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Houston: The Banks Have A Huge Problem

Houston: The Banks Have A Huge Problem

For many years after the financial crisis, US commercial banks were mocked when instead of generating earnings the old-fashioned way, by collecting the interest arb on loans they had made, or even by frontrunning the Fed with their prop (and flow) trading desks, they would “earn” their way to just above consensus estimates by releasing some of their accumulated loan loss reserves, which thanks to creative accounting, would end up boosting the bottom line. The thinking here went that having suffered massive losses during the financial crisis “kitchen sink” when all banks suffered crushing losses to they would get bailed out, banks would then “recoup” billions in losses over time that would be run through the income statement as a reversal of accrued loss provisions.

Well, after the longest expansion in history, it’s time for this process to go into reverse, and instead of releasing loan loss reserves the banks are now starting to build them up again in preparation for a wave of consumer defaults due to the US economic shutdown.

As we reported earlier, this big story from earnings season so far – now that all major US money center banks have reported earnings – has been how much in loan loss provisions and reserves have the big US banks taken as precaution for the economic upheaval due to the coronacrisis. As shown below, on average most banks – this time including the hedge fund known as Goldman Sachs which has since pivoted to becoming a subprime lender to the masses with “Marcus” – saw their loan loss provisions surge by roughly 4x from year ago levels, with JPMorgan’s jumping the most, or just over 5x, hinting the other banks are likely undercapitalized for the storm that is coming.

…click on the above link to read the rest of the article…

Are US Banks Facing a Credit Trap?

Are US Banks Facing a Credit Trap?

José Ignacio, Uruguay

Punta del Este | As we head into Q4 2019 earnings this week, US financials have never been so expensive and risk indicators have never been so skewed. Just as last July we called the problems brewing in the short-term money markets in a discussion on CNBC’s Halftime Report with Mike Mayo of Wells Fargo (NYSE:WFC), today we want to put down a marker regarding the concealed credit risk inside US banks.

Our favorite bank portfolio holding, U.S. Bancorp (NYSE:USB), closed Friday at 1.87x book value, down about 5% from the peak in December just over $60 and 2x book. Still a little too rich to add more to our portfolio of USB common, but we continue to accumulate a number of bank preferred issues. With the number of profitless unicorns dying at an accelerating rate, steady cash flow has a certain appeal right about now.

More important, credit default swap (CDS) spreads for high quality issuers are also at all time lows. JPMorganChase (NYSE:JPM) is inside 40bp or around a “A” rating for the largest bank in the US. In 2015, JPM’s CDS was trading close to 120bp over sovereign swaps. Question is, does the market know, really, how much risk sits on Jamie Dimon’s books in the world of corporate CDS and more obscure credit products, like “transformation repo.” We think not.

For those not familiar with the wonders of OTC derivatives and collateral swapping, see our 2019 comment “HELOCs and Transformational REPO.” We wrote in March of last year: “The dealer bank trades corporate debt for cash (for a fee), but uses its own government or agency collateral to meet the margin call for the customer.

…click on the above link to read the rest of the article…

The Fed Is on High Alert

The Fed Is on High Alert

The Fed Is on High Alert

It’s hard to believe the end of the year is upon us and 2020 is right around the corner.

In many ways, it went by very quickly. For economies and markets, it was a year marked by uncertainty over economic slowdowns, trade wars and a complete pivot in “dark money” policy initiated by the Federal Reserve and subsequently followed by other central banks around the world.

Notably this year, it wasn’t just the major nations that engaged in copycat monetary policy easing. It was a plethora of emerging-market central banks jumping on the same dark money bandwagon.

So as we head into the final FOMC meeting of the year next week, we know one thing for certain: The Fed won’t be cutting rates this time. And it’s recently used some fairly hawkish language.

But reinforcing the dovish outlook it adopted at the start of the year that precipitated three 2019 rate cuts, the Fed remains on high-alert mode.

There are two clear signs why…

First, the Fed keeps creating and dumping money into the front end of the U.S. yield curve through repo operations that it initiated in September.

How healthy is the banking sector overall?

The Board of Governors of the Federal Reserve System recently published their annual Supervision and Regulation Report.

The report measures the financial condition of major U.S. banks, including loan growth and liquidity in the banking system.

Overall, 45% of U.S. banks with more than $100 billion in assets received a supervisory rating of “less than satisfactory.”

That’s not good. As we learned during that crisis, the stability of these large banks is essential to the health of our banking system.

Tellingly, the Federal Reserve report does not say which banks have these less-than-satisfactory ratings.

