Maybe that Mayan calendar is right and the world will be ending shortly after the presidential election. You'd certainly think so by the furor of deck chair arranging going on in the banking industry. I'm told the buzz of the 2012 season of meetings is all about "Who's buying whom?" and "Who's for sale?" The stage seems set for a round of consolidations that will take America's 7,500 plus FDIC insured institutions down to a much smaller number. The big will get bigger and consumer choices -- and their ability to get decent financial terms -- will get fewer.
The root problem I hear about over and over is Zero Interest Rate Policy (ZIRP). Simply put, with zero interest rates pushing operating margins down to nothing, the only thing starving bankers have left to do to survive the drought is cannibalize the industry. It's another sign of the handcuffed wealth of the U.S. economy. And it's not for lack of money. As I pointed out previously in the article "Investors Stuff Mattresses and Wait for U.S. Economy to Find Direction", there's a glut of idled deposits distributed throughout the banking system. But the economics of lending are lacking in vigor. Bankers cope with this in two ways.
Some have just abandoned lending and have given in to taking deposits and putting it into low yield government securities. They've effectively become conservative mutual funds. Yes that does mean we have a situation where consumers stuff their money into a bank mattress and then the banks in turn stuff another government bonds mattress. Talk about draining Main Street of energy... times two. For all you people who "Moved Your Money," you might want to ask you banker or credit union if they are playing the "double stuffed mattress" game with your cash. If they are, maybe you need to make noise about moving again. Nothing says that grass-roots activism has to be static.
The above "money parking lot" game can buy you time but it's not an operational business proposition bankers like. Clearly they should not. Other more proactive bankers tenuously attempt to find productive uses for these deposits despite the difficulties of selling services under a cloud of doubt about the future direction of the economy. The "lending engine that could" conversations I hear from these large and small bankers have three distinct themes.
Theme One: If there's a good deal out there, we're all going to bid on it and compete with as many incentives as we can pile in there to outmaneuver the competition. It is cut throat and it means thinner margins on fewer successful asset deployments.
Theme Two: If it's not a quality deal, we're not touching it with a 10-foot pole. We just can't do it. Not with the uncertainty about this economy. This is most true for banks fighting to regain solid footing for the asset quality portion of their CAMELS* ratings. It's also, by the way, an area where I'm told the old sub-prime mortgage crowd is coming around trying to sell loans to sub-quality commercial and industrial borrowers. The people who laid waste to our mortgage market haven't gone away. They're morphing. Well at least they're no longer unemployed. Is that a good thing?
Theme Three: If it's a big company, forget it. They complain the Fed's ZIRP -- there it is again -- means it's an invitation only game for the 1% club. The implication is that large C&I companies are being driven like sheep into the waiting arms of the cabal on Wall Street by U.S. fiscal policy. When I talk to corporate treasurers about the issue, they pretty much concur.
The smaller bankers who live well off the radar screens of Wall Street also complain about one other insult to injury. They complain about role of "ratings" in impeding business. The big Nationally Recognized Statistical Ratings Organizations (NRSRO's) aka the big ratings agencies -- who are viewed as members in good standing of the Wall Street insider's club -- only cover the biggest banks who can afford their services for doing ratings on multi-billion dollar debentures. It simply costs too much for the smaller banks to go "buy" a rating from these companies. It hurts community banks two ways.
This is particularly macabre when you consider that in many cases, the smaller institution actually has better safety and soundness properties than the bigger one acting as a conduit or "NRSRO rated" recipient of the large deposit. We know this because other more specialized bank analytics companies that do analysis on the safety and soundness of the bank industry indicate so. IRA is one of those analysis providers. The company delivers ratings indicators on 100% of the active banking industry in a timely fashion for compliance, monitoring and counterparty evaluation purposes. IRA isn't the only company doing so. There are others. Among IRA's business niche cohorts, the analysis not only aligns well, the various services have nuances that when taken as a set provide users with far better illustration of the bank's condition. The banks don't hire these firms to make ratings. They assess all of them because that's how you're actually supposed to analyze an industry channel. It begs the question, if you can make more direct measurements and you don't, who's being the fool? Banks do argue that these alternative ratings are very valid because they know the numbers align with their regulatory examination CAMELS ratings.
The bank regulators have had their own trouble with relying on NRSRO data by the way. The FDIC mandated that ratings agency data would no longer be used to computing bank insurance assessments last year and rules about stress testing under the Dodd-Frank Act say banks are not to rely on these external ratings going forward either. This, of course, asks the second question, "If bank regulators are in fact shifting to better objective standards to manage down future systemic risk, why are capital markets lagging behind?"
