Amid Geopolitical Chaos, TikTok Mysteriously Goes Down Across US & UK Tyler Durden
Thu, 07/09/2020 – 14:54
With the social media company caught in the middle of the escalating rhetorical battle between US and China, ‘conspiracy’ theories are running rampant as TikTok suddenly goes down across the US and UK.
And on the same day as TikTok itself started to discuss plans to shift away from China.
“As we consider the best path forward, ByteDance is evaluating changes to the corporate structure of its TikTok business. We remain fully committed to protecting our users’ privacy and security as we build a platform that inspires creativity and brings joy for hundreds of millions of people around the world,” TikTok said in a statement earlier today.
The company is aware of the outage:
Hi TikTok community! We’re aware that some users are experiencing app issues – working to quickly fix things, and we’ll share updates here!
Some of the public figures who signed an open letter decrying the rise of cancel culture retracted their support, presumably fearing they too might become a victim of it.
As we highlighted yesterday, 150 intellectuals, authors and activists including Noam Chomsky, Salman Rushdie and JK Rowling signed the letter, which was published by Harpers Magazine.
The letter criticized how “the free exchange of information and ideas, the lifeblood of a liberal society, is daily becoming more constricted” as a result of “an intolerance of opposing views, a vogue for public shaming and ostracism, and the tendency to dissolve complex policy issues in a blinding moral certainty.”
“Editors are fired for running controversial pieces; books are withdrawn for alleged inauthenticity; journalists are barred from writing on certain topics; professors are investigated for quoting works of literature in class; a researcher is fired for circulating a peer-reviewed academic study; and the heads of organizations are ousted for what are sometimes just clumsy mistakes,” states the letter.
Following its publication and pushback from leftists, some of the signatories caved and publicly withdrew their support.
“I did not know who else had signed that letter,” tweeted author Jennifer Finney Boylan Dog. “I thought I was endorsing a well meaning, if vague, message against internet shaming. I did know Chomsky, Steinem, and Atwood were in, and I thought, good company.”
People who signed a letter concerned about cancel culture being concerned they’ll be cancelled for being concerned about cancel culture due to guilt-by-association makes the point way better than the letter itself ever could. https://t.co/RMnG9CQFwJ
Vox journalist Matt Yglesias was also reported to his own employers by a transgender colleague because she claimed his support for free speech and his association with JK Rowling was an ‘anti-trans dog whistle’. (tweet since deleted)
Is it any wonder that free speech is in such dire straits when this is the reaction to a letter that simply expresses support for it?
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via ZeroHedge News https://ift.tt/3ee1W1W Tyler Durden
S&P Forecasts $2.1 Trillion In Global Bank Credit Losses Over Next Two Years Tyler Durden
Thu, 07/09/2020 – 14:31
Three months ago, when US commercial banks reported a surge in loan losses in Q1 earnings as a result of the covid pandemic, we said that the banks have a “big problem”, because while the largest US banks did anticipate a nearly 4x surge in loan losses from a year ago…
… this was nowhere near enough to account for the deluge of total losses that we coming.
However, it now appears that even our pragmatic assessment will end up obliviously optimistic if S&P analyst Osman Sattar is correct.
In a new note published by S&P Global Ratings, the agency correctly anticipates that the COVID-19 pandemic and responses to it will have huge and long-lasting effects on bank asset quality. In fact, across the 88 banking systems S&P Global Ratings covers, S&P forecasts their credit losses will be about $1.3 trillion in 2020–more than double their 2019 level of $0.6 trillion.
And while S&P is optimistic enough to project a strong recovery in 2021, it still expects losses in that year will be a staggering $0.8 trillion, more than one-third above the 2019 level: “Indeed, we expect that 2019 marked the end of a multiyear period of benign credit losses for banks globally”, according to Sattar.
Looking at 2020, S&P expects that on a global scale, bank credit cost ratios in 2020 will be around 160 basis points (bps), more than double their 2019 level of 78 bps.
