Dangers of a World Where “Almost Anyone Can be Arrested for Something”

Supreme Court Justice Neil Gorsuch.

In a recent dissenting opinion, Supreme Court Justice Neil Gorsuch warns of the dangers of the modern expansion of criminal law to the point where “almost anyone can be arrested for anything”:

History shows that governments sometimes seek to regulate our lives finely, acutely, thoroughly, and exhaustively. In our own time and place, criminal laws have grown so exuberantly and come to cover so much previously innocent conduct that almost anyone can be arrested for something. If the state could use these laws not for their intended purposes but to silence those who voice unpopular ideas, little would be left of our First Amendment liberties, and little would separate us from the tyrannies of the past or the malignant fiefdoms of our own age. The freedom to speak with-out risking arrest is “one of the principal characteristics by which we distinguish a free nation.” Houston v. Hill, 482 U. S. 451, 463 (1987).

The immediate point of Gorsuch’s argument is to criticize the idea that having “probable cause” for an arrest should automatically invalidate a claim that the arrest violated the First Amendment because it was being used as a tool to punish dissenting speech. He is absolutely right on that point.  For reasons I discussed here, the vast modern expansion of both criminal and civil liability poses a more general threat to the rule of law:

Lavrenti Beria, the infamous head of the Soviet secret police under Joseph Stalin, supposedly once said, “Show me the man and I’ll show you the crime.” In the Soviet Union, the regime could always find some crime to pin on anyone it chose to target.

As a general rule, it would be silly to equate the modern United States with a mass-murdering totalitarian state. But in this one respect, the two regimes are more similar than we would like them to be….

This sad state of affairs is deeply at odds with the rule of law. Whatever else that concept means, it surely requires that ordinary people be able to readily determine what laws they are required to obey, and that whether or not you get charged by authorities depends more on objective legal rules than the exercise of official discretion. Unfortunately, neither holds true in the United States today….

Scholars estimate that the vast majority of adult Americans have violated criminal law at some point in their lives. Indeed, a recent survey finds that some 52 percent admit to violating the federal law banning possession of marijuana, to say nothing of the myriad other federal criminal laws. If you also include civil laws (which, though theoretically less severe than criminal laws, often carry heavy fines and other substantial penalties), even more Americans are lawbreakers…

Most Americans, of course, never face punishment for their lawbreaking. But that is true only because the authorities lack the resources to pursue most violators and routinely exercise discretion in determining which ones are worth the effort….

In this way, the rule of law has largely been supplanted by the rule of chance and the rule of executive discretion. Inevitably, political ideology and partisanship have a major impact on the latter. For example, federal law enforcement priorities are very different under Trump than they were under Obama.

Even the law itself is often interpreted differently, depending on who is in power…. As Supreme Court Justice Neil M. Gorsuch puts it, an agency can “reverse its current view 180 degrees anytime based merely on the shift of political winds and still prevail [in court].” The enormous scope of federal regulatory law enables agencies to exercise extensive discretionary authority over many aspects of the economy and society.

In my earlier post on this subject, I consider a number of strategies for alleviating this problem, such as trying to enforce all laws to the hilt (thereby eliminating executive discretion), and curtailing judicial deference to administrative agencies (thereby reducing the extent to which the same laws are interpreted differently based on which party is in power). I am skeptical that either will do the trick (and the former is likely impossible). Ultimately, the best solution is to cut back on the scope and complexity of law, though I  fear we may not have the political will to do it:

The only way to make major progress toward establishing the rule of law would be to greatly reduce the scope and complexity of legal rules. In a world where the scope of law is strictly limited, officials might have sufficient resources to go after a much larger percentage of lawbreakers. And if the law were limited to those areas where there was a broad consensus that the conduct in question should be illegal, there would be less incentive for officials to engage in selective enforcement based on the priorities of the party in power. If federal or state authorities engaged in such shenanigans with respect to laws that enjoyed widespread bipartisan support, they would risk provoking a major political backlash.

