Month: August 2014

By EconMatters

 

  

 

 

The worst possible approach is to give Putin more credibility at home by leveling sanctions and upping the stakes politically for Putin for staking American interests with Ukraine`s independence from Russian influence.

 

© EconMatters All Rights Reserved | Facebook | Twitter | Email Subscribe | Kindle

via Zero Hedge http://ift.tt/1syFHY3 EconMatters

Last week, Paul Krugman said too big to fail is over:

There was indeed a large-bank funding advantage during and for some time after the crisis, but it has now been diminished or gone away — maybe even slightly reversed. That is, financial markets are now acting as if they believe that future bailouts won’t be as favorable to fat cats as the bailouts of 2008.

 

This news is part of broader evidence that Dodd-Frank has actually done considerable good, on fronts from consumer protection to bank capitalization ….

But as David Dayen notes, Krugman’s stretching the facts:

The report [that Krugman relies on for his claim that too big to fail] doesn’t really say that future bailouts won’t be as favorable to the fat cats, or even that market participants believe that: it does say that large financial institutions would likely continue to enjoy lower funding costs than their counterparts in times of high credit risk (see page 40). Furthermore, the report so completely second-guesses itself that it shouldn’t be taken as evidence of anything, as the report itself states in numerous spots. Presumably a Nobel Prize winner has come across reports with muted conclusions before and would know not to get too far out in front of the facts by amplifying them.

 

***

 

The report did not say that the advantage has “essentially disappeared.” GAO ran 42 models to try and assess the subsidy. In 2013, 18 of those models effectively tested positive for the subsidy, 8 tested negative, and 16 showed nothing. That’s fairly inconclusive, and not at all as definitive as Krugman makes it.

 

***

 

Gretchen Morgenson reported on the same study in the news, and managed to get it right, contrawhat Krugman thought he could get away with on the op-ed page.

(GAO’s) methodology was convoluted and its conclusions hardly definitive. The report said that while the big banks had enjoyed a subsidy during the financial crisis, that benefit “may have declined or reversed in recent years.” […]

 

The trouble with this mishmash is that big bankers and even policy makers will cite these figures as proof that the problem of too-big-to-fail institutions has been resolved. Mary J. Miller, the departing under secretary for domestic finance at the United States Treasury, wrote in a letter about the report: “We believe these results reflect increased market recognition of what should now be evident — Dodd-Frank ended ‘too big to fail’ as a matter of law.”

 

Not exactly. As the report noted, the value of the implied guarantee varies, skyrocketing with economic stress (such as in 2008) and settling back down in periods of calm.

 

In other words, were we to return to panic mode, the value of the implied taxpayer backing would rocket. The threat of high-cost taxpayer bailouts remains very much with us.

There’s more: Morgenson actually watched the hearing about the report, and found credible questioning of GAO’s methodology, in particular the narrow way in which they defined the subsidy as entirely about lower debt costs, instead of the lower cost of equity and benefits to stockholders. I’ve also heard that bond prices, with their focus on immediate-term risk, are simply an inaccurate indicator of short-term borrowing costs, particularly those in the securities lending markets.

And a few days after Krugman wrote his piece, the Washington Post reported:

Eleven of the biggest U.S. banks have no viable plan for unwinding their businesses without rattling the economy, federal regulators said Tuesday, ordering the firms to address their shortcomings by July 2015 or face tougher rules.

 

***

The Federal Reserve and the Federal Deposit Insurance Corp. called the banks’ resolution plans, or “living wills,” “unrealistic or inadequately supported.” They said the plans “fail to make, or even to identify, the kinds of changes in firm structure and practices that would be necessary to enhance the prospects for” an orderly resolution.

 

***

 

“Each plan being discussed today is deficient and fails to convincingly demonstrate how, in failure, any one of these firms could overcome obstacles to entering bankruptcy without precipitating a financial crisis,” Thomas M. Hoenig, vice chairman of the FDIC, said in a statement Tuesday.

 

***

 

Regulators, especially Hoenig at the FDIC, worry that banks are generally larger, more complicated and more interconnected than they were before the meltdown.

 

***

 

And the average notional value of derivatives for the three largest firms exceeded $60 trillion at the end of 2013, up 30 percent from the start of the crisis.

 

***

“There have been no fundamental changes in their reliance on wholesale funding markets, bank-like money-market funds, or repos [repurchase agreements], activities that have proven to be major sources of volatility.”

