The Big Picture |
- By The Way, In Conversation with Jeff Garlin
- Succinct Summation of Week’s Events (January 18, 2013)
- Gold, Silver and Platinum . . . Yes, Platinum
- Chinese 2012 GDP comes in at +7.9%
- 10 Friday AM Reads
- Ending ‘Too Big to Fail’: A Proposal for Reform
- First Drive: 2014 Audi R8
- Mea Culpas for 2012
- The Fed is Key to Where Stocks are Heading
- Connected to Whom? International Interbank Borrowing During the Global Crisis
- Top 110%
| By The Way, In Conversation with Jeff Garlin Posted: 18 Jan 2013 01:00 PM PST This is hilarious — and I cannot listen to Jeff Garlin laugh with cracking up myself. | ||||||
| Succinct Summation of Week’s Events (January 18, 2013) Posted: 18 Jan 2013 12:30 PM PST Succinct Summation of Week’s Events: Positives:
Negatives:
If I missed any, please let me know in comments. | ||||||
| Gold, Silver and Platinum . . . Yes, Platinum Posted: 18 Jan 2013 08:30 AM PST Gold, platinum, and silver to 1910. All trading at or near all-time highs. click for ginormous chart
Platinum has amazingly gained nearly a 10% over 7 trading sessions (Wednesday’s close). It is now trading at a premium to gold. Political turmoil and a crisis in Mali saw mines shut down. Africa has has been in the midst of complex labor disputes, adding to the fear of shutdowns and supply constriants. Add to that speculation of a rift between the FED and ECB, and Germany’s 1930s-ish repatriation of gold from New York, London, and Paris, and you have the makings of some curious trading.
Source: | ||||||
| Chinese 2012 GDP comes in at +7.9% Posted: 18 Jan 2013 07:30 AM PST Huge number of comments from Japanese politicians and officials today. I summarise.
The Yen weakened marginally on the statements, but has retreated since. Don’t understand – seems pretty punchy policies, if they are enacted as suggested. However, I've shorted the Yen far more aggressively. Mr Hamada and Japanese politicians and officials continue to believe that they can micro manage the Yen – they will find out differently. The Nikkei is on steroids – it closed +2.9% higher today; Japanese November industrial production declined by -1.4% M/M, as opposed to +1.7% in October. Chinese Q4 growth rose by +7.9% Y/Y, a reversal of 7 consecutive Q's of declines, though the slowest since 1999. GDP came in at +7.8% for 2012. The increase in GDP was mainly due to higher spending on infrastructure. However, the residential property sector also improved, which contributed to the higher growth. Fixed asset investment rose by +20.6% in 2012 Y/Y (+20.7% Y/Y expected). Industrial production was up +10.3% M/M (+10.2% expected) in December (+10.0% Y/Y) up from +10.1% M/M in November. Retail sales rose by +15.2% (+15.1% expected) in December M/M (+14.3% Y/Y), up from +14.9% in November M/M; Chinese home prices rose in 54 of the 70 cities the government follows in December, up modestly from the 53 in November. However, the increase in prices was the largest number since April 2011. Prices fell in 8 cities, as opposed to less than the 10 cities in November. Rising property prices is one of the largest drivers of Chinese GDP. There are conflicting reports about whether a nationwide property tax, proposed by the outgoing Mr Wen, will be introduced. To many conflicting views, which suggests that the proposal will be in hold for a while; Interesting article in the FT today. Based on a "Li Keqiang Index" ("LKI"), essentially an index which is based on power production, rail freight etc, the FT calculates that Chinese GDP is around +5.5%, rather than the +7.9% reported today. Mr Li Keqiang, is the incoming premier of China and stated in the past that Chinese economic data was "man made" and he preferred more tangible data points, such as those stated above. You will not be surprised that I will follow the LKI index. Another issue which suggests that Chinese data is overstated is commodity prices – iron ore and coal. Yes, prices have indeed risen, but by not as much as was the case in 2010/2011. Furthermore, the FT warns of a potential rise in inflation in China – yep, I see that too; The Bank of Italy has reduced its 2013 GDP forecast to -1.0%, from -0.2% previously – bad news; The Bank of Spain announced that bad loans amounted to 11.38% of all loans in November. Spanish banks are going to need a lot more capital. It is going to be interesting to see which Spanish banks return their LTRO loans to the ECB – the 1st repayment opportunity starts shortly; Mrs Merkel faces a regional election in Lower Saxony this weekend. Whilst her CDU party leads the SPD in polls, support for Mrs Merkel's coalition partner, the FPD is collapsing to below 5.0% (currently estimated around just 3.5% nationally, well lower than the