There is no way to completely eliminate executive discretion over law enforcement or to make the law completely transparent to laypeople. But cutting back on the amount and complexity of law can help us make progress toward those goals.

Of course, it may be we do not value the rule of law enough to sacrifice any other objectives to strengthen it.  The laws on the books are not there by accident. Most were enacted because they were supported by majority public  opinion, influential interest groups or some combination of both.

Perhaps we just do not care about the rule of law enough to eliminate any substantial number of current laws and regulations — especially those supported by our side of the political spectrum. The rule of law may be less important to us than the rule of  men whose agenda we like. If so, we might have more in common with Lavrenti Beria than we like to think.

from Latest – Reason.com http://bit.ly/2EJLFD7
via IFTTT

Uber Reports Record Cash Burn, $1 Billion Loss In First Quarter As Public Company

In its highly anticipated first quarterly report as a public company, Uber Technologies reported a $1.034 billion loss from operations, more than double the $478 million loss a year ago despite a 20% rise in revenue, posting results that slightly beat forecasts, yet underscoring the challenges the ride-hailing service faces to become profitable one day.

Uber’s revenue of $3.1 billion, up from $2.58 billion a year ago, was in line with high end of the range Uber forecast for the quarter, while the loss of $1.0 billion compared with the company’s forecast of $1.0 billion to $1.11 billion.

“Our Q1 2019 results were at or near the high end of the ranges we shared last month in our IPO prospectus,” said CFO Nelson Chai. “Our investments remain focused on global platform expansion and long-term product and technology differentiation, but we will not hesitate to invest to defend our market position globally.”

Chai also said the company had begun to see “less aggressive pricing” by rivals, although one wouldn’t know it looking at the company’s EBITDA, because in the quarter revenue hit an all time high, cash burn was a record high ($869) million, more than 3x greater than Q1 2018. In fact, as shown in the chart below, the greater Uber’s revenue, the greater the more negative the EBITDA.

With its share price trading more than 10% below its IPO price of $45, CEO Dara Khosrowshahi has an uphill climb in convincing investors Uber can turn a profit, given its reliance on rider incentives and competition in all parts of its business, from ride hailing to food delivery to freight.

According to Reuters, the results indicate that while the newly public company was able to hit its own financial targets, markets still need to be convinced that the long-term business model can generate cash flow especially with Uber’s take rate declining. Indeed, costs went up 35% in the quarter, as the company spent heavily in the run-up to its IPO earlier this month.

Additionally, gross bookings, a measure of total value of rides before driver costs and other expenses, rose 34% from a year ago to $14.6 billion. However, in a troubling sign that the business is slowing, bookings were up only 3.4% from the previous quarter, showing the difficulty of recruiting new riders in saturated markets.

Uber also faces increased regulation in several countries and fights with its drivers over wages.

Uber said its monthly active users rose to 93 million globally, from 91 million at the end of the fourth quarter.  Uber previously said it expected first-quarter revenue in the range of $3.04 billion to $3.1 billion while seven analysts polled by Refinitiv IBES on average expected revenue of $3.04 billion

The market was confused at first, rewarding the company initially by pushing its stock higher in the after market, before dragging it back down to session lows as concerns about the slowing growth rate appeared to dominate market sentiment.

via ZeroHedge News http://bit.ly/2VZnOVD Tyler Durden

Dangers of a World Where “Almost Anyone Can be Arrested for Something”

Supreme Court Justice Neil Gorsuch.

In a recent dissenting opinion, Supreme Court Justice Neil Gorsuch warns of the dangers of the modern expansion of criminal law to the point where “almost anyone can be arrested for anything”:

History shows that governments sometimes seek to regulate our lives finely, acutely, thoroughly, and exhaustively. In our own time and place, criminal laws have grown so exuberantly and come to cover so much previously innocent conduct that almost anyone can be arrested for something. If the state could use these laws not for their intended purposes but to silence those who voice unpopular ideas, little would be left of our First Amendment liberties, and little would separate us from the tyrannies of the past or the malignant fiefdoms of our own age. The freedom to speak with-out risking arrest is “one of the principal characteristics by which we distinguish a free nation.” Houston v. Hill, 482 U. S. 451, 463 (1987).