So here's the "think outside the box" finance policy question of the day. What if all those line of credit and large deposit deals relied on direct measurement analytics sources instead, bypassing the need to process LOC's though an NRSRO rated manager or parking hard-earned deposits in a TBTF. How many basis points could this shave out of the economy's systemic cost of capital? What would it mean in terms of creating vigor in the 7,000+ smaller banks in this country to be a greater part of America's economic recovery? Will this help change the direction of discussions when bankers get together from starvation and consolidation towards competition and growth? I think these are questions worthy of the banking and the insurance industry exploring. Not a bad thing for policy makers and candidates to be pondering as well.
Clearing the decks for Main Street of unneeded furniture is what I'm trying to explore here. Ultimately this is a search to find a way to bring our industrial system back into sustainable balance. I wrote about this last October in "Economic Recovery Means Learning to Export Unemployment" where I floated the notion that repatriating as little as five-percent (5%) of the U.S. industrial base would go a long way towards getting our corner of the world back to the good side of the systemic tipping point. I mention this in closing because President Obama also made this very point in his State of the Union address. He left it at encouraging business to "think about what you can do."
So I am.
*CAMELS ratings are how bank regulators assign safety and soundness ratings to banks. The acronym stands for Capital Adequacy, Asset Quality, Management, Earnings, Liquidity and Sensitivity to Market Risk.
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Mediocraty is evident too, and an inside hand has been advantaged with dysfuntion. This too has to revert out. The better who are punished and isolated while those who are mediocre but hoop jump and 'line' up, this too has to be lanced rather than the self-immolation culture ways of the old world.
At least repealing all the 'free' trade agreements, US compliance with G20 agreements, and repealing OTC derivatives trading and contracting gives them an economy into which to lend and unwind all their toxic financial waste on their balance sheets. Rather than an RTC a vehicle that was leave no banker or lawer or wealthy investor behind.
Respectfully,
Andrea Psoras
New York, NY
I like your ending. 8-) Btw, the leverage factor between notional balance and reported fair value on derivatives at the big houses is now up to between 800X - 1400X to 1. And that's in a ZIRP environment. It's macabre mathematics that just goes to prove that tiny bets divided by practically zero equals really large multipliers. The system is captive to its own modeling. I've been told I need to write another article explaining it in English soon.
And as a result too, they dont 'have' to lend even though performing loans make operating cash flows while the FV of OTC derivatives contracts produce unrealized non cash gains that flows into the incomestatemetn does NOT produce operating cash flows. The enterprises are not left with sufficient cash flows to pay their bills and/or engage in providing quality goods and services, and/or handle crises. And we'd known even before 2007-2009 availability of cash for borrowings vanishes whereas cash flows from performing loans do not.
Absent the changes I urge, it makes it dificult for them to lend. And as Chris is mentioning when bankers think they need make as much money as their clients, let's also understand 'unjust weights'. Over 5000 years ago God gave that to Moses and the Levites worked that into the law for the Hebrews at that time. There were punishments for thumb on the scale and other ways for violating unjust weights. While bankers also abuse society with this, God isn't mocked - there are punishments for this corrupton however, what that punishment may be for the bankers I am not certain.
Respectfully,
Andrea Psoras
New York, NY
Thirty years ago, at that time coming down from Volcker era tight money and high interest rates, US banks didn't have an economy into which to lend, and used swaps and similar agency self dealing to keep business on the books, deal with their LCD loans and generate fees. This has 'matured' over time into what we're seeing. Of course this also was long before Gramm Leach Bliley (1999), Commodity Futures Modernization Act (2000), derivatives ie, 'hedge' accounting (1993), FAS 157 (2007?) and the Net Capital Rule (2004), German reunification (1989)and US de-industrialization to comply with the G20 Agreements and associateed 'free' trade and PNTR agreements into which the US has gone since G20 in the early 1990s.
So the ISDA banks aren't really sitting on their money. They really almost can't do anything else, unless some other things change. And while they're able to pretend to make money on the FV of the OTC derivatives they've plumed and inflated their balance sheets and faciliated by QE, the accounting allows mangement to recognize in the income statement the unrealized non cash gains of the FV of the balance sheet toxic financial pus.
Respectfully,
Andrea Psoras
New York, NY
8) Perhaps the US should withdraw from WTO; it's bad for our economy and for the voters because WTO makes trade dysfunction when other sovereigns demand us to suspend our Constitution to suit their interests.
9) The wealthy and their global corporates control this. That too we have to reign in here.
If insurance companies get to keep the 'money' abscent crisis, then banks aren't really writing 'insurance contracts' when they write OTC derivatives contracts which are agency self dealing anyway when you understand their origin and their real purpose to yield FV gains enabled in the QE liquidity sloshing into the financial system.