The rating agency estimates this ratio was around 100 bps to 120 bps in the aftermath of the 2008-2009 global financial crisis, which confirms our speculation from April that banks will need to take far, far more loss reserves to catch up to the upcoming dismal reality. Furthermore, current accounting rules require a more timely recognition of credit losses than during the financial crisis. On the other hand, the composition of global lending is more weighted toward developing-market economies (including China) that tend to have weaker asset quality, and that the financial crisis had a more limited effect on loan asset quality in some regions (including Asia-Pacific, for example) than S&P expects to be the case now.
As shown in the next chart, S&P projections for credit losses vary widely among regions, in size and timing of their recognition. Of the $926 billion total increase in credit losses, the agency forecasts over this year and next (from the 2019 level), Asia-Pacific accounts for $518 billion, dominated by $398 billion of losses in China. In large part, this reflects the sheer size of the Chinese banking system in a global context. In terms of customer loans, the Chinese banking system is approximately the same size as the U.S., Japanese, German, and U.K. banking systems combined. Moreover, the banking system in China is relatively much more important in the supply of credit to its economy than the U.S., where borrowers can typically benefit from a deep, liquid, and mature bond market, a large nonbank financial institution sector, as well as access to funding via the banking system. North America’s regions account for a further $240 billion of the increase, followed by $120 billion in Western Europe.
These differences can arise for myriad reasons. China was first hit by the outbreak, but this was put under (draconian) control and the economy has improved since the peak in the first quarter of this year. The large loan exposures to state-owned enterprises (which tend to assume some levels of government support) buffer the potential loan quality fallout. Substantial monetary and targeted fiscal stimulus also helped stabilize confidence and contribute to bankers’ having an improved view of recovery. Sectorwide, there are substantial loan provisions–about 1.8 times the level of official NPLs. However, this is much lower, at about 50%–once our estimate for forborne loans is included. Banks in China are required to comply with strict regulatory provision standards once these forborne loans migrate to weaker classifications. In addition, some listed Chinese banks must consider IFRS 9 provisioning requirements and apply the higher of the two requirements.
What does all this mean for long-term bank viability?
According to the report, while major banks will be able to absorb credit losses from earnings, they will be left with sharply reduced headroom for further upticks. More from S&P:
We estimate that the top 200 rated banks represent about two-thirds of global bank lending. Pro rata, for 2020 we estimate that credit losses for these banks would absorb about 75% of their preprovision earnings. Under our base case, this ratio improves to about 40% in 2021. By way of comparison, in 2019 the ratio was just 30%. These figures illustrate how the sharp uptick in credit losses, combined with muted earnings from slower economic activity, leaves limited capacity to fully absorb further losses from current earnings.
S&P then notes, that should the COVID-19 pandemic prove to be worse or last longer than its current base case economic forecasts assume, then a combination of higher credit losses and lower earnings will inevitably hit banks across the world.
In particular, S&P economists note that the economic damage associated with the pandemic is nonlinear: If containment of the virus takes twice as long as expected, for example, the economic damage will be more than twice as bad as the length of the recession, with recovery longer and weaker (with more lost output). Moreover, even if the spread of the virus were to end tomorrow, the effects could linger, especially if social distancing becomes a new normal or business and consumer spending doesn’t bounce back as people await the arrival of a vaccine.
Meanwhile, even as fiscal measures provide “essential and immediate support to the economy” their eventual withdrawal could reveal new fragilities in asset quality.
As S&P ominously warns, while the unprecedented level of fiscal support that many governments across the world have deployed in response to the pandemic-related slowdown has been a key factor in supporting their citizens and economies during lockdown periods, it is unclear how if ever this support can ever be removed: time will tell whether the size and duration of such support has been effective enough.