The immediate point of Gorsuch’s argument is to criticize the idea that having “probable cause” for an arrest should automatically invalidate a claim that the arrest violated the First Amendment because it was being used as a tool to punish dissenting speech. He is absolutely right on that point.  For reasons I discussed here, the vast modern expansion of both criminal and civil liability poses a more general threat to the rule of law:

Lavrenti Beria, the infamous head of the Soviet secret police under Joseph Stalin, supposedly once said, “Show me the man and I’ll show you the crime.” In the Soviet Union, the regime could always find some crime to pin on anyone it chose to target.

As a general rule, it would be silly to equate the modern United States with a mass-murdering totalitarian state. But in this one respect, the two regimes are more similar than we would like them to be….

This sad state of affairs is deeply at odds with the rule of law. Whatever else that concept means, it surely requires that ordinary people be able to readily determine what laws they are required to obey, and that whether or not you get charged by authorities depends more on objective legal rules than the exercise of official discretion. Unfortunately, neither holds true in the United States today….

Scholars estimate that the vast majority of adult Americans have violated criminal law at some point in their lives. Indeed, a recent survey finds that some 52 percent admit to violating the federal law banning possession of marijuana, to say nothing of the myriad other federal criminal laws. If you also include civil laws (which, though theoretically less severe than criminal laws, often carry heavy fines and other substantial penalties), even more Americans are lawbreakers…

Most Americans, of course, never face punishment for their lawbreaking. But that is true only because the authorities lack the resources to pursue most violators and routinely exercise discretion in determining which ones are worth the effort….

In this way, the rule of law has largely been supplanted by the rule of chance and the rule of executive discretion. Inevitably, political ideology and partisanship have a major impact on the latter. For example, federal law enforcement priorities are very different under Trump than they were under Obama.

Even the law itself is often interpreted differently, depending on who is in power…. As Supreme Court Justice Neil M. Gorsuch puts it, an agency can “reverse its current view 180 degrees anytime based merely on the shift of political winds and still prevail [in court].” The enormous scope of federal regulatory law enables agencies to exercise extensive discretionary authority over many aspects of the economy and society.

In my earlier post on this subject, I consider a number of strategies for alleviating this problem, such as trying to enforce all laws to the hilt (thereby eliminating executive discretion), and curtailing judicial deference to administrative agencies (thereby reducing the extent to which the same laws are interpreted differently based on which party is in power). I am skeptical that either will do the trick (and the former is likely impossible). Ultimately, the best solution is to cut back on the scope and complexity of law, though I  fear we may not have the political will to do it:

The only way to make major progress toward establishing the rule of law would be to greatly reduce the scope and complexity of legal rules. In a world where the scope of law is strictly limited, officials might have sufficient resources to go after a much larger percentage of lawbreakers. And if the law were limited to those areas where there was a broad consensus that the conduct in question should be illegal, there would be less incentive for officials to engage in selective enforcement based on the priorities of the party in power. If federal or state authorities engaged in such shenanigans with respect to laws that enjoyed widespread bipartisan support, they would risk provoking a major political backlash.

There is no way to completely eliminate executive discretion over law enforcement or to make the law completely transparent to laypeople. But cutting back on the amount and complexity of law can help us make progress toward those goals.

Of course, it may be we do not value the rule of law enough to sacrifice any other objectives to strengthen it.  The laws on the books are not there by accident. Most were enacted because they were supported by majority public  opinion, influential interest groups or some combination of both.

Perhaps we just do not care about the rule of law enough to eliminate any substantial number of current laws and regulations — especially those supported by our side of the political spectrum. The rule of law may be less important to us than the rule of  men whose agenda we like. If so, we might have more in common with Lavrenti Beria than we like to think.

from Latest – Reason.com http://bit.ly/2EJLFD7
via IFTTT

Barr Strikes Back, Says Mueller “Could Have Reached A Decision If He Wanted To”

Almost immediately after Robert Mueller stepped away from the podium on Wednesday after giving his first and final remarks on the Russia probe, speculation turned to Attorney General William Barr, as Democrats and the media speculated that the special counsel had just delivered a painful snub to his longtime friend and erstwhile boss.