Turkey On Verge Of Collapse As Overnight Swaps Hit 700%, CDS Soar

Turkey On Verge Of Collapse As Overnight Swaps Hit 700%, CDS Soar

In Turkey’s ongoing attempt to crush currency manipulators, yesterday we reported that in addition to launching a “probe” against JPMorgan, the biggest US bank, for daring to cut its TRY price target, as well as threatening unnamed “manipulators”, on Monday Turkish authorities took a page of the Chinese currency manipulation playbook, when they made it virtually impossible for foreign investors to short the lira as they soaked up virtually all intermarket liquidity, potentially threatening to kill the economy.

As we reported yesterday, the overnight swap rate on Monday soared more than ten-fold over the prior two sessions to more than 300%, the highest spike on record going back to the nation’s 2001 financial crisis as offshore funds clamoring to close out long-lira positions failed to find counterparties and the cost of a lira short exploded.

Think Volkswagen short squeeze but for a currency, or FXwagen.

Well, FXwagen went turbo on Tuesday, when this unprecedented move continued as Turkish Lira swaps exploded again, more than doubling overnight, and hitting an insane 700%, with some reporting prints as high as 750%

There was just one problem: whereas on Monday this “shock therapy” meant to force out the shorts did in fact work, sending the Lira soaring, and the USDTRY tumbling, the continuation of this painful squeeze no longer has a positive impact on the currency, where as of this point most of the shorts had already been stopped out. As a result, the USDTRY actually rose for the day, and was up to 5.4272, after hitting 5.3051 on Monday.

Commenting on this unprecedented move in swaps, Bloomberg’s Mark Cudmore notes that he doesn’t recall “seeing this happen to any liquid and freely tradeable currency in the past 15 years.”

 …click on the above link to read the rest of the article…

Just in Time Stimulus: Fed Proposes Looser Rules for Large U.S. Banks

The Fed’s proposal marks one of the most significant rollbacks of bank regulations since Trump took office.

The Wall Street Journal reports Fed Proposes Looser Rules for Large U.S. Banks

The Federal Reserve announced one of the most significant rollbacks of bank rules since President Trump took office with a proposal for looser capital and liquidity requirements for large U.S. lenders.

The changes would affect large U.S. lenders including U.S. Bancorp , Capital One Financial Corp. , and more than a dozen others. The largest U.S. banks, including JPMorgan Chase & Co., wouldn’t see any significant rule changes, and some in the industry thought the proposal didn’t go far enough.

The draft proposal, approved by a 3-1 vote at a Wednesday meeting of the Fed’s governing board, would divide big banks into four categories based on their size and other risk factors. Regional lenders would be either entirely released from certain capital and liquidity requirements, or see those requirements reduced. They could also, in some cases, be subject to less frequent stress tests.

The proposals received a mixed reaction from banks. While some trade groups praised it, Greg Baer—president of the Bank Policy Institute, which represents large banks—said the proposal “does not do enough to tailor regulations.” He said, for instance, the plan doesn’t include changes to the Fed’s primary stress tests for big banks or to rules affecting foreign-owned banks with U.S. footprints. Fed officials said they were planning future proposal in those areas.

The plan divided the Fed, with Trump-appointed regulators and the Fed’s lone Obama-appointed official taking opposite sides. Fed Chairman Jerome Powell said the proposal would cut the regulatory burden “while maintaining the most stringent requirements for firms that pose the greatest risks.”

…click on the above link to read the rest of the article…

Fed To Ease Liquidity Requirements For Regional Banks As Brainard Warns Of More Bailouts

On Wednesday the Federal Reserve is set to vote on proposals that would further ease capital requirements for banks with assets of $700 billion or lower, expanding on Trump’s promise to deregulate Wall Street.

The biggest benefits will come to banks with between $100 billion and $250 billion of assets – or the bulk of regional banks – who would no longer have to adhere to liquidity coverage ratio and proposed net stable funding ratio, according to prepared remarks by Fed Vice Chairman of Supervision Randal Quarles. Firms between $100 billion and $250 billion would also face stress tests every two years, instead of annually

“A reduction of this magnitude is appropriate because most U.S. banking firms in this group are not engaged in complex activities and have more stable funding than systemic banks given their relatively traditional business models,” said Quarles.

At the same time, Non-Wall Street banks that have more than $250 billion of assets would move to a “calibrated” liquidity coverage ratio that is in the range of 70% to 85% of full LCR, Bloomberg notes.

Meanwhile, large banks will generally see little benefits from today’s deregulation: Quarles said that large bank holding companies now have about $1.3 trillion of capital, and the Fed proposals would reduce that by only $8 billion.