approx 15% at the last election), which would mean that the FPD would not have any representation in the State Assembly. As a result, the SPD/Green coalition may win in Lower Saxony. The polls suggest a dead heat at present. If the SPD/Greens win in Lower Saxony, they will have control of the Upper House, which could pose a problem for Mrs Merkel if she wants to pass legislation; UK retail sales unexpectedly declined by -0.1% in December M/M, as opposed to the rise of +0.2% expected. Retail sales rose by just +0.3% in December Y/Y. However, on-line sales were 10.6% of all sales in December, higher than the 9.4% the previous year. Cable sold off following the release of the data – currently US$1.5927; The Philly Fed index declined to -5.8, in December, from +4.6 in November and well below the forecast of +5.6. New orders declined to -4.3, from +4.9 in November, with the employment component down to -5.2, from -0.2 in November. Inflation was lower, with the index of prices paid lower at 14.7, as compared with 23.5 in November, with output prices down to -1.1, from 12.4 previously.The weaker report diverges from the national data released the previous day, which suggested that manufacturing was rising. The ISM report, to be released on 1st February should help clarify the situation; It looks as if the Cayman Islands will become less of a tax haven. In addition, companies and Hedge Funds will be forced to disclose additional information. The noose around tax havens etc continues to be tightened globally; The IEA has revised higher its demand growth forecast to +930k bpd for the current year, up from +865k bpd previously. The IEA expects that consumption will increase in China, the US and Brazil, whilst production has been cut by Saudi Arabia – bad news; Outlook Asian stocks rose the most in 2 weeks following the better Chinese economic "data". The Nikkei closed +2.9% higher, with the Shanghai Composite up +1.4% higher and +17% higher from its 4 year low in December. Looks like the Shanghai Composite has a bit further to go, but I'm looking to exit shortly. Spot gold is trading marginally higher at US$1689, with March Brent at US$110.61, down on the day – surprising given the IEA news. The Euro is weakening – currently US$1.3363, with the Yen starting to decline again – currently Yen 89.92 against the US$. I have to say, I would have thought it would be trading well above 90 today, given the comments from Japan. By close of play today I will have reduced my equity holdings by some 30%. I far prefer to play currencies at present and continue to believe that markets are overbought, with downside risks being ignored. However, I must admit on the positive side, there is a continued rotation out of bonds and into equities. The US political fight over the debt ceiling/spending cuts continues to be a concern, which I believe could well become particularly contentious. Have a great weekend. Kiron Sarkar 18th January 2013 | ||||||
| Posted: 18 Jan 2013 06:45 AM PST My morning reads:
What are you reading?
Advantages of Dividend Payers | ||||||
| Ending ‘Too Big to Fail’: A Proposal for Reform Posted: 18 Jan 2013 05:30 AM PST Ending ‘Too Big to Fail’: A Proposal for Reform Before It’s Too Late (With Reference to Patrick Henry, Complexity and Reality)
Speeches by Richard W. Fisher It is an honor to be introduced by my college classmate, John Henry. John is a descendant of the iconic patriot, Patrick Henry. Most of John's ancestors were prominent colonial Virginians and many were anti-crown. Patrick, however, was the most outspoken. Ask John why this was so, and he will answer: "Patrick was poor." However poor he may have been, Patrick Henry was a rich orator. In one of his greatest speeches, he said: "Different men often see the same subject in different lights; and therefore, I hope that it will not be thought disrespectful to those gentlemen if, entertaining as I do, opinions of a character very opposite to theirs, I shall speak forth my sentiments freely, and without reserve. This is no time for ceremony … [it] is one of awful moment to this country." Patrick Henry was addressing the repression of the American colonies by the British crown. Tonight, I wish to speak to a different kind of repression—the injustice of being held hostage to large financial institutions considered "too big to fail," or TBTF for short. I submit that these institutions, as a result of their privileged status, exact an unfair tax upon the American people. Moreover, they interfere with the transmission of monetary policy and inhibit the advancement of our nation's economic prosperity. I have spoken of this for several years, beginning with a speech on the "Pathology of Too-Big-to-Fail" in July 2009.