“From a bank credit risk perspective, perhaps the greater danger at this time is the reduction of such support too early, resulting in a longer and deeper economic contraction, further impairing banks’ asset quality and increasing credit losses.” While S&P does not see evidence of this yet, even under our base case, the recovery will take time, with lower GDP growth (and higher unemployment) for a number of years.
While there is much more in the full paper (link), we wanted to focus on S&P’s forecast for North American banks which report Q2 earnings next week, and where we expect tens of billions more in loss reserves will be booked:
North America: Robust uptick in loan provisions driven by regulatory requirements
We forecast credit losses of $366 billion over the two years to end-2021 for the U.S. and Canada. This compares with losses of just $63 billion in 2019. For the U.S., our base case estimate is that loan loss rates will be about half the roughly 6% level the U.S. Federal Reserve has projected in its nine-quarter severely adverse scenario (which is unrelated to the pandemic) in its last two annual stress tests. We expect banks to provision for those losses faster than banks in most other regions, and particularly in 2020, because of this year’s implementation of the CECL accounting methodology.
In fact, in the first quarter of 2020, U.S. FDIC-insured banks reported a robust $53 billion in provisions for credit losses, and some banks have indicated that provisions could be just as high in the quarter ended in June. As a result, the ratio of allowances for credit losses to loans and leases rose to 1.80% at March 31, 2020, from 1.18% at the end of 2019.
We underscore the fluidity of the current situation and the difficulty in forecasting credit losses. Whether our estimate proves too conservative or lenient will depend heavily on the performance of the economy and the continued effectiveness of support measures the government has provided individuals and businesses. Our estimate factors in the U-shape, gradual recovery our economists have set as their base case as well as the assumed benefits of government support measures.
As part of the stress test results released in June 2020, the Fed also provided a sensitivity analysis where it estimated potential losses related to the pandemic under three scenarios for the 33 large banks that were part of the test: 8.2% under a V-shaped recession, 10.3% under a U-shaped one, and 9.9% under a W-shaped recession. Those figures are all higher than the 6.8% loss rate during the global financial crisis. Importantly, however, the Fed’s analysis did not factor in any benefit from government support measures.
The bottom line: global banks are already facing $2 trillion in losses over 2 years. Should the pandemic make a triumphal return and force another round of shutdowns, countless banks – both in the US and across the world – will end up going out of business, as there is no amount of direct or indirect Fed funding that can offset another $2 trillion in losses in the coming years.
via ZeroHedge News https://ift.tt/2ZS9sKX Tyler Durden
NYC Mayor De Blasio Helps Paint ‘Black Lives Matter’ Outside Trump Tower Tyler Durden
Thu, 07/09/2020 – 14:15
Following in the footsteps of Washington DC Mayor Muriel Bowser, NYC Mayor de Blasio joined in the fun (and posed for a few photos that might help bolster his abysmal approval ratings) after closing down a swath of 5th Avenue to paint “Black Lives Matter” in big yellow letters outside Trump Tower.
The work on the new “mural” started around 11amET.
Bandana tied around his face instead of a mask in a ridiculous attempt to appear ‘edgy’, de Blasio managed to arrange what he probably felt was a ‘powerful’ photo op, flanked by Al Sharpton and group of black luminaries and volunteers.
As the National Review pointed out, by indulging in these types of symbolic but ultimately hollow gestures, de Blasio is continuing the trend of Trump’s biggest critics inadvertently adopting the behaviors of the man they claim to abhor.
Once again, we have a case of people who profess to hate Donald Trump – for his inane tweeting and for other reasons – adopting exactly those tactics they keep saying they deplore. There is no purpose to this exercise (and it’s a waste of public money) except to annoy a president – whose support Bill de Blasio would love to get for a bailout to cover his massive budget gap and other kinds of funding. Like him or not, President Trump does exercise some power, perhaps even for four more years. Why go out of your way to be personally obnoxious to a fellow public official? This exercise makes de Blasio look even less mature than Trump. At least Trump doesn’t paint his tweets on Pennsylvania Avenue.
