Jamming the Banks – Part 2 May 13, 2009
Posted by wonderingin in Banking, Financial Markets, Regulation.add a comment
The Chrysler squeeze on the banks was just the warm up in the Obama Administration’s plan to re-make the economy.
It turns out the the compensation choke hold so far applied only to those banks receiving TARP money will be expanded to an industry wide system for all of financial services. (U.S. Eyes Bank Pay Overhaul – WSJ)
Senator Charles Schumer’s proposed legislation to require stockholder votes on executive compensation among a list of other new requirements would set the stage for the extension of the coming banking rules to the rest of corporate America.
Stay tuned – democracy in action is a wonderful thing!
Jamming the Banks May 11, 2009
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“You don’t need banks and bondholders to make cars,” said [an Obama] administration official. WSJ, 5/11/09
The evidence continues to mount that President Obama and his cadre are intent upon re-making the American economy in their own image. We are entering an era of government industrial policy making unlike anything we have ever seen. Mr. Obama knows very little about business and cares even less. Fasten your seat belts for a very bumpy ride.
The banks and other financial intermediaries have played right into the hands of those who desire a more subservient European style capitalism. It’s the reverse of the old trope “You saved my life and now I owe you” as in
“we (the government) saved your bank and now we own you.”
Stay tuned for continuing episodes of As the World Turns, better known as Capitalism Roasting on a Spit.
Banking utilities – Part 2 May 6, 2009
Posted by wonderingin in Banking, Financial Markets, Regulation, The Economy.add a comment
In earlier posts, we spoke to the notion that regulators may be forced into rationalizing the biggest banks as banking utilities – essential players in the economy whose future scope of action will be constrained by regulators’ views about what is good for the economy as a whole rather than just the interests of the banks’ shareholders.
Now the fight is on as The New York Times reports that the private equity community is pushing to allow P/E firms to control as well as invest in big banks – a step in the opposite direction.
Bank managements currently work for shareholders with an eye over their shoulders for the regulators. The utility approach would likely require banks to operate more directly in the interests of the economy while they are allowed to earn a “reasonable return on their capital”.
The dilemma – banks need capital and the P/E firms have a lot. But I do not see the Federal Reserve backing down on the shift toward utility status. The economic stakes are too high and bank managements are already too difficult to control before one considers the predilections of the P/E players.
On the other hand, vultures play a useful role in nature – cleaning up messes. And vulture capitalists, er P/E firms, can play a similar role in cleaning up the current economic mess.
Banking utilities are coming, but the Federal Reserve will ultimately wiggle enough to let the P/E guys help clean up the banking system albeit without the unilateral economic control to which they are accustomed.
We are in the eye of the storm April 17, 2009
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“We are in the eye of the storm. The worst is behind us for housing. For commercial real estate and corporate lending, there is still a big dark cloud.”
- GERARD CASSIDY, a banking analyst.
http://www.nytimes.com/2009/04/17/business/17bank.html?th&emc=th
Ratings firms are chasing the knife April 10, 2009
Posted by wonderingin in Banking, Business.add a comment
The ratings firms have created a new derivative of the old Wall Street phrase about “catching a falling knife”. Not quite able to catch it, they are chasing the knife down.
Ratings agency downgrades abound:
Hartford’s Capital Cushion Questioned
Moody’s Strips Berkshire of Top Rating
The Downside of Ratings Reform
The real problem for investors has been relying on the ratings in the first place instead of doing their own homework.
Capital is precious – investing should always be approached with fear and trepidation.
Making Banking Boring (again) April 10, 2009
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Paul Krugman may have it right this time.
“Thirty-plus years ago, when I was a graduate student in economics, only the least ambitious of my classmates sought careers in the financial world. Even then, investment banks paid more than teaching or public service — but not that much more, and anyway, everyone knew that banking was, well, boring.
“Strange to say, this era of boring banking was also an era of spectacular economic progress for most Americans.”
AIG Bonuses – a dangerous distraction March 19, 2009
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The hue and cry about the AIG retention bonuses is a dangerous distraction on several fronts. Here are two:
The real question is how much money are the Feds going to put down the rat hole and will it really make a positive difference for the economy?
To paraphrase Ross Perot’s famous line, “There is a giant sucking sound” coming from AIG headquarters as the company vacuums up ever more taxpayer dollars.
What’s needed to unwind the mess? Talent. Talent must be paid or it leaves. Draconian claw back taxes and limits on compensation are a sure way to drain the banks of their top talent. This is not a good precedent for the financial services industry or the American economy.
Better to regulate the products and reward the talent.
