’t really get rid of it because it’s kind of what a bank is. On the flip side many crisis contributors – Bear, Lehman, AIG, I’d add Reserve Primary, you name it – were never affiliated with FDIC insured commercial banks and so also would have been untouched by Glass-Steagall or the Volcker Rule, but were both risky and systemically interesting and so worth keeping an eye on. Read more »
Treasury Wants To Make Banks Boring Again By Selling CDOs Of Community-Bank Hybrid Capital InstrumentsBy Matt Levine
“Make banking boring again” is a favorite reaction to news that JPMorgan was screwing up its VaR modelling of its attempt to get long gamma with improperly delta-hedged tranches of the CDX.NA.IG.9 and, sure, maybe, but don’t tell Treasury:
The U.S. Treasury may pool stakes in small banks bailed out during the financial crisis to entice potential investors as the Obama administration winds down the Troubled Asset Relief Program.
“Some of the investments are smaller and it may not be possible to auction them individually,” Tim Massad, the Treasury Department’s assistant secretary for financial stability, said in an interview. “So one of the things we’re looking at is pooling those investments together.”
You can see how much TARP money remains outstanding at all the wee banks at pages 240-257 here; on a quick look the smallest seems to be the $1.4mm subordinated debentures at Frontier Bancshares of Austin, TX, and there are plenty of other single-digit-millions remaining slugs of preferred or sub debt.* The notion that it would be impossible to sell something at auction for less than $50mm seems weird to me – it’s done all the time by, um, auction houses – but you get the idea: these are subordinated fixed-income instruments of small banks that have run into trouble in the recent past; the risks are significant and the potential rewards – particularly in absolute dollar numbers – may not justify the investment of time and effort to understand and bid on them. Read more »