[1] My colleague, Harvey Rosenblum—a highly respected economist and the Dallas Fed's director of research—and I and our staff have written about it extensively. Tomorrow, we will issue a special report that further elucidates our proposal for dealing with the pathology of TBTF. It also addresses the superior relative performance of community banks during the recent crisis and how they are being victimized by excessive regulation that stems from responses to the sins of their behemoth counterparts. I urge all of you to read that report.[2] Now, Federal Reserve convention requires that I issue a disclaimer here: I speak only for the Federal Reserve Bank of Dallas, not for others associated with our central bank. That is usually abundantly clear. In many matters, my staff and I entertain opinions that are very different from those of many of our esteemed colleagues elsewhere in the Federal Reserve System. Today, I "speak forth my sentiments freely and without reserve" on the issue of TBTF, while meaning no disrespect to others who may hold different views. The Problem of TBTFEveryone and their sister knows that financial institutions deemed too big to fail were at the epicenter of the 2007–09 financial crisis. Previously thought of as islands of safety in a sea of risk, they became the enablers of a financial tsunami. Now that the storm has subsided, we submit that they are a key reason accommodative monetary policy and government policies have failed to adequately affect the economic recovery. Harvey Rosenblum and I first wrote about this in an article published in the Wall Street Journal in September 2009, "The Blob That Ate Monetary Policy."[3] Put simply, sick banks don't lend. Sick—seriously undercapitalized—megabanks stopped their lending and capital market activities during the crisis and economic recovery. They brought economic growth to a standstill and spread their sickness to the rest of the banking system. Congress thought it would address the issue of TBTF through the Dodd–Frank Wall Street Reform and Consumer Protection Act. Preventing TBTF from ever occurring again is in the very preamble of the act. We contend that Dodd–Frank has not done enough to corral TBTF banks and that, on balance, the act has made things worse, not better. We submit that, in the short run, parts of Dodd–Frank have exacerbated weak economic growth by increasing regulatory uncertainty in key sectors of the U.S. economy. It has clearly benefited many lawyers and created new layers of bureaucracy. Despite its good intention, it has been counterproductive, working against solving the core problem it seeks to address. Defining TBTFLet me define what we mean when we speak of TBTF. The Dallas Fed's definition is financial firms whose owners, managers and customers believe themselves to be exempt from the processes of bankruptcy and creative destruction. Such firms capture the financial upside of their actions but largely avoid payment—bankruptcy and closure—for actions gone wrong, in violation of one of the basic tenets of market capitalism (at least as it is supposed to be practiced in the United States). Such firms enjoy subsidies relative to their non-TBTF competitors. They are thus more likely to take greater risks in search of profits, protected by the presumption that bankruptcy is a highly unlikely outcome. The phenomenon of TBTF is the result of an implicit but widely taken-for-granted government-sanctioned policy of coming to the aid of the owners, managers and creditors of a financial institution deemed to be so large, interconnected and/or complex that its failure could substantially damage the financial system. By reducing a TBTF firm's exposure to losses from excessive risk taking, such policies undermine the discipline that market forces normally assert on management decisionmaking. The reduction of market discipline has been further eroded by implicit extensions of the federal safety net beyond commercial banks to their nonbank affiliates. Moreover, industry consolidation, fostered by subsidized growth (and during the crisis, encouraged by the federal government in the acquisitions of Merrill Lynch, Bear Stearns, Washington Mutual and Wachovia), has perpetuated and enlarged the weight of financial firms deemed TBTF. This reduces competition in lending. Dodd–Frank does not do enough to constrain the behemoth banks' advantages. Indeed, given its complexity, it unwittingly exacerbates them. Complexity BitesAndrew Haldane, the highly respected member of the Financial Policy Committee of the Bank of England, addressed this at last summer's Jackson Hole, Wyo., policymakers' meeting in witty remarks titled, "The Dog and the Frisbee."