Some analysts at the Bank for International Settlements have found a new way to unwind too-big-to-fail banks painlessly, which I guess is newsworthy; here is a good summary, and here is the actual paper. The basic idea is to resolve a bank over the weekend by writing down its debt by some regulator-chosen amount X, giving it X more capital, which is held by a new temporary holding company. Then the bank reopens for business on Monday with more equity and less debt. The holding company eventually sells its equity in the bank to the market, and distributes the proceeds “to [the old bank's] creditors and shareholders strictly according to the hierarchy of their claim.” Here are some blue boxes:
The main attraction of this, besides speed, is that it provides a market mechanism for determining how much senior creditors lose: regulators decide how much of the bank’s senior liabilities are converted into holdco liabilities, but those holdco liabilities retain their seniority over subordinated liabilities and equity, and ultimately the amount of writedowns suffered by the senior (and junior for that matter) debtholders depends on how much the bank’s equity is ultimately worth when the holdco sells it.
It’s neat! There are some issues. One is picking the initial writedown. The authors say: Read more »
I feel like I’m on the “the too-big-to-fail subsidy is negative!” beat, even though I only kind of believe it, so in that spirit here is a fun paper from Goldman Sachs’ Global Markets Institute1 that finds that the too-big-to-fail subsidy is negative. That is, Goldman concludes, contrary to popular belief, that the biggest U.S. banks actually don’t have a funding advantage over smaller banks due to the possibility that they’ll be bailed out by the government. Here is the money picture:
If that’s hard to read: the bonds of the six biggest U.S. banks – the ones whom everyone thinks the government would rescue if they blew up, JPM-C-BAC-GS-MS-WFC – yielded on average 6bps more than the average non-TBTF-bank bond before the start of the crisis in 2007. They traded hundreds of basis points tighter during the crisis (TBTF subsidy!), but now are back to trading wider: Read more »
There are a lot of things you can read about the Brown-Vitter bill recently, though it’s a really nice day out and you probably shouldn’t. It’s not … it’s not like a real thing is it? When the text of the bill, which would raise the equity capital requirements on big banks to ~15% on a non-risk-weighted basis and forbid U.S. regulators from implementing Basel rules, first leaked, I sort of assumed it was a temper tantrum not intended to become law, and the fact that its official title is the “Terminating Bailouts for Taxpayer Fairness (TBTF) (Get It?) (GET IT?) Act of 2013″ doesn’t exactly change my mind.1
I seem to have company in that view. Here you can read Jesse Eisinger (pro-Brown-Vitter) saying it’s a “barbaric yawp” that “probably won’t get passed.” Here you can read Davis Polk (anti) agreeing. Here you can read Matt Taibbi (very pro) saying that it might.2 So you figure it out.
Here’s one thing though, which is:
- Here you are with $100 in Pretty Safe Assets funded with like $5 of Capital and $95 of Debt.
- Suddenly you need $15 in Capital.
- You’re not going to take that lying down.
- You sell the Pretty Safe Assets to Quintilian Regulatory Fucking-About Partners, a hedge fund, for $100.3
- You buy a call option on the Pretty Safe Assets from QRFAP, struck at say $70, which has a fair value of about $30 since it’s way way way in the money and the Pretty Safe Assets are, by hypothesis, not that volatile.
- Your sources and uses are: 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 »
Bloomberg has an editorial today about how the government is subsidizing the top ten U.S. banks by $83 billion a year and maybe it should stop doing that. Because the editorial is getting a lot of attention, and because it is wrong, let’s discuss it.
Here is Bloomberg:
Lately, economists have tried to pin down exactly how much the subsidy lowers big banks’ borrowing costs. In one relatively thorough effort, two researchers — Kenichi Ueda of the International Monetary Fund and Beatrice Weder di Mauro of the University of Mainz — put the number at about 0.8 percentage point. The discount applies to all their liabilities, including bonds and customer deposits.
Here are Ueda and di Mauro:
[W]hen issuing a five-year bond, a three-notch rating increase translates into a funding advantage of 5 bp to 128 bp, depending on the riskiness of the institution. At the mid-point, it is 66.5 bp for a three-notch improvement, or 22bp for one-notch improvement. Using this and the overall rating bonuses described in the previous paragraph, we can evaluate the overall funding cost advantage of SIFIs as around 60bp in 2007 and 80bp in 2009.
