Dave Emory’s entire lifetime of work is available on a flash drive that can be obtained here. (The flash drive includes the anti-fascist books available on this site.)
Listen:
MP3 One Segment
NB: This Flash stream contains both FTRs 740 and 741 in sequence. Each is a 30-minute broadcast.
Introduction: Recent disclosures concerning the Federal Reserve’s actions during the financial meltdown have revealed the extent to which foreign lending institutions were the beneficiaries of the Fed’s services.
Two of those institutions, Depfa and Dexia, appear to have required the Fed’s assistance partially in order to mask a gambit through which municipal bonds, were fraudulently manipulated, imperiling the financial integrity of American cities.
A great Bloomberg article follows up on the disclosure that the two banks were the largest recipients of Fed “assistance” during the 2007–2008 period of Fed emergency lending. The article notes that the use of the Fed’s “discount window” by foreign banks is a 97-year old secret that was only disclosed because the Fed was forced by congress to reveal the details of the emergency lending.
The program also discusses how Dexia and Depfa were major players in the US municipal bond market... Dexia was also one of the indicted players in a massive muni bid-rigging scandal. Dexia’s presence in this market also happened to jump six-fold in the year preceding the crisis, so it looks like they may have been banking on a bailout (like a lot of the big winners of the crisis were).
The revelations concerning the Fed’s actions are of special concern because Deutsche Bank chief Josef Ackermann has warned that the hedge funds may prove “too big to fail” and that that will lead to a bailout of those institutions as well. Note that Deutsche Bank was the recipient of Fed funds and that the U.S. government is suing Deutsche Bank for a billion dollars over their role in the subprime crisis.
Warren Buffett has echoed the sentiment that more big bailouts may be on the way for firms “too big to fail.”
Program Highlights Include: Warnings that the Obama administration’s provisions to shore up the financial industry are inadequate to prevent another meltdown; the drying up of short-term lending for European banks; European banks have a great deal of red ink on their banks; the fact that junk bond yields are at an all-time low; the lending of money to the failed Wachovia Bank (focal point of FTR #740).
1. Recent disclosures concerning the Federal Reserve’s actions during the financial meltdown have revealed the extent to which foreign lending institutions were the beneficiaries of the Fed’s services.
NB: Italicized and bold-faced excerpts are Mr. Emory’s.
IN August 2007, as world financial markets were seizing up, domestic and foreign banks began lining up for cash from the Federal Reserve Bank of New York.
That Aug. 20, Commerzbank of Germany borrowed $350 million at the Fed’s discount window. Two days later, Citigroup, JPMorgan Chase, Bank of America and the Wachovia Corporation each received $500 million. As collateral for all these loans, the banks put up a total of $213 billion in asset-backed securities, commercial loans and residential mortgages, including second liens.
Thus began the bank run that set off the financial crisis of 2008. But unlike other bank runs, this one was invisible to most Americans.
Until last week, that is, when the Fed pulled back the curtain. Responding to a court ruling, it made public thousands of pages of confidential lending documents from the crisis.
The data dump arose from a lawsuit initiated by Mark Pittman, a reporter at Bloomberg News, who died in November 2009. Upon receiving his request for details on the central bank’s lending, the Fed argued that the public had no right to know. The courts disagreed.
The Fed documents, like much of the information about the crisis that has been pried out of reluctant government agencies, reveal what was going on behind the scenes as the financial storm gathered. For instance, they show how dire the banking crisis was becoming during the summer of 2007. Washington policy makers, meanwhile, were saying that the subprime crisis would subside with little impact on the broad economy and that world markets were highly liquid.
For example, on July 23, 2007, Henry M. Paulson Jr., the Treasury secretary at the time, said the housing slump appeared to be “at or near the bottom.” Two days later, Timothy F. Geithner, then the president of the New York Fed, declared in a speech before the Forum on Global Leadership in Washington: “Financial markets outside the United States are now deeper and more liquid than they used to be, making it easier for companies to raise capital domestically at reasonable cost.”
Within about a month’s time, however, foreign banks began thronging to the Fed’s discount window — its mechanism for short-term lending to banks. Over four days in late August and early September, foreign institutions, through their New York branches, received a total of almost $1.7 billion in Fed loans.
As the global run progressed, banks increased their borrowings, the documents show. For example, on Sept. 12, 2007, Citibank drove up to the New York Fed’s window. It extracted $3.375 billion of cash in exchange for $23 billion worth of assets, including commercial mortgage-backed securities, residential mortgages and commercial loans.
THAT transaction seemed to get the Fed’s attention. At 1:30 that afternoon, Mr. Geithner spent half an hour on the phone with Gary L. Crittenden, Citi’s chief financial officer at the time, Mr. Geithner’s calendar shows. A few weeks later, Citigroup announced that it was writing off $5.9 billion in the third quarter, causing its profit to drop 60 percent from a year earlier — and that was only the beginning.
Perhaps the biggest revelation in the Fed documents is the extent to which the central bank was willing to lend to foreign institutions. On Nov. 8, 2007, Deutsche Bank took out a $2.4 billion overnight loan secured by $4 billion in collateral. And on Dec. 5, 2007, Calyon of France borrowed $2 billion, providing $16 billion in collateral.