President Trump slammed de Blasio in a tweet, accusing him of painting a “symbol of hate” on one of NYC”s “greatest streets”, and called on police to stand up to the mayor and not let it happen.
The money and effort could perhaps be applied to fighting crime instead.
That’s not a bad suggestion, since shootings in the city have skyrocketed by 200%, causing the murder rate to spike.
Newsflash while the tech bubble is running: Most major indices still peaked on June 8th, a month ago.
Hey, it may mean nothing as yet another stimulus package is just around the corner or so conventional wisdom goes.
Who can say, but I’ll share some charts on the $DJIA here that suggest the perhaps unthinkable and currently unprovable: That all this is still a bear market rally.
Why the $DJIA? Well, for one, it has some of the longest charting history and it contains key components of the larger economy. Yes it includes the tech monsters $AAPL and $MSFT but even they haven’t been strong enough to push the $DJIA to new highs in July.
Rather the $DJIA includes major industrials, banks, financials and a lot of the big companies representing large swaths of the American economy. And folks, it’s looking rather ghoulish.
Let’s start with some basics:
Here’s a daily chart:
Firstly note the $DJIA has not gone anywhere for two and half years. Big range. Blow-off top in early 2020 then the big crash bringing $DJIA all the way back to 2016 levels. That was a big shock as nearly 4 years of gains were wiped out in a month.
Then the big rescue operation culminating in an island reversal in June. That reversal has held and the June correction has brought $DJIA back below its 200MA and it has failed every attempt to regain it so far despite tech keeping making new highs.
$DJIA remains above the 50MA as support and that MA is rising. As long as that holds $DJIA has potential to rally higher later in the year.
But note the $DJIA, like many indices still have many open gaps below which puts it at technical risk of future gap fills.
Why the island reversal in June? Why that spot? No technical accident as it coincided with key trend line reisstance:
Note also the perfect bottom at the .50 retrace in March. See, technicals can matter greatly on bottoms as well as on the top ends. Indeed the trend line that was broken in February dated all the way back to 2009 and has now shown to be resistance in June. Classic technical stuff. The implication: $DJIA has broken an 11 year old trend and has failed to recapture it.
But the rally off the lows was powerful, very powerful, over 50%. So that must be bullish right?
Maybe, maybe not, for that rally came on a rising channel that $DJIA now has also broken:
Furthermore 50% rallies are not necessarily a sign of better things to come in context of a structural bear market.
After all we saw a near 50% rally in 1929:
That rally too lasted several months before peaking and then starting to make lower highs which is what I submit the $DJIA has done so far in July.
Maybe a new stimulus package will change that, I can’t say, but we now have tech massively extended and indices such as the $DJIA making lower highs with plenty of open gaps below.
So we’ll see.
But 1929 is so long ago you say, how can a comparison apply? Don’t we have a Fed that saves every dip? Well, that appears to be the case for now. But in the big context of things, including 11 years of central bank printing and a global economy ever more indebted and dependent on zero rates it is perhaps notable that that $DJIA hit its 1929 trend line perfectly when it topped in early 2020.
It was a chart I pointed out on January 3rd as a warning sign:
Since we’re back in the roaring 20’s here’s a chart that dates back to that time.$DJIA and what can happen when it make new highs on pronounced negative monthly divergences.
Incidentally this chart points to a major decision to come in the next year or 2.. pic.twitter.com/Nv6K6VGIaQ
And now $DJIA has not only rejected that 1929 trend line, but it also broke its 2009 trend line and now has failed to recapture it as resistance:
While most are focused on the day to day action this little journey of the bigger picture I trust offers a bit broader perspective which is to say things are far from as bullish as many project them to be. $DJIA needs to fill the island gap and move above the June highs or it remains technically broken which is suggestive of sizable downside risk in the months to come. Stimulus package or else?