David Stockman – Ronald Reagan’s budget director – writes:

the giant regulatory diversion known as Dodd-Frank has actually permitted the TBTF banks to get even bigger and more dangerous. Indeed, JPM and BAC were taken to their present unmanageable size by regulators—ostensibly fighting the last outbreak of TBTF—who imposed or acquiesced to the shotgun mergers of late 2008.

 

So now these same regulators, who have spent four years stumbling around in the Dodd-Frank puzzle palace confecting thousands of pages of indecipherable regulations, slam their wards for not having sufficiently robust “living wills”. C’mon! This is just another Washington double-shuffle.

 

The very idea that $2 trillion global banking behemoths like JPMorgan or Bank of America could be entrusted to write-up standby plans for their own orderly and antiseptic bankruptcy is not only just plain stupid; it also drips with political cynicism and cowardice. If they are too big to fail, they are too big to exist. Period.

And Michael Winship notes:

In The New York Times, columnist Gretchen Morgenson writes, “Six years after the financial crisis, it’s clear that some institutions remain too complex and interconnected to be unwound quickly and efficiently if they get into trouble.“It is also clear that this status confers financial benefits on those institutions. Stated simply, there is an enormous value in a bank’s ability to tap the taxpayer for a bailout rather than being forced to go through bankruptcy.”

 

Morgenson adds, “Were we to return to panic mode, the value of the implied taxpayer backing would rocket. The threat of high-taxpayer bailouts remains very much with us.”

 

Financial professionals echo her concern. Camden Fine, president and CEO of the Independent Community Bankers of America, notes in American Banker (not without self-interest) that while the size of big bank subsidies may have “diminished since the crisis … the larger point is that the biggest and riskiest financial firms still have a competitive advantage in the marketplace. They can still access subsidized funding more cheaply than smaller financial firms because creditors believe the government would bail them out in the event of a crisis. No matter how you cut it, a subsidy is a subsidy. And this subsidy is one that puts the American taxpayer on the hook. …

 

“Meanwhile, the largest financial institutions are only getting bigger. According to our analysis of call report data from the Federal Deposit Insurance Corp., since the end of 2009, the assets of the six largest financial institutions have grown each year. Their total assets rose from $6.41 trillion in 2009 to $7.22 trillion in 2014 — a total increase of $800 billion. The top six banks are also responsible for more than half of the $2 trillion increase in total U.S. banking assets in the years since 2009.”

 

***

 

As Senators Brown and Vitter stated, “Today’s report confirms that in times of crisis, the largest megabanks receive an advantage over Main Street financial institutions. Wall Street lobbyists may try to spin that the advantage has lessened. But if the Army Corps of Engineers came out with a study that said a levee system works pretty well when it’s sunny — but couldn’t be trusted in a hurricane — we would take that as evidence we need to act.”

We’ve noted for years that, the Dodd-Frank financial “reform” bill is a joke which:

• Was just a P.R. stunt which didn’t really change anything

• Increases the risky derivatives holdings of the banks

• Makes the “too big to fail” banks even bigger

• “Will NOT stop the next financial crisis from coming“

• Is all holes and no cheese … a placebo for a sick economy

via Zero Hedge http://ift.tt/1syFFPR George Washington

Submitted by Mike Krieger via Liberty Blitzkrieg blog,

But in practice, OIRA operates largely in secret, exempt from most requests under the Freedom of Information Act. It routinely declines to release the changes it has proposed, the evidence it has relied upon to make them, or the identities and affiliations of White House advisers and other agencies’ staff it has consulted. OIRA doesn’t even disclose the names and credentials of its employees other than its two most senior officials.

 

In 2013 the Administrative Conference, an independent federal agency that reviews government administrative processes, released a study of OIRA’s effect on the application and interpretation of science the agencies gather and analyze to write rules. In examining a group of air-quality regulations, the study found that most of OIRA’s suggestions involved substantive changes. The report concluded that in some instances, the office has proposed changes to the basic science underlying the rules. These included revising numbers in tables created by the EPA, altering technical discussions and recommending different standards altogether.

 

– From ProPublica’s extremely important article: Lobbyists Bidding to Block Government Regs Set Sights on Secretive White House Office.

Have you ever heard of the Office of Information and Regulatory Affairs, otherwise known as OIRA? Yeah, neither had I.

As someone who prides himself on being a relatively informed citizen, it is always shocking and disturbing when I learn of a powerful organization operating in the shadows of America’s faux democracy with which I am almost entirely unfamiliar. While I’m sure I’ve read many articles in which OIRA was mentioned, I had never fully understood exactly what it is, and how it is used by lobbyists and large corporate interests to further entrench the established oligarchic power structure. We can thank ProPublica for providing this service.