When the crisis was full-on in 2008, foreign institutions became even bigger beneficiaries of the Fed’s credit programs. On Nov. 4 of that year, the Fed extended $133 billion through various facilities. Two foreign institutions — the German-Irish bank Depfa and Dexia Credit of Belgium — received 39 percent of the money that day.
“The striking thing was the large amount of borrowing that the New York Fed accepted during the crisis from European banks that had only a minimal presence in the U.S. and arguably posed no threat to the U.S. payment system,” said Walker F. Todd, a research fellow at the American Institute for Economic Research and a former assistant general counsel and research officer at the Federal Reserve Bank of Cleveland. Such a thing would never have occurred 20 years ago, he added.
All of the discount-window borrowings extended to institutions during the debacle have been repaid. But the precedent was set: The Fed was the financial backstop to the world.
Since 2000 or so, the mind-set at the Fed in New York and Washington has been that the central bank must step in when there is a global crisis, Mr. Todd said, even if it appears to exceed its mandate. . . .
“The Bank Run We Knew So Little About” by Gretchen Morgenson; The New York Times; 4/2/2011.
2. Depfa and Dexia appear to have required the Fed’s assistance in order to mask a gambit through which municipal bonds were fraudulently manipulated, imperiling the financial integrity of American cities.
A great Bloomberg article reports on the recent disclosure that the two banks were the largest recipients of Fed “assistance” during the 2007–2008 period of Fed emergency lending. The article notes that the use of the Fed’s “discount window” by foreign banks is a 97-year old secret that was only disclosed because the Fed was forced by congress to reveal the details of the emergency lending.
The article also discusses how Dexia and Depfa wee major players in the US muni market... Dexia was also one of the indicted players in a massive muni bid-rigging scandal Dexia’s presence in this market also happened to jump six-fold in the year preceding the crisis, so it looks like they may have been banking on a bailout (like a lot of the big winners of the crisis were).
A European bank that got the most Federal Reserve discount window help during the financial crisis received a total of about $300 billion in loans, guarantees and cash infusions from governments and central banks. It also owned subsidiaries implicated in bid-rigging that prosecutors say defrauded U.S. taxpayers.
Details of Fed lending released last week show that Dexia SA, based in Brussels and Paris, borrowed as much as $37 billion, with an average daily loan amount of $12.3 billion in the 18 months after Lehman Brothers Holdings Inc. collapsed in September 2008. The House subcommittee that oversees the Fed plans hearings on the central bank’s discount window lending to offshore financial institutions next month.
By lending to Dexia, the Fed kept money flowing into local government projects throughout the U.S. as well as the money market funds that invested in them. Dexia guaranteed bonds issued by entities as varied as the Texas State Veterans Land Board in Austin and the Los Angeles County Metropolitan Transportation Authority.
“If Dexia went bankrupt, it could have been a catastrophe for municipal finance and money funds,” said Matt Fabian, a Concord, Massachusetts-based senior analyst and managing director at Municipal Markets Advisors, an independent research company. “The market has extensive exposure to foreign banks.”
Overseas banks accounted for about 70 percent of discount window loans when borrowing reached its peak of $113.7 billion in October 2008, according to the Fed’s data. The discount window, established in 1914, is known as the lender of last resort.
By law, most U.S. branches of foreign banks have access to the discount window, said David Skidmore, a spokesman for the American central bank. “They are important providers of credit to U.S. businesses and households, and discount window lending during the financial crisis helped support their continued lending in the United States,” he said.
The Fed has kept discount window borrowers secret for 97 years. Last week’s disclosures were court-mandated after legal victories by Bloomberg LP, the parent of Bloomberg News, and News Corp.’s Fox News Network LLC.
Depfa Bank Plc, a German-owned bank based in Dublin, was another insurer of municipal bonds in the U.S. Depfa’s discount window borrowing peaked at $28.5 billion in November 2008.
Dexia, which borrowed $37 billion from the discount window in January 2009, said its loans from central banks peaked at 122 billion euros ($165 billion) in October 2008. That month, it also obtained up to 150 billion euros ($202 billion) in debt guarantees from France, Belgium and Luxembourg, of which it tapped a maximum of about 96 billion euros ($130 billion) in May 2009. The countries and existing shareholders provided Dexia about 6 billion euros ($8.4 billion) in capital.
Dexia stopped issuing guaranteed debt in June 2010, said Alexandre Joly, a member of the bank’s management board and head of strategy, portfolios and market activities.
“It’s apples and oranges to mix central bank loans, debt guarantees and capital infusions to come up with a big headline number,” Joly said in a phone interview from Brussels. “It’s not accurate and it can be damaging to Dexia.”
The bank availed itself of other Fed lending programs too. Its total borrowings from the U.S. central bank’s Commercial Paper Funding Facility ranked third among users of the emergency program created to support the market for short-term debt issued by banks and corporations. Dexia used the program 42 times for a total of $53.5 billion, according to data the Fed released in December.
Dexia also tapped the Term Auction Facility, the lending mechanism the Fed established in December 2007 to augment the discount window. Dexia received 24 TAF loans totaling $105.2 billion, the largest of which was $16.7 billion on Jan. 17, 2008, Fed data show. The lender used TAF about twice a month from December 2007 to September 2008, then once in August 2009 and once more in November 2009. The interest rates it paid ranged from 4.65 percent in December 2007 to 0.25 percent for the two loans in 2009.