[4] Here are some choice passages from that noteworthy speech. Haldane notes that regulators' "… efforts to catch the crisis Frisbee have continued to escalate. Casual empiricism reveals an ever-growing number of regulators … Ever-larger litters have not, however, obviously improved the watchdogs' Frisbee-catching abilities. [After all,] no regulator had the foresight to predict the financial crisis, although some have since exhibited supernatural powers of hindsight. "So what is the secret of the watchdogs' failure? The answer is simple. Or rather, it is complexity … complex regulation … might not just be costly and cumbersome but sub-optimal. … In financial regulation, less may be more." One is reminded of the comment French Prime Minister Clemenceau made about President Wilson's 14 points: "Why 14?" he asked. "God did it in 10." Were that we only had 14 points of financial regulation to contend with today. Haldane notes that Dodd–Frank comes against a background of ever-greater escalation of financial regulation. He points out that nationally chartered banks began to file the antecedents of "call reports" after the formation of the Office of the Comptroller of the Currency in 1863. The Federal Reserve Act of 1913 required state-chartered member banks to do the same, having them submitted to the Federal Reserve starting in 1917. They were short forms; in 1930, Haldane noted, these reports numbered 80 entries. "In 1986, [the 'call reports' submitted by bank holding companies] covered 547 columns in Excel, by 1999, 1,208 columns. By 2011 … 2,271 columns." "Fortunately," he adds wryly, "Excel had expanded sufficiently to capture the increase." Though this growingly complex reporting failed to prevent detection of the seeds of the debacle of 2007–09, Dodd–Frank has layered on copious amounts of new complexity. The legislation has 16 titles and runs 848 pages. It spawns litter upon litter of regulations: More than 8,800 pages of regulations have already been proposed, and the process is not yet done. In his speech, Haldane noted—conservatively, in my view—that a survey of the Federal Register showed that complying with these new rules would require 2,260,631 labor hours each year. He added: "Of course, the costs of this regulatory edifice would be considered small if they delivered even modest improvements to regulators' ability to avert future crises." He then goes on to argue the wick is not worth the candle. And he concludes: "Modern finance is complex, perhaps too complex. Regulation of modern finance is complex, almost certainly too complex. That configuration spells trouble. As you do not fight fire with fire, you do not fight complexity with complexity. [The situation] requires a regulatory response grounded in simplicity, not complexity. Delivering that would require an about-turn." The Dallas Fed's Proposal: A Reasonable 'About-Turn'The Dallas Fed's proposal offers an "about-turn" and a way to mend the flaws in Dodd–Frank. It fights unnecessary complexity with simplicity where appropriate. It eliminates much of the mumbo-jumbo, ineffective, costly complexity of Dodd–Frank. Of note, it would be especially helpful to non-TBTF banks that do not pose systemic or broad risk to the economy or the financial system. Our proposal would relieve small banks of some unnecessary burdens arising from Dodd–Frank that unfairly penalize them. Our proposal would effectively level the playing field for all banking organizations in the country and provide the best protection for taxpaying citizens. In a nutshell, we recommend that TBTF financial institutions be restructured into multiple business entities. Only the resulting downsized commercial banking operations—and not shadow banking affiliates or the parent company—would benefit from the safety net of federal deposit insurance and access to the Federal Reserve's discount window. Defining the LandscapeIt is important to have an accurate view of the landscape of banking today in order to understand the impact of this proposal. As of third quarter 2012, there were approximately 5,600 commercial banking organizations in the U.S. The bulk of these—roughly 5,500—were community banks with assets of less than $10 billion. These community-focused organizations accounted for 98.6 percent of all banks but only 12 percent of total industry assets. Another group numbering nearly 70 banking organizations—with assets of between $10 billion and $250 billion—accounted for 1.2 percent of banks, while controlling 19 percent of industry assets. The remaining group, the megabanks—with assets of between $250 billion and $2.3 trillion—was made up of a mere 12 institutions. These dozen behemoths accounted for roughly 0.2 percent of all banks, but they held 69 percent of industry assets.