Or what if the stimulus package is not enough? After all while $3 trillion in Fed intervention have managed to juice the Nasdaq to new highs but preciously little else and have failed to technically repair the broken trend on $DJIA. and that makes the $DJIA the gargoyle of this rally to be watched closely.
via ZeroHedge News https://ift.tt/31Xz0ZL Tyler Durden
Nearly Two Dozen New Tesla Owners Sign Onto Lawsuit Alleging Unintended Acceleration In Model 3s Tyler Durden
Thu, 07/09/2020 – 13:34
Nearly two dozen Tesla owners have signed onto a lawsuit in the Bay Area that alleges the company’s Model 3 vehicles can dangerously accelerate on their own.
The suit was filed originally in January by eight plaintiffs in six states and the suit has now expanded to include 23 plaintiffs in 11 different states, according to the East Bay Times. The company “has been intentionally overlooking a dangerous problem while rushing its vehicles to market,” the lawsuit claims.
The unintended acceleration issued had been brought to light in the Model X and Model S and is now appearing in the Model 3, the suit says. We have reported on an array of Model S accidents over the last few years where cars have driven through the front of shops. In fact, two of them happened in one week back in March.
The lawsuit says: “A defect causes the Model X, Model S, and Model 3 to accelerate suddenly without prompting from the driver. These vehicles are capable of full power acceleration and achieving high speeds even if no one presses the acceleration pedal.”
Tesla claims that “there is no ‘unintended acceleration’ in Tesla vehicles” and that “the car accelerates if, and only if, the driver told it to do so.”
But the lawsuit points to 195 complaints to the NHTSA about the issue. 52 of those complaints happened in the Model 3 while 47 happened in the Model X and 96 occurred in the Model S.
One complaint states: “I drove my Tesla from work, driving over 35 miles during rush hour of the Bay Area. Instead of stopping, car sped up at extremely high acceleration. It drove through the garage door, hit Maserati parked in the garage, and a motorcycle.”
Another Plaintiff, Sandy Xia, said she was at a red light in February 2019 in her 2018 Model S “when she experienced sudden un-commanded acceleration that caused her to spin 360 degrees multiple times and collide with other vehicles.”
Recall, in Palm Springs back in March a driver suffered minor injuries after “crashing a Tesla into a building”, according to the Palm Spring Desert Sun.
But even more noteworthy was the fact that this was the second time in a week that a Tesla crashed through the front of a building in the Coachella Valley. Earlier that month an elderly woman plowed her Tesla through the front of Mastro’s Steakhouse in Palm Desert.
Recall, back in January of this year, we wrote about the U.S. National Highway Traffic Safety Administration opening an investigation into a petition it received regarding certain Tesla models.
According to Bloomberg, the petition involved “unintended acceleration in vehicles”.
The NHTSA says its Office of Defects received the defect petition on December 19 and that the request applied to model year 2012 through 2019 Tesla Model S vehicles, model year 2016 through 2019 Tesla Model X vehicles and model year 2018 through 2019 Tesla Model 3 vehicles.
This totals about 500,000 Tesla vehicles.
via ZeroHedge News https://ift.tt/3egLHkN Tyler Durden
Record Foreign Demand For Spectacular 30Y Treasury Auction Tyler Durden
Thu, 07/09/2020 – 13:15
If yesterday’s 10-Year reopening auction was blockbuster, then today’s just concluded sale of $19BN in 30Y paper was spectacular.
Pricing at a high yield of 1.330%, the auction stopped through by a whopping 2.7bps, the most in at least four years. And while it wasn’t the lowest yield ever for a 30Y auction unlike yesterday’s 10Y, it was just 1 basis point higher than the all time low 30Y auction hit in March when the auction priced at 1.32%.
The Bid to Cover saw an impressive jump from both the June and recent auction, rising to 2.50, above June’s 2.265, and above the six auction average of 2.37%; it was also the highest bid to cover since January.