The Fed loans have been repaid, said Ulrike Pommee, a Brussels-based Dexia spokeswoman. The bank used the Fed’s emergency lending facilities to finance U.S. assets only, Pommee said in an e‑mail statement.
“We have always been very transparent in our communications about the wear and tear on us in the market during the crisis,” Pommee said.
In 2008, Dexia was hit with buyback provisions in municipal bonds, Pommee said. The bank was one of the biggest backstops of the bonds, providing letters of credit or so-called standby purchase agreements — guarantees to buy the bonds if investors wanted out. Dexia’s so-called credit enhancement made it possible for money market funds to buy the bonds.
Dexia provided $14.7 billion in standby agreements and letters of credit in North and South America, excluding Mexico, in the first half of 2008, a six-fold increase over the same period a year earlier, the bank said in its first-half 2008 report.
“This growth was the direct result of a dwindling number of market participants able to offer such financial products combined with the urgent needs of issuers to restructure their debt,” Dexia said.
Over most of the last decade, thousands of cities, counties, hospitals and universities issued long-term floating- rate bonds and paired them with interest-rate swaps to try to protect against higher borrowing costs. The strategy, which relied on banks such as Dexia to guarantee a market for the variable-rate notes, collapsed when investment firms and bond insurers lost their top-credit ratings.
Interest-rate swaps are derivatives, or contracts whose values are derived from assets including stocks, bonds, currencies and commodities, or from events such as changes in interest rates or the weather. Swaps are private contracts and the market for them isn’t regulated.
Redemptions sapped Dexia so much that the bank was “two days from bankruptcy,” Pommee said, citing the French ministry for the economy.
Interest-rate swaps have cost U.S. taxpayers billions. The Denver public school system is borrowing $800 million this week to escape a wrong-way bet on rates. A Dexia unit that had provided a standby purchase agreement on the school district’s swap declined to renew its credit protection this month. The cities of Detroit and Pittsburgh also have restructured debt after Dexia decided not to renew its insurance.
Dexia’s lifeline from U.S. taxpayers came as federal officials were investigating allegations that the bank’s subsidiaries colluded with others to defraud state and local governments.
Two former Dexia units were among more than a dozen financial firms that conspired to pay below-market interest rates to U.S. state and local governments on so-called guaranteed investment contracts, or GICs, according to documents filed in a U.S. Justice Department criminal antitrust case.
Municipalities buy GICs with money raised by selling bonds, allowing them to earn a return until the funds are needed for schools, roads and other public works.
An employee of Financial Security Assurance Holdings Ltd., one of the Dexia subsidiaries, agreed to pay kickbacks ranging from $4,500 to $475,000 to a Los Angeles investment broker called CDR Financial Products Inc. in exchange for rigging bids, according to people familiar with the case and public records.
CDR employees fed information on competitors’ bids to FSA, allowing the firm to win deals at a lower interest rate than it would have paid, according to a federal indictment, public records and the people.
Steven Goldberg, a former FSA banker, was indicted in July on fraud and conspiracy charges. He has pleaded not guilty. FSA, which hasn’t been indicted, is facing a lawsuit from the U.S. Securities and Exchange Commission. While Dexia sold the bond insurance unit of FSA, it remained exposed to legal risks because it kept another division of the company, its Financial Products segment, Dexia said in its third-quarter 2010 report.
Joly said Dexia’s funding from the European Central Bank remains at 17 billion euros today. Its borrowing from the Fed “was a temporary situation and now they’re trading just fine,” said Nat Singer of Swap Financial Group LLC in South Orange, New Jersey.
3. Deutsche Bank chief Josef Ackermann has predicted that the hedge funds may prove “too big to fail” and that that will lead to a bailout of those institutions as well. Note that Deutsche Bank was the recipient of Fed funds and that the U.S. government is suing Deutsche Bank for a billion dollars over their role in the subprime crisis.
Deutsche Bank AG Chief Executive Officer Josef Ackermann said unregulated financial companies such as hedge funds may pose a systemic risk to the economy if oversight isn’t increased.
“You have an unregulated area which becomes — as a consequence of all the regulatory changes — more and more important,” Ackermann, 62, said in an interview at the World Economic Forum in Davos, Switzerland. “You may one day wake up and realize that the systemic challenges are so big that you will have to bail out or at least help support the unregulated sector.”
Ackermann’s warning echoes comments made by former U.S. Treasury Secretary Lawrence Summers, who said this week in Davos that regulators haven’t paid enough attention to problems that could emerge in “a large, less healthy buccaneer sector.” Hedge funds have dodged the brunt of new global banking regulation aimed at avoiding a repeat of the worst global financial crisis since the Great Depression.
“If you separate utility banks from casino banking, you will one day realize that casino banks are also counterparties to corporations but also to other banks and to asset management and to governments,” Ackermann said yesterday. “It would be somewhat naïve to assume that if you have a strong regulated sector and leave the unregulated in the open, that you will never have systemic risk.”
The biggest U.S. banks such as Bank of America Corp. and Goldman Sachs Group Inc., also facing tighter scrutiny and higher capital requirements, argue they’ll be at a competitive disadvantage if hedge funds, money managers and insurers aren’t subject to similar constraints.