Barr

Some felt that Mueller’s terse account of the investigation, and more critically, his explanation for why he and his team stopped short of making a recommendation about wrongdoing allegedly committed by the president, contradicted the summary of the report’s findings released by Barr a few weeks before the redacted report was made public. In his summary, Barr said Mueller found no evidence of collusion or obstruction committed by the president, a conclusion that Mueller apparently felt was misleading.

But two can play at that game, and in a brief excerpt from an interview with CBS News that’s set to air on Friday morning, Barr undermined Mueller’s account of his team’s conclusion by telling CBS that he felt Mueller could have made a conclusion about presidential wrongdoing if he wanted to – the Office of Legal Counsel opinion Mueller cited simply suggests a sitting president can’t be indicted.

“I personally felt he could have reached a decision as to whether it was criminal activity…the opinion says you can’t indict…but he had his reasons for not doing it which he explained…but when he didn’t make a decision the Deputy Attorney General Rod Rosenstein and I felt it necessary as the heads of the department to make a decision.”

After Mueller decided to leave the conclusion open-ended, Barr and Deputy AG Rod Rosenstein felt they needed to say something about Mueller’s conclusions in their summary. But presumably, if Mueller really felt Trump had committed crimes, he could have conclusively said so in his report.

During yesterday’s press conference, Mueller appeared to press Congress to pursue impeachment, saying “if we had confidence that the president had not committed a crime, we would have said so.”

As for Mueller’s argument that he would leave the task of prosecuting the president to Congress, Barr said the DOJ typically doesn’t resign itself to playing second fiddle to Congress.

“The DoJ doesn’t use our powers of investigating crimes as an adjunct to Congress.”

In a second clip, Barr responded to criticisms that he was protecting the president by saying these claims “just go with the territory of being the attorney general in a hyperpartisan time.”

“We live in a hyperpartisan age where people no longer really pay attention to the substance of what’s said but instead who said it…the Department of Justice is all about the law and the facts and the substance…I’m going to make the decision based on the law and the facts…I think it just goes with the territory of being attorney general in a hyperpartisan period of time.”

Watch two clips from the interview below:

via ZeroHedge News http://bit.ly/2JJTE7r Tyler Durden

Cryptos & Crude Crack As Credit & Yield Curve Collapse Continues

Paging Steve Mnuchin…

Chinese stocks were lower overnight as an afternoon bid failed to get back to even, but remain higher on the week thanks to PBOC’s panicky liquidity injection…

 

Italy (lower) and Spain (higher) diverged notably intraday as the latter got almost back to unch on the week…

 

Bund yields continue to inch nearer record (negative) lows…

 

US Small Caps were the biggest losers today with S&P, Nasdaq, and Dow desperately trying to hold green…However, on the week (and month), they’re all red…

 

For the second day in a row a sudden buying panic program lifted at 1534ET…

 

Desperate to keep S&P above its 200DMA (but unable to get back above 2800)…

 

The trillion dollar tech stocks aren’t anymore…

 

Breadth is starting to turn ugly in US stocks…

 

Financials continue to outperform the market, despite plunging yield curve…

 

Credit spreads continue to push wider (echoing 2018)…

 

Signaling more pain to come for stocks…

 

Many claimed that after a strong month for bonds (and weak for stocks) that month-end pension rebalancing would spark forced buying in stocks… that didn’t happen…

 

Treasury yields tumbled once again (down 9-10bps on the week), despite a small hope-filled rise overnight…

 

10Y Yields broke down to yesterday’s lows after Pence’s China comments…

 

The yield curve slumped back to cycle lows, erasing yesterday’s late-day bounce…

 

The Dollar was flat on the day, after testing yesterday’s highs (lower highs)…

 

Yuan managed gains on the day but remains down from PBOC warnings to shorts…

NOTE – the yuan fix has been oddly stable for the last two weeks, despite offshore yuan’s vol.