Ratings Agency Rope-a-dope March 14, 2009
Posted by wonderingin in Banking, Financial Markets, Personal Finance.add a comment
The ratings agency downgrades of Warren Buffet’s Berkshire Hathaway after the company recently reported some large paper losses for 2008 remind me of the old joke about the job of an auditor -
he’s the guy who comes in after the battle to shoot the wounded.
Throughout the financial crisis, the ratings agencies (Fitch, S&P, Moody’s) have been more than a few days late and a lot of dollars short. They have been just one more cog in Wall Street’s investment banking black box.
That banking black box has worked much like the chicken pie machine in the children’s movie, Chicken Run (“chickens go in; pies come out”) until the machine broke down and its owners had no idea what to do to fix it.
Ratings and default insurance have allowed investors to avoid doing their own homework much to their current dismay. If you don’t know what you are buying and why, you are a chicken waiting to be plucked.
Real change or just Mea Culpa for the moment? March 12, 2009
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“The events of the past months have shaken the foundation of our global financial system … And they’ve made clear the need for profound change to that system. At Morgan Stanley, we’ve dramatically brought down our leverage, increased transparency, reduced our level of risk and made changes to how we pay people…. We didn’t do everything right. Far from it. And make no mistake: as the head of this firm, I take responsibility for our performance.” – John Mack, CEO of Morgan Stanley before a Congressional Hearing, February 2009
John Mack has been one of the few banking CEOs to publicly acknowledge that his company’s business went off the rails in recent years. CEOs of failed firms (Bear, Lehman, Merrill) continue to deny that any of the problems were their fault- it was a tsunami in the market! Certainly the remaining solvent firms have declined to take any responsibility.
Maybe real self-directed change only comes about through a near death experience. After all, Morgan Stanley is the only investment banking firm which has come close to failing without actually doing so.
Financial market success is like doing drugs – the longer the fat profits continue, the more bankers and traders seem to think that the good times will never end. And the current generation of players has never experienced the pain of withdrawal – until now.
Wall Street could benefit from Andy Grove’s advice – Only the Paranoid Survive. Unfortunately, a high proportion of addicts forced off drugs cold turkey eventually revert to their former habits.
Easier credit is a mirage March 2, 2009
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“A couple of years ago, banking was all about leveraging capital and growing [earnings per share],” says Michael Reinhard, CFO of National Penn Bancshares, a community bank with $9 billion in assets. “Now it’s about generating capital and preserving it.”
Read the Big Freeze at CFO.com.
There are two realities which need to be recognized:
- The currently frozen credit markets will take time to thaw.
- When they do thaw, the rules for borrowers will be different: tighter scrutiny and covenants and lower banker appetites for the riskier deals.
And that’s before we get to any new financial regulatory framework to be imposed by the government “to make sure this never happens again.”
The worm has indeed turned.
Banking utilities on the horizon? January 9, 2009
Posted by wonderingin in Banking.1 comment so far
In an earlier post, Getting to “Yes” in the Wild West, we suggested that the proper role of the banking system was as a financial utility to grease the wheels of industry and commerce.
Now, even Treasury Secretary Paulson is suggesting that the regulated utility model with an an independent commission to set target rates of return might be a proper direction in which to take at least some parts of the financial system.
Getting to “Yes” in the Wild West December 28, 2008
Posted by wonderingin in Banking.add a comment
Washington Mutual (WaMu) was one of the parade marshals leading mortgage borrowers down the path to financial ruin for the bank, their borrowers, and ultimately the taxpayers who are footing the bill for the largest bank failure in history!
“At WaMu, getting the job done meant lending money to nearly anyone who asked for it — the force behind the bank’s meteoric rise and its precipitous collapse this year in the biggest bank failure in American history.
On a financial landscape littered with wreckage, WaMu, a Seattle-based bank that opened branches at a clip worthy of a fast-food chain, stands out as a singularly brazen case of lax lending. By the first half of this year, the value of its bad loans had reached $11.5 billion, nearly tripling from $4.2 billion a year earlier.”
Continue reading from the NYTimes…
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Many if not most spectacular bank failures involve aggressive bank executives pursuing aggressive growth, which ultimately requires lowering the bank’s lending standards and subsequently burying the bank under a mountain of bad loans.
For some strange reason, some people think that banks can and should be growth businesses. They are not.
Banks’ functions are more like those of a utility – enabling commerce for a fee. And they should be treated like utilities, which are allowed to earn a reasonable return on their capital but only under the aegis of tight regulatory supervision.
Stay tuned for big changes in the way banks operate and don’t buy any bank stocks just yet!