Let’s break that down. Their paper: Read more »
There’s nothing surprising, exactly, about this chart that Fitch sent out today, but it’s still sort of stark:
Once there was a land where bank debt was AA, AAA if it was particularly good or A if it was particularly dicey. Now AA is the new AAA and BBB is commonplace. The idea of risk-free unsecured lending to banks, implicit in things like Libor discounting, is over.
Right? I don’t entirely understand this proposal by House Republican John Campbell to require banks to “hold substantially more capital,” though the gist is basically that there’s a move to require banks to do more of their funding via long-term holdco debt. Here is a puzzling summary: Read more »
So, HSBC is going to have to cough up almost $2 billion for, in effect, running a massive money-laundering operation that helped fund such luminary do-gooders as the Iranian government and Mexican drug gangs. But the U.S. has decided not to throw the cuffs on the British bank because, well, that would be pretty hard. And could create an awful lot of collateral damage that no one needs as the country careens off the fiscal cliff. Read more »
About a month ago, retired Citi CEO Sandy Weill set his alarm an hour early, got out of bed when it was still dark, ate a piece of rye toast, told Joan he’d see her when he’d see her, took the elevator downstairs to wait for the car that drove him out to Englewood Cliffs, and went on CNBC to proffer a small suggestion to Wall Street: break up the big banks. Perhaps you heard about it? Not many people were receptive to the notion of Weill giving them advice on the matter, which may or may not have had something to do with the fact that in his day, Weill couldn’t get enough of big banks and was the man responsible for cobbling together the behemoth known as Citigroup, an institution so huge it can barely support its own weight. The response by most, in fact, was “Shut it, you old bag.” But what about Vikram Pandit, the lucky guy who inherited the place? What did he think of Weill’s tip? After giving it some good thought– really and truly considering it– for a few weeks, he’s decided to take a pass:
Citigroup’s chief executive has knocked back the idea of big banks being split up after calls from people such as his predecessor Sandy Weill.
But not for the reasons you might think! Pandit actually agrees with Sando because if you think about it, Citi’s already been broken up and is basically the bank it was before the merger that resulted in the need for firefighters to use a giant pulley system to lift it out of bed every morning and help it get around. Read more »
One way you could spend this slow week is reading the “living wills” submitted by a bunch of banks telling regulators how to wind them up if they go under. Don’t, though: they’re about the most boring and least informative things imaginable and I am angry that I read them.* Here for instance is how JPMorgan would wind itself up if left to its own devices**:
(1) It would just file for bankruptcy and stiff its non-deposit creditors (at the holding company and then, if necessary, at the bank).
(2) If after stiffing its non-deposit creditors it didn’t have enough money to pay its depositors it would sell its highly attractive businesses in a competitive sale to willing buyers who would pay top dollar.
This seems wrong, no? And not just in the sense of “in my opinion that would be sort of difficult, what with people freaking out about JPMorgan going bankrupt and its highly attractive businesses having landing it in, um, bankruptcy.” It’s wrong in the sense that it’s the opposite of having a plan for dealing with banks being “too big to fail”: it’s premised on an assumption that the bank is not too big to fail. If JPMorgan runs into trouble that it can’t get out of without taxpayer support, it’ll just file for bankruptcy like anybody else. Depositors will be repaid (if they’re under FDIC limits); non-depositor creditors will be screwed just like they would be on a failure of Second Community Bank of Kenosha. Read more »
…if I were in charge I would probably reorganize the movement around a single, achievable goal: a financial boycott of the six “ too big to fail ” Wall Street firms: Bank of America, Citigroup, JPMorgan Chase, Goldman Sachs, Morgan Stanley, Wells Fargo. We would encourage people who had deposits in these firms to withdraw them, and put them in smaller, not “too big to fail” banks. We would stigmatize anyone who invested, in any way, in any of these banks. I’d try to organize college students to protest on campuses. Their first goal would be to force the university endowments to divest themselves of shares in these banks…I think we could create a run on a bank. [TDB]