Let’s start off with a little background. OIRA was created in 1980, and shortly thereafter the Reagan administration greatly expanded its powers by signing an executive order that gave the office the authority to review all federal rules. Ever since then, it has been used to rewrite or entirely block regulations from almost every regulatory body imaginable. While the initial idea of a government body to review newly proposed regulations and gather additional feedback before implementation is a noble one, in practice it has amounted to nothing more than the censorship of science in the name of protecting large corporate interests. Most importantly, all of this happens in total darkness.

For example, ProPublica notes that OIRA is disturbingly exempt from most requests under the Freedom of Information Act (FOIA). For example, the public cannot even find out the qualifications of the people who make drastic changes to proposed environmental regulations. In one specific case regarding a proposed EPA rule, we see an economist and a lawyer completely overruling peer-reviewed science.

Significantly, OIRA doesn’t just interfere every once in a while. As ProPublic notes: “84% of the EPA’s proposed rules from 2001 to 2011 featured changes suggested by OIRA.” As mentioned earlier, the American public has no idea what was changed, why, or the qualifications of the people who made the changes. All of that is intentionally kept completely secret. Surely, in order to protect us from terrorists or something.

Even more worrisome, OIRA power is not only wielded for corporate profit protection purposes, but for political purposes as well. For example, according to OIRA’s governing executive order, it is supposed to complete its review within 90 days of receiving a proposed regulation. Nevertheless, “delays reached an all-time peak under President Obama between 2011 and 2013.”

High level EPA officials believe this was due to the 2012 election and not wanting to review any potentially controversial environmental regulations ahead of it. Quite often an OIRA strategy is to simply never review a proposed regulation until the regulatory body gives up and pulls it.

The anti-democratic, secretive and feudal power vested in the OIRA is an issue with which I was entirely unaware, but it is extremely important nonetheless. Here are some excerpts from ProPublica’s very important article:

In 2008, an OIRA review by the Bush administration deleted a provision intended to protect plant life from the effects of ozone, a key component of smog. The EPA had proposed a sharp reduction in the permissible levels of ozone to protect forests and vegetation, which naturally remove carbon from the atmosphere. According to an investigation by the House Committee on Oversight and Government Reform, the White House summarily overturned the unanimous recommendation of the EPA’s Clean Air Scientific Advisory Committee and an array of expert testimony.

 

In 2013 the Administrative Conference, an independent federal agency that reviews government administrative processes, released a study of OIRA’s effect on the application and interpretation of science the agencies gather and analyze to write rules. In examining a group of air-quality regulations, the study found that most of OIRA’s suggestions involved substantive changes. The report concluded that in some instances, the office has proposed changes to the basic science underlying the rules. These included revising numbers in tables created by the EPA, altering technical discussions and recommending different standards altogether.

 

Congress created OIRA in 1980 to prevent federal agencies from demanding excessive amounts of data from public and private parties. President Reagan greatly expanded its powers, signing an executive order that gave the office the authority to review all federal rules. This was an important change, since most laws say the rules are to be written by the relevant Cabinet agency, not the president and his aides. At the time, Reagan’s move kicked up controversy — still alive today — about whether it was appropriate for the White House to have such a direct say in government rulemaking. 

 

Since then, both Republican and Democratic presidents have signed executive orders enshrining OIRA’s pivotal role.

 

via Zero Hedge http://ift.tt/1kobf2s Tyler Durden

With Shanghai having limited retail exposure to high-yield bonds, and the Chinese corporate bond market has overtaken the United States as the world's biggest and is set to soak up a third of global company debt needs over the next five years, it is no wonder that, as Bloomberg reports, analysts fear "a prelude to a storm." Privately issued notes totaling 6.2 billion yuan ($1 billion) come due next quarter, the most since authorities first allowed such offerings from small- to medium-sized borrowers in 2012. This week a 4th issuer has faced a "payment crisis" and while officials are trying to expand financing for small companies (which account for 70% of China's economy, with debt-to-equity ratios exceeding 200%, this is nothing but more ponzi. As Goldman warns, it appears China's Minsky Moment is drawing near (as the hangover from Q1's credit impulse kicks in).

China's small companies are fundamentally a disaster…

Number of Chinese firms whose liabilities are double their equity has surged since global financial crisis, suggesting more defaults may come.