Curiously, Fed Governor Lael Brainard said she plans to vote against proposals, arguing they would raise “the risk that American taxpayers again will be on the hook” to bail out banks.

“I see little benefit to the institutions or the system from the proposed reduction in core resilience that could justify the increased risk to financial stability and the taxpayer,” Brainard says in prepared remarks.

Her caution is warranted in light of the recent earnings shock unveiled by Bank OZK which unveiled a deeply distressed commercial real estate portfolio, which sent its stock plunging and prompted questions whether banks are covering up deterioration in some of their CRE holdings.

Crisis After Crisis: 10 Years After the Crash, There’s No ‘Reforming’ Global Capitalism

Crisis After Crisis: 10 Years After the Crash, There’s No ‘Reforming’ Global Capitalism



It is now clear that financial crises are not discrete events but are linked phenomena that have been unleashed on the globe ever since the financial markets were liberalized during the Reagan-Thatcher era in the early 1980s.

To take just the three most prominent crashes, surplus capital that could not find profitable domestic outlets after the Japanese bubble burst in the late 1980s found its way as speculative capital into Southeast Asia, where it contributed to the Asian financial crisis in 1997-98. The Asian crisis, in turn, helped generate Wall Street’s implosion in 2008, owing to the Asian countries’ channeling the financial reserves they had accumulated to protect them from a repeat of 1997 into the United States — where they helped fuel the subprime real estate boom.

The turbulence that hit global stock markets last February, causing much fright and a paper loss of 4 billion dollars, was a reminder that the next big implosion may be just around the corner. A just concluded study by the Transnational Institute reveals that in 10 critical areas where major reform is needed, few to no measures have been taken to prevent a recurrence of 2007. These areas range from shadow banking to fractional reserve banking to international financial governance to central bank accountability.

Skating on Thin Ice Once More

So, not surprisingly, current indicators show that the world again is skating on thin ice.

First, the “too big to fail” problem has become worse. The big banks that were rescued by the U.S. government in 2008 because they were seen as too big to fail have become even more too big to fail, with the “Big Six” U.S. banks — JP Morgan Chase, Citigroup, Wells Fargo, Bank of America, Goldman Sachs, and Morgan Stanley — collectively having 43 percent more deposits, 84 percent more assets, and triple the amount of cash they held before the 2008 crisis.

…click on the above link to read the rest of the article…

Subprime Begins to Haunt Credit Card Balances

Subprime Begins to Haunt Credit Card Balances

Delinquencies soar past Financial-Crisis peak at the ca. 5,000 smaller US banks, and these are the Good Times. What’s going on?

The delinquency rate on credit-card loan balances at commercial banks other than the largest 100 – so at the nearly 5,000 smaller banks in the US – rose to 6.2% in the second quarter. This exceeds the peak during the Financial Crisis by a full percentage point and was up from 4.0% a year ago.

But for the largest 100 banks – which carry the majority of the credit-card loan balances – the delinquency rate was 2.4% (seasonally adjusted), the Federal Reserve Board of Governors reported Tuesday afternoon. So what is going on here?

A bank classifies credit card balances as “delinquent” when they’re 30 days or more past due. The rate is figured as a percent of total credit card balances. In other words, among the smaller banks, 6.2% of the outstanding credit card balances are now delinquent.

Some customers are able to catch up with their minimum payments, and their credit card balances are removed from the delinquency basket. Others are not able to catch up, and the bank tries to collect what it can. It then moves the balance out of the delinquency basket into the charge-off basket – when the loan is “charged off” against loan loss reserves.

These charge-offs among the largest 100 banks in Q2 rose a fraction year-over-year to 3.6% (seasonally adjusted).

But among the nearly 5,000 remaining banks, the charge-off rate spiked three full percentage points year-over-year to 7.8%, the highest since Q1 2010. The rate among smaller banks had peaked during the Financial Crisis in Q1 2010 at 8.4%:

…click on the above link to read the rest of the article…

Facebook Asking Major US Banks To Share User Data

Facebook has asked several large US banks to share detailed financial information about their customers, including checking account balances and card transactions, as part of a new push to offer new services to its users, according to the Wall Street Journal.

Facebook increasingly wants to be a platform where people buy and sell goods and services, besides connecting with friends. The company over the past year asked JPMorgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and U.S. Bancorp to discuss potential offerings it could host for bank customers on Facebook Messenger, said people familiar with the matter. –WSJ

Facebook’s new feature would show people their checking account balances, as well as offer fraud alerts, according to the WSJ‘s sources, while the banks are apparently waffling over data privacy concerns.