The 12 institutions that presently account for 69 percent of total industry assets are candidates to be considered TBTF because of the threat they could pose to the financial system and the economy should one or more of them get into trouble. By contrast, should any of the other 99.8 percent of banking institutions get into trouble, the matter most likely would be settled with private-sector ownership changes and minimal governmental intervention. How and why does this work for 99.8 percent but not the other 0.2 percent? To answer this question, it helps to consider the sources of regulatory and market discipline imposed on each of the three groups of banks. Let's look at two dimensions of regulatory discipline: Potential closure of the institution and the effectiveness of supervisory pressure on bank management practices. Do the owners and managers of a banking institution operate with the belief that their institution is subject to a bankruptcy process that works reasonably quickly to transfer ownership and control to another banking entity or entities? Is there a group of interested and involved shareholders that can exert a restraining force on franchise-threatening risk taking by the bank's top management team? Can management be replaced and ownership value wiped out? Is the firm controlled de facto by its owners, or instead effectively management-controlled?[5] In addition, we ask: To what extent do uninsured creditors of the banking entity impose risk-management discipline on management? This analytical framework is summarized in the following slide:
Looking across line 1, it is clear that community banks are subject to considerable regulatory and shareholder discipline. They can and do fail. In the last few years, the Federal Deposit Insurance Corp. (FDIC) has built a reputation for regulators carrying out Joseph Schumpeter's concept of "creative destruction" by taking over small banks on a Friday evening and reopening them on Monday morning under new ownership. "In on Friday, out by Monday" is the mantra of this process. Knowing the power of banking supervisors to close the institution, owners and managers of community banks heed supervisory suggestions to limit risk. Community banks often have a few significant shareholders who have a considerable portion of their wealth tied to the fate of the bank. Consequently, they exert substantial control over the behavior of management because risk and potential closure matter to them. Since community banks derive the bulk of their funding from federally insured deposits, they are simple rather than complex in their capital structure and rarely have uninsured and unsecured creditors. "Market discipline" over management practices is primarily exerted through shareholders. Of the three groups, the 70 regional and moderate-sized banking organizations depicted in line 2 are subject to a broader range of market discipline. Like community banks, these institutions are not exempt from the bankruptcy process; they can and do fail. But given their size, complexity and generally larger geographic footprint, the failure resolution and ownership transfer processes cannot always be accomplished over a weekend. In practice, owners and managers of mid-sized institutions are nonetheless aware of the downside consequences of the risks taken by the institution. Uninsured depositors and unsecured creditors are also aware of their unprotected status in the event the institution experiences financial difficulties. Mid-sized banking institutions receive a good dose of external discipline from both supervisors and market-based signals. TBTF megabanks, depicted in line 3, receive far too little regulatory and market discipline. This is unfortunate because their failure, if it were allowed, could disrupt financial markets and the economy. For all intents and purposes, we believe that TBTF banks have not been allowed to fail outright.[6] Knowing this, the management of TBTF banks can, to a large extent, choose to resist the advice and guidance of their bank supervisors' efforts to impose regulatory discipline. And for TBTF banks, the forces of market discipline from shareholders and unsecured creditors are limited. Let's first consider discipline from shareholders. Having millions of stockholders has diluted shareholders' ability to prevent the management of TBTF banks from pursuing corporate strategies that are profitable for management, though not necessarily for shareholders. As we learned during the crisis, adverse information on poor financial performance often is available too late for shareholder reaction or credit default swap (CDS) spreads to have any impact on management behavior. For example, during the financial crisis, shares in two of the largest bank holding companies (BHCs) declined more than 95 percent from their prior peak prices and their CDS spreads went haywire.[7] The ratings agencies eventually reacted, in keeping with their tendency to be reactive rather than proactive. But the damage from excessive risk taking had already been done. And after the crisis? Judging from the behavior of many of the largest BHCs, with limited exception, efforts by shareholders of these institutions to meaningfully influence management compensation practices have been slow in coming. So much for shareholder discipline as a check on TBTF banks. Unfortunately, TBTF banks also do not face much external discipline from unsecured creditors. An important facet of TBTF is that the funding sources for megabanks extend far beyond insured deposits, as referenced by my mention of CDS spreads. The largest banks, not just the TBTF banks, fund themselves with a wide range of liabilities. These include large, negotiable CDs, which often exceed the FDIC insurance limit; federal funds purchased from other banks, all of which are uninsured, and subordinated notes and bonds, generally unsecured. It is not unusual for such uninsured/unsecured liabilities to account for well over half the liabilities of TBTF institutions. If market discipline were to be imposed on TBTF institutions, one would expect it to come from uninsured/unsecured depositors, creditors and debt holders. But TBTF status exerts perverse market discipline on the risk-taking activities of these banks. Unsecured creditors recognize the implicit government guarantee of TBTF banks' liabilities. As a result, unsecured depositors and creditors offer their funds at a lower cost to TBTF banks than to mid-sized and regional banks that face the risk of failure. This TBTF subsidy is quite large and has risen following the financial crisis. Recent estimates by the Bank for International Settlements, for example, suggest that the implicit government guarantee provides the largest U.S. BHCs with an average credit rating uplift of more than two notches, thereby lowering average funding costs a full percentage point relative to their smaller competitors.