Representatives for the latter have fought back in meetings with government officials, saying economic stability wouldn’t be threatened if one of their firms failed. The Alternative Investment Management Association, a London-based group that represents hedge funds, released a statement today that says it’s “inaccurate” to call the industry unregulated.
“All the major jurisdictions where hedge funds operate, whether in North America, Europe or Asia-Pacific, have rigorous regulation of the industry,” the group’s CEO, Andrew Baker, said in the statement. “This already rigorous regulation is being increased by new legislation introduced since the crisis.”
The U.S. Congress in July approved the Dodd-Frank Act, which forces hedge funds to undergo routine inspections by the Securities and Exchange Commission and requires firms that manage more than $1 billion to disclose their investments, leverage and risk profile to regulators.
European lawmakers in November approved regulations requiring hedge funds to set limits on their use of leverage and avoid pay practices that encourage risk taking.
Deutsche Bank, which is scheduled to publish fourth-quarter and full-year earnings on Feb. 3, will likely pay bonuses that are in line with other competitors in the market, Ackermann said.
When asked about considerations by Credit Suisse Group AG to pay parts of bonuses with bonds that convert into equity if the company’s capital shrinks, he said the German firm sees “too many challenges” with the so-called CoCos and is not yet planning to use them for pay.
“I think we are paying the bonus which markets require,” he said. He declined to comment on whether variable pay for 2010 will be lower or higher than the year before, saying only that compensation at Frankfurt-based Deutsche Bank, Germany’s biggest bank, complies with “all the directives and recommendations” from policymakers and regulators.
Ackermann said in December 2009 that the big German financial institutions, including Allianz SE and Commerzbank AG, agreed to impose self-discipline on pay based on recommendations by the Basel, Switzerland-based Financial Stability Board.
4. Warren Buffett has echoed the view that it is too late to sidestep “too big to fail.”
Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., told the Financial Crisis Inquiry Commission that taxpayers will always be on the hook for collapses at the biggest U.S. companies.
“You will always have institutions that are too big to fail, and sometimes they will fail,” Buffett, 80, told the FCIC in a May 26 interview, according to a recording released by the panel yesterday. “We still have them now. We’ll have them after your commission report.”
The Dodd-Frank financial reform act, enacted in July, was touted by President Barack Obama as a means to ending bailouts and protecting taxpayers from firms that are “too big to fail.” Federal Reserve Chairman Ben S. Bernanke, who made more than $3 trillion of assistance available during the crisis, has said the “too-big-to-fail” issue can be eliminated only when investors believe the U.S. won’t rescue firms.
Investors were rescued in 2008 by Bernanke and then- Treasury Secretary Henry Paulson, whose relief programs cushioned declines for stockholders and bailed out bondholders at firms including American International Group Inc. Buffett, who injected $5 billion in Goldman Sachs Group Inc. at the depths of the crisis, said he was betting on the success of government intervention. . . .
5. The program closes by noting indications that another financial collapse may be coming:
- Warnings that the Obama administration’s provisions to shore up the financial industry are inadequate to prevent another meltdown.
- The drying up of short-term lending for European banks.
- European banks have a great deal of red ink on their banks.
- The fact that junk bond yields are at an all-time low.
The Political Implications of the UFO Phenomenon and the "ET" Myth
http://www.latimes.com/news/opinion/commentary/la-oe-meyerson-europeans-20110515,0,3990894.story
It looks like the Fed’s “discount window” is still open for business, but you don’t necessarily want to get in line:
Let’s see, we have:
1. An unprecedented eurozone crisis denominated in euros.
2. Interbank lending lockups and a big retrenchment in foreign investments in eurozone bank debt.
3. A bailout fund that’s potentially 14 trillion Euros.
and
4. A “loosening of restrictions” for collateral swaps in the “bigger” countries (Italy, Spain, maybe France?).
Gulp.:
Double Gulp.
And...let’s make that a
Triple Gulp
I prefer to think of it as $7 trillion of financial manure:
Yikes, so $7 trillion in crap assets needs to get offloaded onto the ECB, and fast. This reminds me of the classic fairy tale “How Fred Fed the Bear”:
I’m not sure there’s a moral to the story...maybe something to do with credit facility implementation logistics and game theory? Either way, I’d avoid reading the sequel. The storyline is just implausible.
Also, I wouldn’t feel especially bad for Stearn the Bear. It turns out he was kind of an asshole.
It looks like the Dexia bailout might need a bailout:
No Jamie, that wasn’t “Motivation” you were providing. Stop being so humble. It’s called leadership:
Oh crap, another round of free money is on the way for the banksters. This sounds like situation requiring some serious motivational leadership (I’m looking at you Jamie). It’s called teamwork:
So does the ECB only become the lender of last resort when it’s lending with other central banks? They really love their teamwork. It’s like we’re ALL on the same team:
Ouch, that’s not going to be easy convincing the masses of the necessity of wage cuts. Looks like we need some leadership:
Only $1.8 million for top investment-grade-bond trader? That’s highway robbery! Now I know why they’re called bond “vigilantes”.
I really need to stop trashing my fellow wage earners:
It must really hurt to make so much that it’s almost like your entire salary is taxed at the top tax rate. On top of that, those at the top have to worry about extreme wage volatility:
AND he had trouble selling his home? If that’s what it’s like to be ultra wealthy then count me out! It sounds more like a wealth of burdens if you ask me.