 

Bitcoin tagged $9,000 intraday but seemed to trigger sell orders at that level…

 

Which spread across the entire crypto space…

 

Despite the dollar going nowhere fast, commodities were volatile with safe-haven flows heading into PMs (gold outperforming) and crude clubbed after a smaller than expected inventory draw…

 

WTI is the lowest since mid-Feb (testing and losing its 100DMA)…

 

And gold was bid on heavy volume up to its 50DMA…

 

Combined with Yuan’s recent weakness, gold is strongest against the Chinese currency in over 2 weeks…

 

Finally, we note that, having diverged massively for a few months, the correlation between the S&P 500 and US Treasury yields has accelerated in recent weeks, back to its highest level since Aug 2016…

And its global…

The question is – will the relationship revert like in 2016 (rates higher) or 2007 (equities lower)?

via ZeroHedge News http://bit.ly/2W22yPb Tyler Durden

Vox Symposium on Whether a Sitting President Can be Indicted and Prosecuted for a Crime

President Donald Trump. Ron Sachs (CNP/MEGA /Newscom)

Vox has posted a symposium on the question of whether a sitting president can be indicted and prosecuted for a federal crime. It includes contributions by a wide range of legal scholars and commentators, including Volokh Conspiracy bloggers Keith Whittington, and myself. Here’s an excerpt from my piece:

There’s a longstanding disagreement over the issue of whether a sitting president can be indicted and prosecuted for possible crimes. In my view, the answer is yes. Nothing in the Constitution grants the president immunity from prosecution of the sort that exists in some European constitutions.

The idea that a sitting president is immune from criminal prosecution is also at odds with the Supreme Court’s 1997 ruling in Clinton v. Jones, which holds that the president is subject to civil lawsuits (thereby allowing Paula Jones to proceed with her sexual harassment case against then-President Bill Clinton). A civil case can be just as disruptive as a criminal one….

Prosecution of sitting presidents does create the risk that a president will be tied up by a case involving some minor violation of the law. The founders did not envision today’s extraordinarily expansive federal criminal law, under which a majority of adult Americans have probably committed a federal crime at some time in their lives.

Short of cutting back on the scope of federal law (a highly desirable measure for other reasons), the remedy for this would be for Congress to pass a law limiting prosecution of sitting presidents to very serious offenses…

While it would be a mistake to tie up presidents with prosecutions for minor offenses, it would also be an error to give sitting presidents immunity from prosecution for even the most serious crimes. A criminal president can do grave damage, and deferring prosecution until he leaves office — potentially many years later — may not be a sufficient deterrent.

from Latest – Reason.com http://bit.ly/2MiICIo
via IFTTT

Vox Symposium on Whether a Sitting President Can be Indicted and Prosecuted for a Crime

President Donald Trump. Ron Sachs (CNP/MEGA /Newscom)

Vox has posted a symposium on the question of whether a sitting president can be indicted and prosecuted for a federal crime. It includes contributions by a wide range of legal scholars and commentators, including Volokh Conspiracy bloggers Keith Whittington, and myself. Here’s an excerpt from my piece:

There’s a longstanding disagreement over the issue of whether a sitting president can be indicted and prosecuted for possible crimes. In my view, the answer is yes. Nothing in the Constitution grants the president immunity from prosecution of the sort that exists in some European constitutions.

The idea that a sitting president is immune from criminal prosecution is also at odds with the Supreme Court’s 1997 ruling in Clinton v. Jones, which holds that the president is subject to civil lawsuits (thereby allowing Paula Jones to proceed with her sexual harassment case against then-President Bill Clinton). A civil case can be just as disruptive as a criminal one….

Prosecution of sitting presidents does create the risk that a president will be tied up by a case involving some minor violation of the law. The founders did not envision today’s extraordinarily expansive federal criminal law, under which a majority of adult Americans have probably committed a federal crime at some time in their lives.