Finally, the real surprise was in the internals, where Indirects took down a record 72%, as foreign central banks, reserve managers and private buyers seemingly couldn’t get enough, and with Directs taking down 10.5%, Dealers were left with just 17.4%, which while not quite the lowest ever (that was 15.5%) was the second lowest in history.
Overall, a stellar auction which saw blockbuster demand with foreigners now flooding US paper thanks to favorable USD-hedging dynamics (thanks Fed), and which sharply flattened the curve in kneejerk response, sending 10Y and 30Y yields tumbling.
via ZeroHedge News https://ift.tt/3gFMQ75 Tyler Durden
At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?
McNeely was the Founder and CEO of Sun Microsystems, one of the most popular and most overvalued stocks during the height of the stock market mania that peaked 20 years ago. He saw his stock price rise from $10 in the beginning of 1999 to over $60, and over 10-times revenues as he notes, at its peak just a year later and then fall back under $10 over the next two years. In other words, he had a front row seat in the roller coaster that was the Dotcom bubble and so his thoughts on the episode are especially interesting.
Even more interesting, however, may be the fact that only a few months ago there were even more companies within the S&P 500 Index that trade above this “ridiculous” valuation level than there were back in 2000 (thank you Tobias Carlisle and AcquirersMultiple.com for providing the data).
What’s more, even as we find ourselves in the midst of the worst economic crisis in modern history, there are still more stocks that trade above 10-times revenues today (37) than there were in March of 2000 (30), the month the Nasdaq put in its infamous peak before falling 75% over the subsequent two years.
Now that we are entering earnings season, these numbers could get even more interesting. With the Nasdaq at new highs and sales for S&P 500 companies expected to fall 11.1% in the second quarter (according to Factset), there’s a good chance we could set a new record set for the number of components trading above 10-times revenues.
Wells Now Demands Clients Who Refi Jumbo Mortgages Have At Least A $1 Million Balance Tyler Durden
Thu, 07/09/2020 – 12:54
The virus-induced recession has mortgage lenders quickly steering away from traditional clients, as fears abound that lost income could result in a massive wave of mortgage defaults. So that’s why Wells Fargo is tightening mortgage standards for new clients and laying off thousands of jobs.
More specifically, sources told CNBC that Wells Fargo is now requesting new clients who want to refinance jumbo mortgages to have at least a $1 million balance, up from the previous threshold of $250,000.
“The change came in a July 1 overhaul of lending guidelines that broadly lowered barriers to the product for existing customers, while making it far harder for new ones to qualify,” said the source.
Wells Fargo, the largest U.S. mortgage lender, has been pressured by the economic downturn and a Federal Reserve cap on its balance sheet to rein in operations. The bank hasn’t been able to expand its balance sheet due to regulatory constraints tied to scandals in 2016.
The bank reduced its footprint in the jumbo loan market in April. Back then, jumbos yielded 3.68%, 30 bps higher than the average conventional rate. The reason? Well, banks tightened lending standards and shunned making any new jumbo loans because they weren’t government guaranteed.
Stanley Middleman, chief executive officer of Freedom Mortgage Corp., explained the pullback in jumbo loan making in April:
“Much of this pullback is because investors who’d normally buy these loans no longer want them. Whether the assets are good or not good is irrelevant because there’s no liquidity to buy them,” said Middleman.
Wells Fargo is by far one of the largest jumbo loan holders, producing about $70 billion of the mortgages last year.
Besides tightening lending standards, the bank also announced it’s preparing to cut thousands of jobs later this year – as the industry is set for mass layoffs.
“Pressure to dramatically reduce costs is coming to a head inside the bank, prompting executives to draft plans that may ultimately eliminate tens of thousands of positions, people with knowledge of the confidential talks said, asking not to be named. Some analysts predict the lender may post its first quarterly loss in more than a decade next week, when the firm is set to reveal how much it’s lowering its dividend following Federal Reserve stress tests,” Bloomberg noted.