Sometimes the headline says it all:
Draghi: ECB to Offer Banks Unlimited Cash.
Of course, if you read the article it isn’t actually quite that extreme. The banks don’t get free money for nothing. That would just encourage more bad behavior. Instead, they have to swap their increasingly toxic assets in exchange for the cash. You can’t have a morality play without morals to uphold.
So according to the World Economic Forum, the world’s total financial credit supply will have to double over the next decade to support economic growth. There’s a mere 100 trillion in new credit over the next decade:
Hmm...now how is the financial system going to generate an extra $100 trillion in credit, especially during a depression?
Well, for starters we might call upon
regulatorsthe Leveraging Fairy to keep waving her “re-hypothecation” wand, thus magically allowing multiple financial giants to pledge the same underlying assets as collateral used for leveraged bets. And if infinite shadow banking fractional reserve leveraging doesn’t do the trick, we’ll just ask the “leverage fairy” to wave her “Regulation T” wand and magically allow brokerages to secretly pledge their clients’ deposits as collateral for internal brokerage bets. Perhaps the “T” stands for “terribly tricky”?And once we’re leveraged up nice and good, maybe we’ll ask the Leverage Fairy to wave her “specious argument” wand. That handy little wand allows everyone to ignore the fallacy of risk elimination by counter-hedging when counter-parties can clearly fail. When that wand is waved fun things get to happen like the two top credit-default swap market makers (JP Morgan and Goldman Sachs) writing 43% of a $24 trillion credit-default swap market while only listing $1.5 billion in collateral at risk and giving no information on counter-parties because that 43% consists of counter-hedged contracts, thus neutralizing the risk according to arguments.
That might be how we’ll find that extra $100 trillion.
Here’s a fascinating quirk of this era of re-hypothetication-induced leveraging, where financial institutions A can make loans to institution B, and then A can take the assets it receives as collateral from B to use those assets as collateral for a new loan from institution C. And C can do the same and so on...Well, it looks like there’s a bit of a problem with this magic credit machine when the central banks step in: the central banks don’t re-hypothecate and the buck (or euro) literally stops there:
The 523 members of the Free Money Club want you to know that it is an exclusive club. Rabble need not apply. That is all.
There’s more on the regulation firewall that the financial industry is continuing to maintain. This time it’s about opposition to regulations capping banker bonuses:
I guess it’s nice that shrinking bonuses might make it easier for “mid-sized” financial operations to hire that vital banking “talent” away from big-bonus-paying giants. I wonder what kind of sales job Howard Lutnick had in mind when he said he was planning on hiring 500 individuals from his larger competitors? No doubt those new hires will be selling tools with enormous value for society:
In related news, Ezra Klein has a recent post on there study of whether or not “pay-for-performance” bonuses did, indeed, contribute towards risky behavior in the financial sector. It’s conclusion? Bonuses for short-term profits don’t actually incentive excessively risky behavior because the bankers were getting paid huge sums regardless of performance. Instead, it looked like the bigger the bank, the bigger the bonus and risk-taking, creating a primary incentive to just keep growing the firms assets (typically a debt/risk-based endeavor). While Ezra points out that there’s disagreement over the study’s conclusions, it’s another reminder that these “too big to fail” entities and Mitt-mentum-based economic driving forces remain a serious threat to the global economy and, increasingly, national sovereignty.
Well, now we know what a philosophically unacceptable bailout is from the perspective of our financial overlords:
Wow, it’s almost like Freddie mac had something to gain from more foreclosures. Oh that’s right, they did.
Oops! Here’s the corrected 1st link in the above comment
Austerity:
Warren Buffett has finally had enough with all the bankster bashing:
Those poor poor banksters. When will the public finally leave them alone:
Good ol’ Goldman Sachs, where
God’sMammon’s work get done.This is interesting...according to the Carlyle Group, their owners’ wallets qualify as “investment products” in need of expansion:
Hmmm...that kind of maneuver isn’t exactly confidence-inducing with an IPO only months away. Oh well, no doubt it will turn out as profitable as the last Carlye IPO.
In the aftermath of the Goldman Sachs executive resignation kefuffle some pundits are pointing out that the public really shouldn’t care whether or not one of the most powerful banks in the world has adopted a “screw the client” mentality because the marketplace will eventually solve the problem and avoid Goldman Sachs altogether. Atrios has a different take on the subject worth considering:
Oh look, Deutsche Bank just discovered (a year ago) a fun little loophole that might allow foreign banks to avoid the new Frank-Dodd financial reform regulations while still fully participating in future US bailouts:
The financial industry’s ‘moral hazard’-based opposition to principle reduction for underwater homeowners appears to be rooted in some, ummm, questionable priciples:
Ownership Society? That is so 2005. We need to get with the times:
Sounds awesome!