Short of cutting back on the scope of federal law (a highly desirable measure for other reasons), the remedy for this would be for Congress to pass a law limiting prosecution of sitting presidents to very serious offenses…

While it would be a mistake to tie up presidents with prosecutions for minor offenses, it would also be an error to give sitting presidents immunity from prosecution for even the most serious crimes. A criminal president can do grave damage, and deferring prosecution until he leaves office — potentially many years later — may not be a sufficient deterrent.

from Latest – Reason.com http://bit.ly/2MiICIo
via IFTTT

New Jersey Pensions Slash Hedge Fund Allocation For 2nd Time In 3 Years

Aside from a handful of notable outliers, 2018 was another bruising year for the 2-and-20 crowd, as average returns sunk deep into the red and LPs yanked money at the fastest pace in years.

The carnage was so bad, several venerable funds decided to return outside capital and pack it in, a sign that LPs had reached the limits of their patience with the so-called ‘smart money’ crowd.

Hedge Funds

Even some successful funds like David Tepper’s Appaloosa Management decided to quit while they were ahead, opting to return capital to shareholders and convert to a family office.

After this historic beatdown, one would think desperate active managers would at least have had the good sense to BTFD. But amazingly, hedge funds continued to underperform during the Q1 rebound, even as US stocks experienced one of their strongest rebounds in decades. As managers struggled to attract new capital, new fund launches sunk to their lowest level since the start of the century.

After all of this, the last thing PMs needed was more bad news. But alas, that’s what they got on Wednesday, when the New Jersey State Investment Council unanimously voted to cut its hedge fund allocation in half for the second time in three years, reducing investments in the sector to just $2 billion, Bloomberg reports.

That’s a far cry from the more than $9 billion they had allocated as of May 2016.

Though the board didn’t say which funds would be impacted, some of the firms it had money with as of last month included Winton Capital Management, MKP Capital Management, Solus Alternative Asset Management, Chatham Asset Management, Davidson Kempner Capital Management and Elliott Management.

New Jersey’s labor unions pushed for the cuts, arguing that hedge funds wasted their members’ money by collecting high fees while lagging market benchmarks – echoing the criticisms levied by New York City’s pension for civil employees and CALPers three years ago when they cut ties with hedge funds, prompting firms to slash management fees amid fears that the industry could be headed for an extinction level event.

While praising the NJSIC’s decision, one union spokesman hinted that more cuts could be in the offing.

“Several members had concerns about this over the last several years,” said Eric Richard, one of the council’s union members. “I am happy to see us move in this direction.” Richard, legislative affairs director for the New Jersey AFL-CIO, said he questioned whether the allocation to hedge funds provided effective downside protection, if the fees were justified and performance was comparable to peers.

Adding insult to injury, New Jersey’s investment board also voted to increase its allocation to private equity funds. The changes will take effect in October.

The NJSIC managed $79.5 billion as of the end of last month. And during the five years to April 30, New Jersey’s credit-oriented hedge funds produced annualized gains of 3.1%, while its equity-oriented funds returned just 1.54%. That’s compared with the Barclays US index, which returned 2.6% for the period, while the S&P 500 returned 11.6% with dividends reinvested.

If the current selloff metastasizes into a full-blown bear market, NJ’s remaining funds might have an easier time meeting their benchmarks. But then again, this wouldn’t be the first time that the advent of a ‘stock picker’s market’ failed to materialize.

via ZeroHedge News http://bit.ly/2KfF334 Tyler Durden

Which Chinese Banks Will Fail Next?

Yesterday we reported that in the aftermath of the failure of China’s Baoshang Bank (BSB), and its subsequent seizure by the government – the first takeover of a commercial bank since the Hainan Development Bank 20 years ago – the PBOC appeared to panic and injected a whopping 250 billion yuan via an open-market operation, the largest since January.

