Archive for the ‘Banking’ Category

Wall Street Bonuses – Blind leading the Blind

Monday, January 11th, 2010

Main street America is bracing for the all expected news of coming bonuses for Wall Street executives. When main street is suffering with shrinking credit and high unemployment, why should the source of the problem get a bonuses. Well they made a lot of money over the past year, right? Most of these institutions paid off the TARP funds, so why should they not get bonuses?

First let’s look at how those institutions paid off their tarp funds. Goldman Sachs is believed to be at the apex of Wall Street with their proven track record. How did Goldman Sachs pay off their TARP debt so fast? Last year the US government bailed out AIG by giving them a large chunk of tax payer money. Most of those funds given to AIG passed directly through to institutions that they owed due to bad bets with credit default swaps. Goldman Sachs was the top recipient of $12.9 billion of those tax payer dollars. Goldman Sachs owed TARP $10 billion. Shouldn’t the house be responsible for the bets they take?

They made a lot of money, right? The question is at whose expense. These institutions make a good share of their profits off the consumer. Since credit card rates have gone up and the banks cost of money gone down (fed funds rate), it would seem some of the TARP funds where paid back by the same tax payer who bailed them out.

Who should decide whether these institutions give their executives bonuses? I personally believe that the shareholders should be making the decision, since they are the ones who own the company. Let’s take a look at Goldman Sachs’s top 10 institutional shareholders as of September 30th, 2009 considering 76% of Goldman Sachs is owned by Institutional & Mutual Fund Owners.

4.62% AXA – They provide insurance and asset management services through their subsidiaries around the world.
4.41% Barclay Group – They provide financial services to United States and Europe.
3.72% State Street Corporation – Provides financial services around the world.
3.40% Wellington Management Company – Institutional investment managers.
3.29% Vanguard Group – Provides mutual funds and other financial services.
3.20% FMR LLC – Otherwise known as Fidelity Investments is one of the largest mutual fund providers in the world.
2.14% Price (T. Rowe) Associates – Large mutual fund provider.
2.07% Marsico Capital Management – Financial services and mutual fund provider.
1.76% Janus Capital Management –Asset management and mutual fund provider.
1.70% J.P. Morgan and Company – Large financial services provider.

All of the above institutions have one thing in common and that is they are all investment managers. If you hold a mutual fund or ETF (exchange traded fund) that owns Goldman Sachs, do you vote as a shareholder? The answer is no, the fund manager makes the decision. Do you think the fund manager is going to say no to bonuses?

Whether Wall Street deserves the bonuses or not, one thing is for sure they will do what they want since there is no one to stop them.

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Federal Reserve’s Scary Math

Thursday, December 10th, 2009

In the early 1980’s mortgage rates where above 14% and other debt carried an even higher rates of interest. During the early 1980’s, banks required most home buyers to put down 20% and have spotless credit. For example if a buyer purchased a home for $125,000 he or she would more than likely need to put $25,000 down (20%) and the monthly principle and interest payment at 14% would be $1184.87.

Over the past 25 plus years, rates on mortgages and most debt have fallen considerably. The cause of this decrease in rates is mostly attributed to the Federal Reserve’s action of lowering rates and raising rates to control inflation in the US economy. Clearly the Federal Reserve has viewed the past 2 plus decades as having relatively low inflation thereby lowing more than raising rates (Fed Funds Rate).

Lowering rates more than raising them creates cheaper costs of borrowing thereby making room for more. This cheap money also creates more of a demand for credit. This excessive credit demand led to fierce competition among banks. Competition is definitely a good thing until demand starts to wane. As soon as the credit demand let up this led to banks acting as their own Federal Reserves by creating products that artificially lowered the cost of lending thereby stimulating borrowing.

Most home buyers view a home purchase not by the sales price, but by the down payment and monthly obligation. Now let’s look at the buyer from the early 1980’s with he or she’s $25,000 to put down and the ability to afford $1184.87 monthly payment. This buyer today could afford a $225,000 home with $25,000 down with $1183.08 monthly principle and interest payment with an interest rate of 5.875% and relaxed down payment restrictions. Identical down payments and same monthly, but twice the debt, was the growth in value or debt?