According to Deutsche Bank analysts, the financial support from the ECB’s $1.3 trillion “longter-term refinancing operations” (LTRO) and the Fed’s “Operation Twist” (which was designed to lower the rate of 10-year bonds which is critial for a lot of things like mortgages and corporate borrowing) is coming to an end and the “worst is yet to come”. The last five years are even characterized as “a period of relative calm” compared to what they’re predicting. They looked in their crystal ball (i.e. the credit-default swaps derivatives market) and all signs point towards “more default”. Putting aside what a joke these derivatives market are now, the saddest thing is barring the deliberate restructuring of our financial system — one where we basically break the behemoth banks, resets the rules, reset the debt, and build a financial system that’s not designed to destroy — barring that, Deutsche Bank is probably right. As long as “austerity” is the primary tool in the ECB’s toolbox these bailouts are just buying more time and bigger bank bailouts, which is part of the point of keeping the crises going. It’s a system built to fail and then get bailed. And this system wants more bailouts. And then mass defaults. It’s hungry. When you live with monsters, you either feed the beast or get eaten
Ahhhh....sweet sweet justice. Finally.
Oh wait:
I just can’t believe our betters in JPMorgan’s risk oversight office missed this:
Oh wait, yes I can:
See no evil, hear no evil, do a bunch of evil...humanity’s latest awesome trend in risk management.
Once again, Iceland shows the world how it’s done.
I think this pretty much summarizes the last decade: Even worse than you think:
Well this is sure going to be a relief to the world’s poor and unemployed: The big banks got an extra four years to delay the full implementation of the new, stricter Basel III liquidity rules for international lenders. We wouldn’t want to, you know, impose too many harsh impediments to economic growth at this delicate point in the global the economy. The liquidity-cliff has been averted people! Now we can all breathe a sigh of relief and get back to business as usual.
Recommended google searches: Bill Still, Bradbury Pound, How Guernsey Beat the Bankers, IMF WP12202(Don’t trust), Victoria Grant, COMER lawsuit Bank of Canada.
Governments are printing and lending money to banks at near zero, then borrowing back at higher interest with the taxpayers covering the difference. Why not cut out the middle man.
As we are continuing to learn from JP Morgan’s “Whale” debacle, rigging the assumptions in a banks’s internal models can be a preferred approach to dealing with (delaying) crisis. It’s sort of the “hide under a pile of coats and hope everything works out” approach to crisis management:
Yes, by tweaking a bank’s models, like the models that determine the assumed value of the “risk weighted assets” in a giant portfolio of derivates, many magical things can happen, like a sudden increase or decrease in the valuation of the assets and liabilities the bank holds. And since new regulations are requiring banks to increase the ratio of assets to liabilities, let’s just say there’s going to be a number of large banks that are going to have a whale of a time swimming through this model muddle:
The CEOs of JP Morgan and Deutsche Bank may not realize what they’re saying here:
There is one obvious solution to ensuring that ‘too-big-fail’ banks can’t take down the economy and require a bailout if they implode, but it’s kind of impossible to imagine that these two don’t realize that very obvious solution:
It looks like Deutsche Bank has found a way out of its increasing capital requirements model muddle: muddle the models more:
Because there can be only one!
Uh oh!:
@Pterrafractyl–
Stunning find! Will be a FFT post before long–I want to wrap up some thoughts on Baby Face Snowden and the destabilization of Obama.
This is what so many can’t stand about Germany–as they self-righteously dictate (and I mean DICTATE) to others about their fiscal profligacy, their largest bank is badly exposed.
A whore preaching abstinence!
Best,
Dave
@Dave: And here’s a brand new Deutsche Bank-related scandal. Maybe. All we know at this point is that there are allegations that foreign-exchange rates are systematically being rigged by major players in the massive, unregulated daily foreign-exchange. The anonymous traders won’t say which banks are under suspicion, but what we know is that it would have to involve some very big players in this sector in order to pull it off given the size of the market. Guess which bank is the biggest:
Just to reinterate: “Sixteen of the largest banks, including Barclays, JPMorgan Chase & Co. (JPM) and Deutsche Bank (DBK), signed a voluntary code of conduct for foreign-exchange and money-market dealers in 2001 that was later included as an annex to guidelines issued by the Bank of England in November 2011″.
And another regulatory agency looking into a massive cartel goes through the motions...
There’s really one and only one thing JPMorgan needs to apologize for over this whole “London Whale” incident: loving too much. Just because polite society will never accept man-on-money love doesn’t make it wrong
The heart is not a “manipulative device”!
Here they go again!
And there they didn’t go. Again.
Here’s a peak at the GOP’s plan for how to handle failing Too Big to Fail banks: First, cut the SEC’s budget and ability to oversee banks and demand that only bank shareholders and creditors are liable in future bank failures. Then transfer the budget powers new Consumer Financial Protection Bureau to congress so it can be systematically underfunded. Then, when the TBTF banks inevitably fail (because congress starves the SEC and CFPB of the funds needed for meaningful oversight ) and liabilities vastly exceed what can be extracted from the creditors and shareholders, make sure the FDIC doesn’t have the power to get the Too Big to Fail bailout money back:
So, if banks aren’t going to have to pay back the bailout packages that exceed the liabilities of the shareholders and creditors under the Ryan plan, isn’t there an incentive, once banks cross a high enough leveraging threshold, for big banks to get as over leveraged as possible? After all, let’s say you had a bank that issues $10 billion in bonds and shareholder assets. If that bank implodes and liabilities exceed $10 billion, would the bond holders and shareholders have preferred that the bank had a $30 billion portfolio or a $300 billion portfolio? Wouldn’t they prefer the bigger portfolio at that point that was making money in the lead up to the meltdown? Why not if the bailout money never has to be paid back? It’s Too-Rigged-to-Not-Go-Big, isn’t it?