[8] Our aforementioned friend from the Bank of England, Andrew Haldane, estimates the current implicit TBTF global subsidy to be roughly $300 billion per year for the 29 global institutions identified by the Financial Stability Board (2011) as "systemically important."[9] To put that $300 billion estimated annual subsidy in perspective, all the U.S. BHCs summed together reported 2011 earnings of $108 billion. Add to that the burdens stemming from the complexity of TBTF banks. Here is the basic organization diagram for a typical complex financial holding company:
To simplify a complex issue, one might consider all the operations other than the commercial banking operation as shadow banking affiliates, including any special investment vehicles—or SIVs—of the commercial bank [10]. Now, consider this table. It gives you a sense of the size and scope of some of the five largest BHCs, noting their nondeposit liabilities in billions of dollars and their number of total subsidiaries and countries of operation (according to the Financial Stability Oversight Council):
For perspective, consider the sad case of Lehman Brothers. More than four years later, the Lehman bankruptcy is still not completely resolved. As of its 10-K regulatory filing in 2007, Lehman operated a mere 209 subsidiaries across only 21 countries and had total liabilities of $619 billion. By these metrics, Lehman was a small player compared with any of the Big Five. If Lehman Brothers was too big for a private-sector solution while still a going concern, what can we infer about the Big Five in the table? Correcting for the Drawbacks of Dodd–FrankDodd–Frank addresses this concern. Under the Orderly Liquidation Authority provisions of Dodd–Frank, a systemically important financial institution would receive debtor-in-possession financing from the U.S. Treasury over the period its operations needed to be stabilized. This is quasi-nationalization, just in a new, and untested, format. In Dallas, we consider government ownership of our financial institutions, even on a "temporary" basis, to be a clear distortion of our capitalist principles. Of course, an alternative would be to have another systemically important financial institution acquire the failing institution. We have been down that road already. All it does is compound the problem, expanding the risk posed by the even larger surviving behemoth organizations. In addition, perpetuating the practice of arranging shotgun marriages between giants at taxpayer expense worsens the funding disadvantage faced by the 99.8 percent remaining—small and regional banks. Merging large institutions is a form of discrimination that favors the unwieldy and dangerous TBTF banks over more focused, fit and disciplined banks. The approach of the Dallas Fed neither expands the reach of government nor further handicaps the 99.8 percent of community and regional banks. Nor does it fight complexity with complexity. It calls for reshaping TBTF banking institutions into smaller, less-complex institutions that are: economically viable; profitable; competitively able to attract financial capital and talent; and of a size, complexity and scope that allows both regulatory and market discipline to restrain excessive risk taking. Our proposal is simple and easy to understand. It can be accomplished with minimal statutory modification and implemented with as little government intervention as possible. It calls first for rolling back the federal safety net to apply only to basic, traditional commercial banking. Second, it calls for clarifying, through simple, understandable disclosures, that the federal safety net applies only to the commercial bank and its customers and never ever to the customers of any other affiliated subsidiary or the holding company. The shadow banking activities of financial institutions must not receive taxpayer support. We recognize that undoing customer inertia and management habits at TBTF banking institutions may take many years. During such a period, TBTF banks could possibly sow the seeds for another financial crisis. For these reasons, additional action may be necessary. The TBTF BHCs may need to be downsized and restructured so that the safety-net-supported commercial banking part of the holding company can be effectively disciplined by regulators and market forces. And there will likely have to be additional restrictions (or possibly prohibitions) on the ability to move assets or liabilities from a shadow banking affiliate to a banking affiliate within the holding company.[11] To illustrate how the first two points in our plan would work, I come back to the hypothetical structure of a complex financial holding company. Recall that this type of holding company has a commercial bank subsidiary and several subsidiaries that are not traditional commercial banks: insurance, securities underwriting and brokerage, finance company and others, many with a vast geographic reach. Where the Government Safety Net Would Begin and EndUnder our proposal, only the commercial bank would have access to deposit insurance provided by the FDIC and discount window loans provided by the Federal Reserve. These two features of the safety net would explicitly, by statute, become unavailable to any shadow banking affiliate, special investment vehicle of the commercial bank or any obligations of the parent holding company. This is largely the current case—but in theory, not in practice. And consistent enforcement is viewed as unlikely.