And while the bank first failure of a Chinese bank resulted in some notable turmoil in China’s interbank market, where the issuance of Negotiable Certificates of Deposit was partially frozen as overnight funding rates spiked, dragging prices of both corporate and sovereign bonds briefly lower, we warned that “Baoshang is just the tip of the iceberg.”

According to UBS analyst Jason Bedford, who in 2017 was the first to highlight Baoshang’s troubles, there are several other banks that have “identical leading risk indicators” to Baoshang. Hengfeng Bank, Jinzhou Bank Co. and Chengdu Rural Commercial Bank all failed to publish their latest financial statements, have a large portion of their balance sheets invested in “loan-like investment assets” and are subject to negative local media coverage.

To be sure, storm clouds had been gathering above for quite some time. Here is a quick primer on how BSB was unique, and why it was especially at risk, courtesy of Barclays. 

BSB is a city commercial bank (Figure 1), with a AA+ credit rating from Dagong Credit Rating Group. However, it has faced more problems and financial difficulties than banks with a similar credit rating. BSB has not published its annual report since 2016, which to us suggests significant asset quality stress. Its ratio of 90-day overdue loans to NPL stood at ~180% in 2016, versus an average of ~110% for similar sized banks. Meanwhile, its key stakeholder (~30%), Tomorrow Group, has been under an anti-graft investigation with its founder Xiao Jianhua missing since 2017.

It has been a notably aggressive player in China’s interbank market, with ~40% of its funding from wholesale sources, compared with a ~25% average for smaller regional banks, and ~20% for all banks in April 2019 (see Figure 2). As a result, BSB has been hit hard by the deleveraging drive and tightening of the interbank funding channels.

Most of the above was already well-known, at least in the aftermath of the BSB collapse. What investors are far more curious about is i) will the failure become systemic, and ii) who will fail next.

Addressing the first question, Barclays analyst Jian Chang writes that the bank doesn’t expect the BSB takeover to cause a systemic crisis (many would disagree). The reason: the bank’s total assets/outstanding loans/deposits only accounted for 0.23%/0.18%/0.14% of China’s whole banking system (as of Q3 2017, the latest available data on BSB), and the PBoC is committed to “keeping eye on the liquidity situation of medium-to-small banks, and make use of various tools such as OMOs to ensure reasonably ample liquidity in the system and maintain stability in the money market rates”.

That said, Barclays admits that the takeover of BSB “highlights the difficulties and challenges facing some medium-to-small sized banks arising from China’s deleveraging campaign of the past several years and a slowing economy.” Specifically, during the first phase of “deleveraging the financial system” (August 2016 – October 2017), interbank lending, a major funding source facilitating the aggressive expansion of medium/small banks before, was significantly tightened. Then as the financial deleveraging extended to the real economy (Nov 17 – May 18), the resulting rise in corporate delinquency and defaults added to banks’ credit risks. Then, during the period of policy easing since the second half of 2018, banks’ asset quality has not been helped by the regulator’s push for more SME lending, “as the NPL ratio of urban commercial banks as a whole rose notably by ~30bp to 1.9% in Q1 19, from 1.6% Q2 18, while their bad-loan provision ratio declined by 30pp to ~180% over the same period (Figures 3-4).”

As such, Barclays expects more “exits” (read “failures”) of smaller banks or NBFIs (Non-bank financial institutions) either through takeovers or M&A with bigger parties, most likely with some regional significance (eg. urban or rural commercial banks. However, in keeping an optimistic outlook, Barclays does not view a few more bank failures as a systemic risk, “as the total >130 urban and >1300 rural commercial banks only account for ~10% of the banking sector.”

Meanwhile, the analyst notes the regulators’ efforts to help banks replenish their capital through various channels (eg. the recently introduced perpetual bonds which are a form of quasi QE) as “indicated by the government’s attempts to prevent systemic risks from materializing before they become too great to contain.

Furthermore, the official remarks (listed below) suggest that, even if some FIs are allowed to “experiment” with bankruptcy, this would only go forward in a controlled and manageable manner (ie. mainly through mergers and restructuring) to ensure the government’s bottom line of no systemic risks being created.