Fight! Fight! Fight!
It’s great to see the financial giants fight like this since we get to read about things like an “industrywide abandonment of underwriting guidelines” although you have to wonder what the odds are that BlackRock and Pimco weren’t, themselves, also quite aware of this “industrywide abandonment of underwriting guidelines” at the time since these two firms are, after all, industry giants. Hopefully we’ll see a “hey, you guys knew this was all crap too” defense. That could be fun.
Not satisfied with its seemingly impenetrable wall of legal protection, JP Morgan wants a “safe harbor” for its illegal hiring practices. That’s literally what Jamie Dimon asked for in an interview:
Beyond the issue of hiring Chinese “princeling” to get business, if JP Morgan actually got its wish for a corrupt hiring “safe harbor” policy from US authorities you have to wonder how many non-Chinese “princelings” around the world would also benefit from such a safe harbor policy. It seems like it might be a lot.
h gee, imagine that: in the midst of a panicky last minute attempt to thwart an government shutdown Wall Street just managed to slip in an early Christmas present for themselves: “The provision enables the big banks once again to use insured deposits and other taxpayer subsidies and guarantees to gamble in the derivatives markets—the very type of business that drove the 2008 financial crisis and the economic devastation that followed”:
Well, the author does make a valid point: This was just shockingly ‘in your face’ even by Wall Street’s standards. So who knows, maybe this will be a Pyrrhic Victory for the banksters.
But don’t forget that Wall Street is basically the master of Pyrrhic Defeats, so you also have to wonder if the US mid term elections didn’t end up teaching Wall Street a very powerful lesson: A politically cynical and demoralized US public prefers to just stay at home rather than vote (because voting “none of the above” is apparently too much work to voice your dissatisfaction with the status quo) and when the voters don’t vote, the oligarchs win by default. In other words, base on American voting patterns, the oligarchs of the country have an incentive to be as openly awful as possible as long as the awfulness can be done in a bipartisan manner likely to demoralize Democratic-leaning voters.
So maybe being extra ‘in your face’ awful is to the banksters’ long-term political advantage, at least long as both parties get blamed. And what better way to execute bipartisan awfulness than during a giant “Crominbus” bill that has to pass in order to prevent a government shutdown?
And since emergency last-minute deal-making on giant spending bills is pretty much the way Congress functions now it should be horrifyingly interesting to see what kinds other surprises are hiding in the ‘crominbuses’ of the future. Or the present
Revolving doors don’t oil themselves:
While questions about special Wall Street-to-government ‘golden parachutes” just are certainly important to ask, it’s also worth pointing out that, even if there were no golden parachutes at all, you have to question the wisdom of hiring people straight out of Wall Street for these positions at all. If you’re trying to find the best people to oversee a notoriously greed-driven industry, why hire someone that already took the ‘I wants lots of money and power’ career path in the first place?! Sure, there’s obviously going to be some useful talent working in Wall Street, but presumably they’re useful because they’re disgusted with how it operates and want to reform it and don’t think all that Wall Street cash is worth the guilt.
If someone needs to be basically paid off to work for the government, how much is their expertise really worth even if they’re quite knowledgeable? It seems like there are better talent pools government agencies should be focusing on.
Just FYI, Wall Street’s epidemic of late-onset affluenza has yet to peak:
“The vast majority of people are good and ethical, but they have become desensitized on Wall Street”
Note that if we’re to take Wall Street’s excuses seriously, that sort of means the rich and powerful can’t really be trusted with their riches and power because their innocent minds are inevitably going to become infected by the larger affluenza echo-chamber they’re operating within.
Sure, we often hear about how even if we taxed the rich at 100% you still wouldn’t get rid of poverty. And while that’s worth debating, it’s important to keep in mind that heavily taxing the super-rich doesn’t just allow for more money to help everyone else. It also helps stop the affluenza-infected individuals from using their riches to trash the rest of society. In other words, taxing the rich isn’t just about the redistribution of wealth. It’s also about not redistributing all the horrible affluenza-inspired bad ideas from the rich that inevitably make their way into the halls of power.
The more money you have the more contagious your affluenza becomes.
Ben Bernanke just released a memoire which is inevitably going to include some “what should we have done differently?” speculation. Wall Street executives probably aren’t going to be thrilled to hear his recommendations for the Justice Department, but, then again, they should be very excited about the reason he has to issue the recommendation in the first place:
“While you want to do everything you can to fix corporations that have bad cultures and encourage bad behavior — and the Fed was very much engaged in doing that — obviously illegal acts ultimately are done by individuals, not by legal fictions.”
Corporations are
peoplelegal fictions, and as Bernanke points out, legal fiction justice is basically fictional justice. And you know who agrees: The Justice Department. Yes, it’s the agency that’s been in charge of actually perpetuating the legal fiction justice farce, but they now agree it’s farcical:“With the era of financial crisis cases drawing to a close, the main lesson the Justice Department seems to have taken away is that the focus should be more on individuals who cause corporations to engage in misconduct rather than just the organizations themselves.”
Mega-fines for mega-crimes: It’s just the cost of doing business:
“Cryan said the various probes were “a millstone around the neck of the bank” after legal charges at Germany’s largest lender more than doubled to 5.2 billion euros last year. The firm has now racked up more than 13 billion euros in legal expenses since 2008, more than any other continental European institution.”