This rather rapid reduction in the cost of money over the past two plus decades has led to an equal increase in the price of cars, education, utilities, etc. Inflation seems to have been masked in credit. The credit markets in the US and around the world nearly collapsed because they had “maxed out their credit”. With the rapid expansion of debt at the end of the road with the Fed Funds rate at 0 to .25% target and lending rates increasing because of diminishing credit quality (except for mortgages because the Federal Reserve is supporting the rates), what’s next? Deflation?

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Wringing out the Credit

Monday, December 7th, 2009

Last year the world markets suffered a massive trauma that crippled most financial institutions. This trauma, led to; the US government to taking over Fannie Mae and Freddie Mac, form the ever popular TARP fund, the Federal Reserve to reduce the Fed Funds rate to 0 to .25%, President Obama to pass a near $800 billion stimulus and many more multi-billion (probably trillions) dollar actions.

This trauma was caused by a bubble in the credit markets. America and the world essentially took on too much debt. The US and most of the world have attempted to solve this crisis by filling the credit and demand gaps with stimulus and cheap money.

GDP in the 3rd quarter did showed its first positive growth (2.8%, revised down from the 3.5% first estimated) quarter of quarter since the 2nd quarter 2008. Most of the US consumption growth (in GDP) has been attributed to the Government’s cash for clunkers program and the first time homebuyer tax credit (along with the Federal Reserve supporting low mortgage rates). The “cheap money” has reduced the value of the US dollar thereby improving exports, which also has spurred some growth in the US GDP.

The question still remains whether government stimulus and cheap money can truly carry us over the hump. Most of this growth has come at the expense of more credit and reduced buying power. Matter of fact, most the Government’s programs seem to have targeted the only individuals left who had room to expand their credit. Who owns a car worth less than $4000 and typically is a first time home buyer? These programs look to have wrung out the credit from the last remaining source in the US economy, the youth, our future.

What happens when the credit towel is dry?

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Ben Bernanke and The Federal Reserve Money Factory

Thursday, December 3rd, 2009

golden-ticketOver the past few weeks Republican Congressman Ron Paul out of Texas has been making a noticeable push to get more transparency out of the Federal Reserve. The Federal Reserve members and its Chairman (Ben Bernanke) have been verbally opposed to the measures that the Congressman is attempting to have enacted. The proposal Congressman Ron Paul is pushing for would allow for an independent audit to be called for following any decisions on monetary policy by the Federal Reserve.

Currently the Federal Reserve keeps most of its dealings a secret. The Federal Reserve believes that by keeping politics and the public view out of monetary policy they will be able to act more prudently and timely without influence. They believe that this independence is crucial to maintaining their objectives.

Some believe that many of the problems today are caused by their objectives. The Federal Reserve’s deliberate reactions to economic events creates a relatively predictable cycle. When the economy contracts, the Federal Reserve lowers rates to expand credit to spur growth with cheap money. When the economy is growing too fast they raise interest rates to slow the growth. Unfortunately, it is much easier to indentify contraction than over expansion, which typically results in a late raising of rates which can result in a bubble.

For the past 25 years the Federal Reserve has lowered rates more than raising them and now is faced with a very troubling 0 to .25% Fed Funds Rate. Interest rates as a whole should be falling, but for credit that is not supported by the government, rates are rising. One can only assume that with banks profit margins so high that the rising rates are being caused by falling credit quality and defaults. The Federal Reserve has resorted to another avenue in attempts to promote lending with “quantitative easing”. Quantitative easing is essentially when the Federal Reserve becomes the lender of last resort. This form of injecting money into the economy can have adverse and unknown consequences, since much of the money is created out of thin air in the form of credit.

Who, what and how they are supporting these institutions seems to be behind Congressman Ron Paul’s motivation. Over this historical Financial Crisis the Federal Reserve’s political powers have been weakened. We will see if this weakness will lead to the Congressman getting his golden ticket.

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Too Big to Fail – A Concept that has gone into Bankruptcy

Tuesday, May 12th, 2009

Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay its creditors. Since the beginning of the current financial crisis thousands of businesses and individuals have filed bankruptcy in America. Most of America has no protection from bankruptcy. The US government has invented a term “too big to fail” which seems to have immunized the nation’s largest businesses from bankruptcy.