Reinforced by a New CovenantTo reinforce the statute and its credibility, every customer, creditor and counterparty of every shadow banking affiliate and of the senior holding company would be required to agree to and sign a new covenant, a simple disclosure statement that acknowledges their unprotected status. A sample disclosure need be no more complex than this:
This two-part step should begin to remove the implicit TBTF subsidy provided to BHCs and their shadow banking operations. Entities other than commercial banks have inappropriately benefited from an implicit safety net. Our proposal promotes competition in light of market and regulatory discipline, replacing the status quo of subsidized and perverse incentives to take excessive risk. As indicated earlier, some government intervention may be necessary to accelerate the imposition of effective market discipline. We believe that market forces should be relied upon as much as practicable. However, entrenched oligopoly forces, in combination with customer inertia, will likely only be overcome through government-sanctioned reorganization and restructuring of the TBTF BHCs. A subsidy once given is nearly impossible to take away. Thus, it appears we may need a push, using as little government intervention as possible to realign incentives, reestablish a competitive landscape and level the playing field. Why Protect the 0.2 Percent?My team at the Dallas Fed and I are confident this simple treatment to the complex problem and risks posed by TBTF institutions would be the most effective treatment. Think about it this way: At present, 99.8 percent of the banking organizations in America are subject to sufficient regulatory or shareholder/market discipline to contain the risk of misbehavior that could threaten the stability of the financial system. Zero-point-two percent are not. Their very existence threatens both economic and financial stability. Furthermore, to contain that risk, regulators and many small banks are tied up in regulatory and legal knots at an enormous direct cost to them and a large indirect cost to our economy. Zero-point-two percent. If the administration and the Congress could agree as recently as two weeks ago on legislation that affects 1 percent of taxpayers, surely it can process a solution that affects 0.2 percent of the nation's banks and is less complex and far more effective than Dodd–Frank. Making a Time of 'Awful Moment' a Time of PromiseThe time has come to change the decisionmaking paradigm. There should be more than the present two solutions: bailout or the end-of-the-economic-world-as-we-have-known-it. Both choices are unacceptable. The next financial crisis could cost more than two years of economic output, borne by millions of U.S. taxpayers. That horrendous cost must be weighed against the supposed benefits of maintaining the TBTF status quo. To us, the remedy is obvious: end TBTF now. End TBTF by reintroducing market forces instead of complex rules, and in so doing, level the playing field for all banking institutions. I return to Patrick Henry. He noted that "it is natural to man to indulge in the illusions of hope. We are apt to shut our eyes against a painful truth, and listen to the song of that siren till she transforms us." We labor under the siren song of Dodd–Frank and the recent run-up in the pricing of TBTF bank stocks and credit, indulging in the illusion of hope that this complex legislation will end too big to fail and right the banking system. We shut our eyes to the painful truth that TBTF represents an ongoing danger not just to financial stability, but also to fair competition. The Dallas Fed offers a modest but, we believe, far more effective fix to Dodd–Frank. This plan is not without its costs. But it is less costly than all the alternatives put forward and it seriously reduces the likelihood of another horrendous and costly financial crisis. This need not be a time of "awful moment." It should instead be a time of promise. Treating the pathology of TBTF now would be a big step toward a more stable and prosperous economic system, one that relies on fundamental principles of capitalism rather than regulatory complexity and increasing government intervention. Thank you. NotesThe views expressed by the author do not necessarily reflect official positions of the Federal Reserve System.
About the AuthorRichard W. Fisher is president and CEO of the Federal Reserve Bank of Dallas. | ||||||
| Posted: 18 Jan 2013 05:00 AM PST
2014 Audi R8:
Source: Automobile Magazine | ||||||
| Posted: 18 Jan 2013 04:30 AM PST Every year in January, I look back at the prior year to assess the various errors, mistakes and bad calls that I made in the course of running an asset management business. I make a list of these mistakes, analyze why they occurred, and what I can do to avoid similar errors in the future. This is my 4th go round, and I have made 'fessing up a key part of my process (my previous mea culpas can be found for 2009, 2010 and 2011). This is not simply a rite of contrition — in this business, you must expect to be wrong. Owning up to your own mistakes is the only way to a) get better; b) admit that failure is part of the investing process; c) stay humble. 