How we got hear and where we may be headed December 21, 2008
Posted by wonderingin in Banking, The Economy.add a comment
There have been numerous recent explanations for how we came to the current financial crisis and what might happen next. The following commentary is one of the better summaries.
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“Little by little, business is enlarged with easy money. With the exhaustless reservoir of the Government of the United States furnishing easy money, the sales increase, the businesses enlarge, more new enterprises are started, the spirit of optimism pervades the community.
“Bankers are not free from it… They are human. The members of the Federal Reserve board will not be free of it. They are human…. Everyone is making money. Everyone is growing rich. It goes up and up, the margin between costs and sales continually growing smaller as a result of the operation of inevitable laws, until finally someone whose judgment was bad, someone whose capacity for business was small, breaks; and as he falls he hits the next brick in the row, and then another, and then another, and down comes the whole structure.
“That, sir…is no dream. That is the history of every movement of inflation since the world’s business began, and it is the history of many a period in our own country.”
- Elihu Root opposing establishment of the Federal Reserve System in 1913, as quoted in Is the Medicine Worse Than the Illness?
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And lest we forget, while inflation is good for borrowers, it’s deadly for savers.
Throwing stones December 19, 2008
Posted by wonderingin in Accounting, Banking, The Economy.add a comment
The current credit and financial crises have produced more than their share of scapegoats – unreasonable politicians; greedy executives, mortgage brokers and investment bankers; lax regulators; tight-fisted accountants, etc., etc.
Now, the putative scapegoats are throwing stones at each other!
In a recent interview, Gerrit Zalm, former Dutch Minister of Finance and recently named CEO of the combined ABN Amro and Fortis operations in the Netherlands, claims that the credit crisis is a regulatory problem and not an accounting problem (referring to the furor over whether the new fair value accounting standard in the U.S. is a cause of the credit crisis).
Zalm says the accountants merely report what they see. Zalm also serves as a trustee of the IASC Foundation which oversees the work of the International Accounting Standards Board (IASB).
In reality, it’s more like an incestuous ecosystem – all are to blame or none are to blame. We’re all in it together.
Ring around the Rosie December 18, 2008
Posted by wonderingin in Accounting, Banking, Corporate Finance.add a comment
Modern financial reporting contains elements similar to the observer effect in physics where the act of observing the behavior of sub-atomic particles actually changes their behavior.
Investment banking and financial services have focused much of their energy on creating innovative (black box) financial instruments (e.g. derivatives, mortgage-backed securities, structured financial products) which generated wealth (for their creators) while often skirting existing capital, regulatory, or accounting requirements. SIVs (off balance sheet special purpose investment vehicles) were also involved in many instances.
Financial gurus create products designed to get around particular accounting or regulatory constraints for which their clients gladly pay. Something blows up, regulators clamp down and demand that the accountants write new (often heavy-handed) rules to limit or eliminate the offending practices or products and then the game starts all over again.
Chuck Prince of Citigroup said it best, “As long as the music is playing, you’ve got to get up and dance.” This time around, however, when the music stopped, all of the chairs were knocked over, some broken beyond recognition. It reminds me of the nursery rhyme Ring around the Rosie.
Let’s hope the credit crisis is not a financial version of the bubonic plague.
Everyone wants to be a bank (holding company) December 16, 2008
Posted by wonderingin in Banking.add a comment
It seems that everyone in the financial sector now wants to be a bank holding company. Earlier, it was Goldman Sachs (GS) and Morgan Stanley (MS) as they worked to stave off the market contagion hammering their stock prices.
More recently, other players are stepping up for some Fed love, notably GMAC the giant finance company owned by Cerberus Capital and General Motors.
There would seem to be some real opportunity here for better funding using bank deposits, in addition to access to various Fed borrowing programs and FDIC debt guarantees.
GS had total assets at the end of August of $1.081 trillion versus bank deposits of $29 billion (3% of assets). MS had assets at the end of August of $987 billion and deposits of $36.7 billion (4% of assets). Finally, GMAC had $211 billion of assets and $19.5 billion of deposits (9% of assets).
By contrast, JPMorgan Chase had $969 billion of deposits supporting $2.2 trillion of assets and Bank of America reported $874 billion of deposits against $1.8 trillion of total assets, both at September 30, for an average of 46% of deposits to assets.
For GS, MS and GMAC to achieve deposit levels equal to only 30% of their current total assets, they would collectively need to raise approximately $600 billion in new deposits.
I wonder where all that money is going to come from?
But, then again maybe some of them won’t need those deposits after all.