Note that these kind of “millstones” double as a US tax write-off. Again, it’s just a business expense.
And in related news, guess which large bank has a new subprime auto loan probe to start saving up for...
Financial worries are back in the headlines following a precipitous drop in US stocks this week. Higher-than-expected inflation numbers leading to expectations of another round of Federal Reserve interest rate hikes appear to be driving this market reaction. And as the following piece in Wall Street on Parade describes, the markets have good reasons for all this fear. Because the financial weather is increasingly looking like the conditions for another 2008-style perfect storm may already be here. But instead of a mortage-driven crisis, this would be precipitated by a banking system hooked on low rates and too brittle and greedy to survive in a normalized rate environment. A banking system that responded to the 2008 crisis by becoming more consolidated than ever. Just four megabanks — JPMorgan Chase, Goldman Sachs Bank USA, Citigroup’s Citibank, and Bank of America — hold almost 89% of the notion value of derivatives in the US banking system and 66% of the industry net current credit exposure. In other words, these four megabanks are all WAY Too Big To Fail. Wall Street’s chokehold on the US economy has only grown since 2008.
And that brings us to the scariest warning in this piece: while we obviously need to be concerned about the health and stability of these US megabanks, it’s the banks’ counterparties on all those derivatives trades that we really need to be worried about. Counterparies like Deutsch Bank and Credit Suisse which appear to be particularly vulnerable. If either of those banks ends up facing their own crisis, that could then bleed over into these US megabanks. Megabanks that happen to be insured by US taxpayers.
Another thing to keep in mind in all this is that the 2008 financial crisis didn’t just precipitate a bailout of US banks. It was a global bailout with trillions of dollars lent out to banks around the world, including European banks like Depfa and Dexia. If it turns out the next financial ‘oopsy’ moment originates overseas but still hobbles the US financial system there’s no reason for those overseas banks to assume they can’t get bailed out too.
So as we enter into what could be a very cold and dark winter for the EU’s financial system as rising energy prices imperil the EU economy, it’s going to be worth keeping in mind that the many same underlying dynamics that drove the 2008 financial crisis are still in place today. Too Big To Fail institutions still dominate the landscape and continue to engage in the kind of self-serving behavior that risks collective catastrophe. All it could take to set it off again is the fall of a single well-positioned domino. And those Deutsche Bank or Credit Suisse dominoes are looking kind of wobbly at the moment:
“The Fed is set to meet next Tuesday and Wednesday and with the CPI number coming in hotter than anticipated, there is now talk of the Fed slamming on the brakes more than anticipated, with at least a 75 basis point hike in the Fed Funds rate and Larry Summers pushing for a full point move. (Larry Summers is the last person the Fed should be listening to.) That rate talk is freaking out the stock market, which is keenly aware of what further sharp rises in interest rates can do to stock valuations – particularly the valuations of the Wall Street megabanks which continue to hold tens of trillions of dollars (notional or face amount) of derivatives – despite bringing down the entire U.S. economy with those derivatives in 2008.”
Rising interest rates has been hammering the valuations of the Wall Street megabanks. Megabanks that happen to be bristling with trillions of dollars in derivatives portfolios that have exploded this year alone. JP Morgan Chase’s derivatives holdings jumped by almost a quarter in the first three months of this year:
But the declining valuations of these derivatives-laden megabanks in response to rising interest rates is just one of the financial warning signs flashing red right now. There’s also the trend that’s been growing since 2008 regarding the relative role trading revenue plays in the overall revenue of the Bank Holding Company (BHC) entities that actually owns these banks. It’s the BHC’s that are regulated by the federal reserve and the commercial banks owned by teh BHCs are insured by the FDIC (insured by taxpayers!). But since 2008, these BHCs have seen trading revenue decline from 60–80 percent down to 30–50 percent. It’s a warning sign that BHCs are increasingly engaging in the kind of speculation outside of the FDIC insured commercial banking space. In other words, the mega-banks have been engaged in large risky financial gambles in the uninsured banking space:
And if a problem does develop in the derivatives market it’s almost by definition going to involve one of these megabanks. Because just four megabanks — JPMorgan Chase, Goldman Sachs Bank USA, Citigroup’s Citibank, and Bank of America — hold almost 89% of the total banking industry derivatives. If any one of these megabanks runs into trouble, that’s trouble for the entire global financial system:
That brings us to what is likely the scariest warning in this report: if any of the major counterparties for the derivatives held by these megabanks runs into trouble themselves, these megabanks could end up in major trouble. The kind of trouble that could trigger another 2008-style crisis. All it takes is one bad counterparty. Like Deutsch Bank or Credit Suisse:
We all now have to root for Deutsch Bank and Credit Suisse not to fail. Two of the sleaziest and dirtiest banks on the planet. That’s the messed up nature of the contemporary global economy. But that’s where we are. If either them fail, their sleazy dirty US counterparts in the US are going to be at risk, putting us all at risk. So let’s hope these horrifically bloated irresponsible criminal enterprises that shouldn’t exist in the first place don’t fail. Because we have to hope they don’t fail or we’re all f#cked. That’s how our system works. Which some might consider a giant moral failure in the first place. Albeit a giant moral failure that appears to be too big to fail too.