 

Publicly traded non-financial corporates with debt-to-equity ratios exceeding 200% have jumped 68% since 2007

As Bloomberg reports,

The small companies that dominate China’s private market for high-yield bonds face rising default risks as their debt obligations soar to a record and economic growth slows to the lowest in more than two decades.

 

Privately issued notes totaling 6.2 billion yuan ($1 billion) come due next quarter, the most since authorities first allowed such offerings from small- to medium-sized borrowers in 2012, according to China Merchants Securities Co. The guarantor of debentures sold by Xuzhou Zhongsen Tonghao New Board Co. stepped in to help after the building materials producer based in the eastern province of Jiangsu missed a coupon payment in March.

 

Three other issuers have also faced “payment crises” this year, China Merchants said.

 

Premier Li Keqiang has sought to expand financing for small companies, which account for 70 percent of China’s economy, as expansion is set to cool to the slowest since 1990 at 7.4 percent this year, according to a Bloomberg survey. The nation’s bond clearing house last month suspended valuation of privately placed securities sold by an auto-parts exporter after it failed to clarify media reports regarding a possible default. A polyester maker with similar notes had a bankruptcy application accepted in March.

 

“The current risks exposed in the private-bond market are probably a prelude to a storm,” said Sun Binbin, a Shanghai-based bond analyst at China Merchants

 

“There’s been improvement in only some sectors of the economy, not in all.”

*  *  *

As we noted previously, the problems are mounting and global in nature… (As Reuters reports,)

The Chinese corporate bond market has overtaken the United States as the world's biggest and is set to soak up a third of global company debt needs over the next five years, according to rating agency Standard & Poor's, underscoring the growing risk China's debt market is imposing on the global financial system.

 

 

Chinese corporate borrowers owed $14.2 trillion at the end of 2013 versus $13.1 trillion owed by U.S. corporations with the switch in rankings taking place a year earlier than it had expected, S&P said on Monday.

But that is not good news for the world's investors…

China, the world's second-largest economy is currently financing a quarter to a third of its corporate debt through its shadow banking sector and this had global implications, S&P said.

 

"This means that as much as 10 percent of global corporate debt is exposed to the risk of a contraction in China's informal banking sector," the agency said, estimating this at $4 trillion to $5 trillion. "With China's economy likely to grow at a nominal 10 percent per year over the next five years, this amount can only increase."

 

…

 

"As the world's second-largest national economy, any significant reverse for China's corporate sector could quickly spread to other countries."

As S&P sums up…

Cash flows and leverage at Chinese corporations are the worst among global peers, having deteriorated from being the best in 2009.

 

 

 

 

China's large and still-expanding contribution to global corporate debt, the higher financial risk is causing overall corporate risk to increase globally," the agency said.

 *  *  *

Goldman wonders if this is China's Minsky moment?

As a reference, the BIS paper estimated that a number of economies had similar or moderately lower debt service ratios (DSRs) when they were headed towards serious financial and economic crises. Examples include Finland (early 1990s), Korea (1997), the UK (2009), and the US (2009). This is one more data point in China that evokes the troubling thought of a hard landing.

 

However, we also agree that the actual DSR is probably lower. The assumption of an instalment-loan schedule implies that roll-over is not an option and all debt is fully repaid at maturity. This is clearly not the case in China. Otherwise, the 1% non-performing loan (NPL) ratio of the formal banking system would be simply impossible to explain – not to mention the zero default record kept by China’s domestic bond market or by the vast numbers of low-return infrastructure LGFVs.

 

Apparently, debt roll-over is not a good thing either; and, it cannot explain the increase in the debt burden. Hence, the logical conclusion has to be that a non-negligible share of the corporate sector is not able to repay either principal or interest, which qualifies as Ponzi financing in a Minsky framework. The mechanism that still holds the situation together is the state-backed formal banking system and its unspoken commitment to supporting local governments. We think this precarious equilibrium could last a bit longer but not much longer, particularly if the central government does nothing.

 

It is encouraging that the new leadership has so far tolerated slowing growth and largely resisted the temptation to resort to the 2009 approach [EXCEPT they just broke that rule] This at least has the merit of not making the problem any bigger than it already is. Furthermore, the set of new financial regulations targeting the shadow banking system and the bond market reflects the awareness of authorities of the level of financial risk. Nevertheless, we think more corporate defaults, rising NPLs, and some degree of credit crunch will still be unavoidable in the next three years, which lends weight to our below-consensus medium-term growth forecast.

*  *  *

Time for Xi to unleash some more QE-Lite or face the real consequence…

 

 

via Zero Hedge http://ift.tt/1kJzQPP Tyler Durden