Insurance contracts are kept inforce by the insured paying regular if not monthy premiums and an upfront contract fee but like performing loans these yield regular cash flows. Virtually all OTC derivatives contracts fail this test and management doesnt get to keep the money absent a crisis because these aren't bona fide insurance contracts if there is this animal. But there is a well worn groove of hundreds of years of history of bona fide insurance contracts, whereas OTC derivatives such as swaps only have come about since the bogus banking era of 3rd world debt lending.
Respectfully,
Andrea Psoras
New York, NY
As I'd mentioned above, the large financial institutions do not have a healthy US economy in which to provide lending and investment banking services while many americans are under employed or unemployed. Additionally many US companies are acquired or starved from growing in our current economy. Growth abroad too has been done on the voters' wallet and management hasnt paid those taxes back to the gov even with supposedly fatter profts. Among other things they've kept this money off-shore and have needed to reshore it to the IRS.
So fatter dividends, M&A and stock buybacks have been the way management has dealt with the cash hoard rather than capital expenditure for growth in our own commercial environment.
It's also for this reason I've called for the Psoras Manifesto:
1) Cease and desist all OTC derivatives contracts a) writing and b) trading, with the
2) repeal of the Commodity Futures Modernization Act and
3) repeal Gramm Leach Bliley while
4) restore judicious qualities of Glass Steagall.
5) Repeal US compliance with the G20 Agreements and also
6) Repeal all 'free' trade agreements and PNTR with the PRC, along with repealing 'fast track'
7) Restore ALL US tariffs to spur re-shoring of production and repeal all tax breaks of any sort for off-shoring of any US production.
Respectfully,
Andrea Psoras
New York, NY
Follow the money: tariffs on imports into the US help maintain the top line for enterprises here. In other words, when there is 'free' trade, a 'free' trade agreement favors managements in some industries and those whose enterprises are located in certain geographies in the US. Other companies not advantaged under the 'free' trade agreement are faced with that race to the bottom in which managers who are favored by the 'free' trade can offshore production, lay off 'expensive' americans and their pensions and health care costs and pocket the diffference. SEe the squeeze a the 'top line". With 'free' trade, top line is gone and the income statement craft becomes very aggressive.
In a way, other than M&A, this 'stragey' has been an operating strategy for management to appear as if they're successful.
As a result, 'free' trade has been a slick form of agency self-dealing. Moreover, understand the campaign contributions that go to elected government to obtain 'free' trade agreements, which play out over thru the income statements a period of roughly 7 or so years I estimate, and with the banks and all their OTC derivatives inflating their balance sheets, which although they can trade these, only Fair valuing of the OTC derivatives contracts in a monetary/interest rate environment in which the Fed is engaging in quantitiative easing, can the ISDA banks appear to be profitable.
Respectfully,
Andrea Psoras
New York, NY
Article 1 Section 8 also was successful to establish a commercial framework in the US that contributed to building our economy, facilitating broad and deep wealth development and serve as commercial environment into which our banks could lend and our companies could engage in healthy commerce.
Now we've not only eroded all of this and largely by US compliance with the G20 agreements, and the associated 'free', ie non tariff'd trade under it, the associated deindustrializing also in effect called for under G20 in order to advantage the German's production dominated export driven economy, also has advantaged management, but spurred economic shrinkage of our economy, also to achieve compliance with the G20 agreements. This would be the constraining, but in effect the collapsing of the US economy.
This has not been easy information to come by, even as an experienced bank/financial sector analyst. As an analyst on this sector, I had to reflect on the history of what I was seeing - Consider this: until NAFTA, we'd not done aggressive 'free' trade ie importing as a policy that violated the Constitution's Article 1 Section 8.
Respectfully,
Andrea Psoras
New York, NY
Hello Dennis,
The large - ISDA - and other large banks don't have an economy to lend into under US compliance with the G20 Agreements crafted after the German spawned 1991 Maastricht treaty after its reunification in 1989.
At Maastricht when Germany proposed fiscal union as its goal also proposing the tool EU 'free' trade zone and the Euro, the US was not in the Maastricht birthed EU 'free' trade zone. For this reason the Germans also spurred the of establishing G20 in order to also snare the US into 'free' trade and deindustrializing so as to not be a competitor to Germany.
US would then engage in importing goods without tariff and de-industrializing to suit the German dominated G20 Agreements. Importing then skirts compliance with the Constitution's Article1 Section 8 which calls for using duties, tariffs and excise taxes as the form of indirect taxation to raise fiscal revenues, rather than direct taxation ("income taxes") to raise fiscal revenues. Over time this gets us to a contracting economy and lower tax receipts to the federal gov.
Respectfully,
Andrea Psoras
New York, NY