Companies that have been labeled “too big to fail” directly and indirectly (suppliers) employ millions of people. Over the past year the Government contributed billions of US tax payer money to these behemoth companies to prevent them from meeting a self inflicted fate.

The recent optimism over banks seems somewhat over exaggerated considering we have already given hundreds of billions of dollars to these banks and they need 75 billion more. The treasury secretary has been quoted that he believes the banks can “earn their way out” of this crisis. Tax payer allowed these once doomed banks to raise their profit margins so they can “earn their way out” of the hole they dug themselves into (i.e. questionable credit card practices that has taken recent political stage).

The US auto industry has been dying slowly for decades. Two out of the three US auto manufacturers were pulled from the thaws bankruptcy late last year. Now one of them has already entered bankruptcy and the other is all but guaranteed to file. So this intervention by the US government just ended up being a waste of taxpayer money.

Bankruptcy is a clear case that capitalism is successful. It is Business’s form of natural selection. A business goes bankrupt when supply exceeds demand and or new innovation trumps the old. Bankruptcy makes room for new businesses that are better suited for the times. Since bankruptcy is such an integral part of capitalism and the evolution of business, what happens when you manipulate natural selection?

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Bank Stress Test – Possible Train Wreck?

Friday, May 8th, 2009

File:Train wreck at Montparnasse 1895.jpgSince the announcement of the Bank Stress Test the US Government has been promising a level of transparency that was suppose to shed light on the real condition of the largest banks in the USA. The official results were announced at 5:00 PM EST but the actual results had been leaked to the press over that past two weeks.

With the test scores in, Wall Street seems unsurprised by the results. The US Government seems to have spent more effort on releasing the information so as not to disrupt the markets, than realistically testing the banks. This test was supposed to see if banks could handle another future financial earthquake. Instead it seems to have tested if they could handle what may be a best case scenario.

The US government used both a worst case scenario and a more “probable case” to test the possible financial needs of Americas 19 largest banks. The “probable case” unemployment for this year has already been met. The Federal Reserve Chairman during his last testimony to congress stressed the increasingly concerning commercial real estate industry, but the test puts little weight to it. The Bank Stress test seemed to be more political propaganda to spur optimism than a true test of structural integrity.

Consumer credit was released today showing consumers paid down debt $11.1 billion in April instead of the forecasted reduction of $4.2 billion. The consumer still appears to be concerned about debt reduction than expansion. The backbone of the US governments recovery plan is to expand lending and spur consumer spending.

United States Railroad freight traffic was down 23 percent in April and 18.2% year to date. Railroads move raw goods around America. The Association of American Railroads Senior Vice President John T. Gray was quoted in a released statement “Unfortunately, it’s hard to find much in rail traffic data in April to support the idea that the economy is starting to see ‘green shoots’ … it may still just be weeds”. How can manufacturing be recovering without the raw goods to make products?

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Bank Stress Test – At Least 1 then, now 10 need Funds?

Tuesday, May 5th, 2009

On Friday April 24th, 2009 the US Government released the parameters of their imposed stress test on the 19 largest banks in the USA. This release acknowledged that at least one of the banks involved in the test needed additional capital. On Tuesday May 5th 2009, information has leaked out that possibly 10 of the 19 banks will need additional funds.

The stress test results are scheduled to be released on Thursday May 7th, 2009. Since the release of the parameters on April 24th, information has been suspiciously disseminated seemly to soften the blow of the tests findings. So far from the information released, it appears over 50% of 19 largest banks in the USA need more money.


With still a couple days until the results are released, one has to consider if there will be more than 10. With the diminished political will towards Wall Street the obvious first step towards these banks raising the necessary capital will be to convert the US governments preferred shares (from TARP funds they received) to common equity. This conversion, which would alleviate debt from their balance sheets, would essentially put these banks one step towards nationalization.

Over two months ago the US Markets plunged to new lows on fears on banks being nationalized. Now it appears that the US government is inches from nationalization of some of the largest banks in the USA. If over 50% of the largest banks need money, what about the mid and small sized banks? Where will the funds come from?

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