2012 was a tough year for many, despite a robust set of gains for equities. The S&P500 index returned 13.4%, plus another 2%+ for dividends = >15% for 2012. Lots of managers missed this benchmark (My benchmark is a total return 60/40 model). This is not about absolute performance, but rather the process that impacts those outcomes. Let's get to it: 1) Tactical Moves: 2012 was not the year that tactical was an especially successful formula. (Many Tactical Asset Allocators under-performed). A few of my tactical moves worked out, but more than a few did not. There are costs and taxes associated with being tactical when you nail it perfectly, and opportunity costs when you are wrong. Tactical led to excess cash at times throughout the year, and that impacts performance. Solution: My goal in executing tactical moves should not involve avoiding 5-10-15% retracements, but should aim to steer clear of 25% plus moves to the downside. Reduce tactical moves by tightening metrics for evaluation. Use tactical more sparingly – it should be a 2X per decade shift, not an annual event. 2) RE/Housing Market: I doubted, and continue to doubt, the recovery in the Housing market. I expected foreclosures to tick up, the REO overhang and the underwater owners to continue to weigh on the market. I was wrong. Instead, the market stabilized, and prices rose. The Fed's Operation Twist managed to drive rates even lower than they were, increasing purchasers' buying power. Mortgage settlements have given banks more flexibility in dealing with REOs, and appetite for Homes as part of the American Dream is still alive and well. Solution: I am still aware of the inorganic nature of this improvement, but the key takeaway is a) US housing market down 35% eventually stabilizes; 2) do not under-estimate the ability of a determined Central Bank to impact any specific market it chooses. 3) JP Morgan: I have been critical of the TBTF money center banks that have opaque balance sheets, but a balanced portfolio has some exposure to financials. Our solution was to own companies with cleaner balance sheets and less credit risk: Think Visa and Berkshire Hathaway. But Jamie Dimon's so-called “Fortress Bank” suckered me in, and 6 months later the London Whale took all of our profits in the position away and then some. Solution: More courage of my convictions. Find alternatives to garner the exposure to a desired sector, and avoid owning what you cannot possibly understand potential risks. Be aware of the trend but do not accede to the crowd. 4) Facebook: After berating Facebook for the better part of 2 years on valuation, fabricated metrics, and a weak business model, I began to wonder if everyone else was right and I was suffering some of my own confirmation bias. These self-doubts led me, as the stock came in on the day of the IPO, to buy Facebook for aggressive portfolios. The good news our is stop loss discipline was the IPO price, and I kicked it before the day was over. Solution: Have the courage of your convictions. Yes, I owned Facebook for less than a day, but I never should have bought it until it was closer to my valuation of $12-15. If sometimes you have to miss a move because there are warts on it that might blow up, so be it. (Similar to JPM) 5) Global Macro: One error I made this year was allowing macro views to trump our more pedestrian day-to-day investing approach. We all love to look at the really big picture, but in 3 out of 4 years it has not been a good way to make money. This investing approach does work well at major turning points, but the rest of the time it creates excess activity and potential for loss. Solution: Asset allocation has proven itself over time. Stay with it; do not allow yourself to be distracted by the noise. 6) Individual stocks: In addition to broad asset classes we own, we also buy individual stocks that we have a high degree of confidence in (these are only for not conservative accounts). Some have been home runs (V, BRK, CVX) others have been losers (JPM, FB, COP). However, all individual stocks carry additional risk that you do not get with an index. While this has not hurt our performance, it has increased our volatility and decreased our Sharpe ratio. Solution: Use individual stocks more sparingly to fill in holes in exposure. 7) Dealing with Crappy People: Having a public persona means you have to deal with people who as a private citizen you normally would not. Writing in public brings about all manner of haters, jerks and creeps. My naturally combativeness leads me to instinctively engage with these folks on their level. Solution: Twitter battles, flame wars, comment headaches — all waste time and emotional energy. There is no obligation to interact with jerks. Disengage from them. Block the Twitter haters, ban the nasty commenters. Distinguish between legitimate debate and ideological silliness. Constructive comments and legitimate disagreements are very different than ad hominem attackers. There is no requirement to publish the comments of liars or haters. If I want to reduce the level of cynicism and negativity in my life, it helps to get rid of the carriers of that emotion.
Those are the big ones for this year (there are more little ones, and some personally embarrassing items that missed the cut off). Come back in 12 months for a whole new set of different mistakes. | ||||||
| The Fed is Key to Where Stocks are Heading Posted: 18 Jan 2013 04:00 AM PST | ||||||
| Connected to Whom? International Interbank Borrowing During the Global Crisis Posted: 18 Jan 2013 03:00 AM PST | ||||||
| Posted: 18 Jan 2013 02:30 AM PST |
| You are subscribed to email updates from The Big Picture To stop receiving these emails, you may unsubscribe now. | Email delivery powered by Google |
| Google Inc., 20 West Kinzie, Chicago IL USA 60610 | |
0 comments:
Post a Comment