The negotiations come as the social media giant has fallen under several investigations over data harvesting, including its ties to political analytics firm Cambridge Analytica, which was able to gain access to the data of as many as 87 million Facebook users without their consent.

One large bank withdrew from talks due to privacy concerns, according to the Journal, however Facebook swears that they’re simply trying to enhance the user experience and won’t use any banking data for ad-targeting.

Facebook has told banks that the additional customer information could be used to offer services that might entice users to spend more time on Messenger, a person familiar with the discussions said. The company is trying to deepen user engagement: Investors shaved more than $120 billion from its market value in one day last month after it said its growth is starting to slow.

Facebook said it wouldn’t use the bank data for ad-targeting purposes or share it with third parties. –WSJ

…click on the above link to read the rest of the article…

Gold and the Monetary Blockade on Iran

Gold and the Monetary Blockade on Iran

This blog post is a guest post on BullionStar’s Blog by the renowned blogger JP Koning who will be writing about monetary economics, central banking and gold. BullionStar does not endorse or oppose the opinions presented but encourage a healthy debate.

With Donald Trump close to re-instituting economic sanctions on Iran, it’s worth remembering that gold served as a tool for skirting the the last round of Iranian sanctions. If a blockade were to be re-imposed on Iran, might this role be resuscitated?

The 2010-2015 Monetary Blockade

The set of sanctions that the U.S. began placing on Iran back in 2010 can be best thought of as a monetary blockade. It relied on deputizing U.S. banks to act as snitches. Any U.S. bank that was caught providing correspondent accounts to a foreign bank that itself helped Iran engage in sanctioned activities would be fined. To avoid being penalized, U.S. banks threatened their foreign bank customers to stop enabling Iranian payments or lose their accounts. And of course the foreign banks (mostly) complied. Being cut off from the U.S. payment system would have meant losing a big chunk of business, whereas losing Iranian businesses was small fry.

One of the sanctioned activities was helping Iran to sell oil. By proving that they had significantly reduced their Iranian oil imports, large importers like Japan, Korea, Turkey, India, and China managed to secure for their banks a temporary exemption from U.S. banking sanctions. So banks could keep facilitating oil-related payments for Iran without being cut off from the dollar-based payments system. The result was that Iran’s oil exports fell, but never ground to a halt. This was a fairly balanced approach. While the U.S. wanted to deprive Iran of oil revenue – which might be used to build nuclear weapons – it didn’t want to force allies to do entirely without necessary crude oil.

…click on the above link to read the rest of the article…

Gary Cohn Backs Reinstating Glass-Steagal, Breaking Up Big Banks

Gary Cohn Backs Reinstating Glass-Steagal, Breaking Up Big Banks

In an unexpected statement made by the former COO of Goldman Sachs and current director of Trump’s National Economic Council, Gary Cohn told a private meeting with lawmakers on the Senate Banking Committee on Wednesday evening that he could support legislation breaking up the largest U.S. banks – a development that could provide support to congressional efforts to reinstate the Depression-era Glass-Steagall law – and impact if not so much his former employer, Goldman Sachs, whose depository business is relatively modest, then certainly the balance sheets of some of Goldman’s biggest competitors including JPM and BofA.

According to Bloomberg, Cohn said he generally favors banking going back to how it was “when firms like Goldman focused on trading and underwriting securities, and companies such as Citigroup Inc. primarily issued loans.”

What Cohn may not have mentioned is that with rates as low as they are, issuing loans – i.e., profiting from the Net Interest Margin spread – remains far less profitable than trading and underwriting securities in a world in which virtually every “developed world” central banker is either directly spawned from Goldman, or is advised by an ex-Goldman employee,

The remarks surprised some senators and congressional aides who attended the Wednesday meeting, as they didn’t expect a former top Wall Street executive to speak favorably of proposals that would force banks to dramatically rethink how they do business.

Yet Cohn’s comments echo what Trump and Republican lawmakers have previously said about wanting to bring back the Glass-Steagall Act, the Depression-era law that kept bricks-and-mortar lending separate from investment banking for more than six decades.

As Bloomberg further notes, Wednesday’s Capitol Hill meeting with Cohn was arranged by Senate Banking Committee Chairman Mike Crapo, and included lawmakers from both political parties and their staffs. The discussion covered a wide range of topics, including financial regulations and overhauling the tax code, the people said.

…click on the above link to read the rest of the article…

Corruption, resources, climate and systemic risk

Corruption, resources, climate and systemic risk

Corruption is a loaded word. One person’s corruption is another’s sound social policy. Some people believe providing unemployment benefits to laid-off workers corrupts them by making them “lazy.” Many others think such benefits are sound social policy in an economic system that is prone to major cyclical ups and downs.