Shares of Wells Fargo traded down 2.3% on Thursday afternoon.
The actions by America’s largest mortgage lender suggests the recession ain’t over… For more color on what could be next, listen to what Gary Shilling is predicting.
via ZeroHedge News https://ift.tt/3eaHOhn Tyler Durden
“Your money is safe at the banks,” she said, with soft piano music in the background.
“The last thing you should be doing is pulling your money out of the banks thinking it’s going to be safer somewhere else.”
This reminds me of back when Ben Bernanke repeatedly told the public, and Congress, that housing prices would continue rise, and that a subprime mortgage meltdown would not affect the broader economy.
Or in July 2007 when Bernanke said:
“Overall, the U.S. economy seems likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008.”
And even in early 2008 when Bernanke said, “The Federal Reserve is not currently forecasting a recession,” and that the federal housing agencies Fannie Mae and Freddie Mac “would make it through the storm.”
Within months, Fannie Mae and Freddie Mac had collapsed, the economy went into the harshest recession since the Great Depression, and the entire financial system was on the brink of failure.
Bear in mind, this was the Chairman of the Federal Reserve telling people that everything was fine.
Now the Fed (and FDIC) are once again telling us that everything is fine.
Yes, everything is fine despite the fact that large sections of the economy have shut down, tens of millions of people are unemployed, countless businesses have failed and will never re-open, major cities across the United States have experienced extreme social unrest and continued economic disruption, and now a second wave of the pandemic is upon us.
But other than that, everything is just fine.
And, definitely, DEFINITELY, don’t worry about the banks. Don’t even think about the banks. Nevermind that some of the largest banks in the world failed in 2008. This time is different.
In fairness, they might be right. But who really knows?
This is one of the [many] big problems in banking: there’s practically zero transparency.
As an example, I was looking at Bank of America’s financial statements yesterday; their balance sheet shows $983 billion in loans.
And that’s about all the detail you get; even doing a deep dive into the footnotes and annual report shows little additional information.
What are the loan terms? What’s the duration risk? How valuable and marketable is the collateral? What legal security was taken over the collateral? Is there even any collateral at all?
Plus there’s extremely limited information on the bank’s exposure to riskier derivatives and collateralized loan obligations (CLOs– which are the toxic securities du jour).
In fact there’s far more information about Bank of America’s diversity and inclusion programs than disclosures about potential financial threats.
Again, it’s possible that there’s nothing to see here and everything is just fine. But given the lack of transparency, it’s impossible to independently verify.
The Fed and FDIC insist everything is OK. But the Fed and FDIC (along with the entire financial system) insisted that everything was OK back in 2008 right before everything collapsed.
Why should we be so trusting again this time in light of such obvious risks?
To be clear, I’m not suggesting that anyone should pull their money out of the banks.
But there are a few important things to consider:
You work hard for your money. So the decision of which bank to trust with your hard-earned savings should be deliberate.
Most people choose where to bank based on irrelevant factors, like location– ‘There’s a branch near my kid’s karate school, so I’ll deposit my funds there.’
There are far more important factors. Do they treat you well, or like a criminal suspect? Do they treat your money well, or do they gamble it away on some ridiculous investment fad?
Are they transparent? Are they conservative, responsible custodians of my money?
Those are the things that matter in a bank.
Here’s an easy litmus test: if your bank routinely sends you junk mail offering to loan money at super attractive terms, that’s a good indication you DON’T want to be a depositor there.
No money down? Teaser interest rates? No personal guarantee?
To me, those are reasons to take my money and run. Because when a bank makes it easy for people to borrow money, they’re taking on unnecessary risks. And they’re doing it with MY money. And YOUR money. Not theirs.
I prefer to deposit my savings at a bank that scrutinizes every prospective borrower and has incredibly stingy loan terms. Because at least I know they’re being very conservative with my money.