Fewer people agree that bailing out major U.S. banks at taxpayer expense in the aftermath of the 2008 crash was a good use of public money. An alternative would have been for the U.S. government to seize the banks, inject funds to stabilize them, and then resell them to investors, perhaps at a profit.

Was it corruption that led to the bailout instead of a takeover? Or was it an honest difference of opinion about what would work best under emergency circumstances?

We can argue whether these examples of transfers of funds from one group to another are fair. But by themselves they do not constitute a systemic risk to the stability of the entire economic and social system. In fact, some would argue that such transfers enhance that stability. However one evaluates these transfers, I would contend that a much worse corruption is to subject our society knowingly to systemic failures such as severe climate change and widespread crop failures.

To understand this contention, we must review the material basis for our modern society. Despite all the hype about the service economy, the activities which make the service economy even possible are agriculture, fishing, forestry, mining and manufacturing. These sectors create the surplus food and fiber, the surplus energy and minerals, and the surplus goods that allow so many of us to do something other than farm, fish, log, mine or manufacture goods.

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US Bank Counterparty Risk Soars After Energy MTM Debacle

US Bank Counterparty Risk Soars After Energy MTM Debacle

A few dots are starting to be connected now that we have exposed the debacle of The Fed’s decision to allow banks to mark-to-unicorn their energy loans. “Something” was wrong in recent weeks as the TED-Spread surged (implying rising counterparty uncertainty among banks) and then the last week – since The Fed’s alleged meeting with banks – has seen financial credit and stocks crash.

Coincidence? We don’t think so. In the week since The Fed gave the nod to banks to hide losses on energy loans, credit risk has spiked and stocks tumbled…

It is clear banks are hedging against one another’s systemic risk.

Simply put, it’s 2008 all-over-again as “when in doubt, sell ’em all” is back for the US financial system. When you know/question one bank (or some banks) is not transparent in their loan losses (and implicitly their capital ratios) then contagion (and collateral chains) tells any good fiduciary to sell them all – and the banks themselves will enable a vicious circle as they hedge.

And of course, the unintended consequence of The Fed’s decision to enable cheating in the banks’ energy loans is a surge in financial system instability as banks and the price of oil now become systemically more coupled.

Insider: “Very Sophisticated High Net Worth Investors Are Buying Up Physical Precious Metals”

Insider: “Very Sophisticated High Net Worth Investors Are Buying Up Physical Precious Metals”

According to the CEO of one of the world’s top primary producers of silver, looming precious metals shortages could drive the price of gold to $5000 and silver to $100 over the next three to five years. Keith Neumeyer, who oversees First Majestic Silver and is also the Chairman of mineral bank First Mining Finance, says that with commodity prices in capitulation mining companies around the world are either reducing operations or outright shutting down, the consequence of which will be a supply crunch across the industry and a resurgence in precious metals prices.

And Neumeyer isn’t the only one who sees the trend developing. Well known investment billionaires like George Soros and Carl Icahn are rushing into gold. Soros is so convinced that a paradigm shift is in the works that after warning of financial collapse and violent riots in America he sold his holdings in major U.S. banks and allocated more of his portfolio into gold mining firms.

And here’s a little known secret Neumeyer shares in an interview with SGT Report – high net worth individuals aren’t just buying paper. Neumeyer says that the coin shortages being reported by national mints around the world are the result of direct buying of physical gold and silver from sophisticated market players:

I’m seeing the numbers coming out of the the Canadian Mint, Australian Mint and the U.S. Mint… the numbers are quite high for silver coins and to a lesser degree gold coins… I think, personally, that the commercials are buying them… I think that very sophisticated high net worth investors at banks and institutions are buying them.

Supply and demand fundamentals aside there appears to be another significant reason that major players like billionaires and central banks are shifting their holdings into precious metals.

…click on the above link to read the rest of the article…

Forget about Ebola – here’s why US banks (and your savings) are now EXTREMELY vulnerable

Forget about Ebola – here’s why US banks (and your savings) are now EXTREMELY vulnerable.

For a casual observer of the US economy (most “experts”), you could say that things look pretty good. Unemployment is at its lowest rate in six years. Earnings of S&P 500 companies are higher than ever, while their debt is lower than it’s been in the last 24 years.

Nonetheless, rather than getting excited for good economic times, the big commercial banks are all battening down the hatches. They’re preparing for bad times ahead.

I often stress the importance of being prepared, so in theory, that should be a great sign.

…click on the link above for the rest of the article…

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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