Below is a list of selected comments by a Chinese official, in this case Xiao Yuanqi, the Chief Risk Officer of the CBIRC, in February 2019, which help understand the regulators’ thinking on smaller FIs, NPL risk exposure, and planned resolutions:

  • He said that regulators will continue encouraging smaller and private players to join the market to expand access to credit for SMEs, meanwhile they will also work out measures to contain risks associated with smaller financial institutions (FIs).
  • While some institutions will be allowed to experiment with bankruptcy, regulators will mainly use mergers and restructuring to defuse risks and force unqualified players out of the market.
  • The authorities will also encourage lenders to step up efforts to offload their non-performing loans (NPLs). The banking sector has disposed of CNY3.48trn of bad loans over the past two years, according to CBIRC data, but commercial banks still have CNY2trn of NPLs on their balance sheets.
  • Improving the supply of financing will involve shifting “inefficient” credit from industries suffering from overcapacity to areas with greater needs, such as SMEs in innovative and strategic sectors. Poorly performing companies with little prospect of improvement will be guided to exit the market through reorganization or bankruptcy.

Finally, for those curious which banks are most likely to follow in Baoshang’s footsteps, and fail next, Barclays has compiled a list of regional banks that have delayed publishing 2018 reports, the biggest red flag suggesting an upcoming solvency “event.”

 

via ZeroHedge News http://bit.ly/2W4RDUM Tyler Durden

Subpoenas Seeking to Identify Illegally Absent Teachers Likely Don’t Violate the First Amendment

From an opinion by Judge Danny C. Reeves in Commonwealth v. Dickerson, 2019 WL 2064500 (E.D. Ky. May 9):

In 2018 and 2019, a number of public school teachers protested certain proposed legislation at the state capitol building in Frankfort, Kentucky. Ordinarily, such actions would not be a problem. However, because the subject protests occurred during the school year, their actions left many districts with last-minute decisions regarding school closures. If a sufficient number of qualified substitutes could not be obtained, districts were forced to close their doors. And this left many parents and students scrambling to make alternate arrangements. As discussed more fully below, this action was not isolated. In Jefferson County, for example, the schools were forced to close for several days and critical student testing was delayed. The parties disagree regarding whether the teachers’ actions constitute a work stoppage.

Following the forced school closures, the Kentucky Labor Cabinet issued subpoenas to ten school districts for the purpose of investigating and determining whether the absent teachers committed violated KRS 336.130 through an illegal work stoppage…. The subpoenas directed the production, inspection, and copying of all documents identifying the names of any employees who called in sick during the sick out dates. Additionally, the subpoenas required the production of copies of all affidavits from employees or letters from licensed medical professionals provided by the employees who called in sick for any of the dates of the “sick outs.” … The plaintiffs seek … a temporary injunction to prohibit Secretary Dickerson from acting on or enforcing the subpoenas….

The plaintiffs assert that Secretary Dickerson exceeded his authority in issuing the subpoenas because the teachers were not engaged in a strike or a work stoppage, the law does not enable Dickerson to penalize public-school employees, and the issued subpoenas target constitutionally protected activity. As to the first claim, however, the Court concludes that the plaintiffs have not shown that Secretary Dickerson exceeded his authority in issuing the subpoenas. [Details as to this claim and the other state law claim omitted, as are the details about the dispute on the subpoenas between the state labor department and the state Attorney General. -EV] …

KRS 336.130(1) states that “[e]mployees, collectively and individually, may strike, engage in peaceful picketing, and assembly collectively for peaceful purposes, except that no public employee, collectively or individually, may engage in a strike or a work stoppage.” (emphasis added)…. Kentucky courts have concluded that “the word strike clearly includes a work stoppage and a job action which deprives the public of the services of the employees in question.” …

[I]t would appear from the information contained in the parties’ pleadings that teachers collectively decided to call in “sick,” leading to school closures on several occasions. This deprived parents, students, and taxpayers of the teacher’s services. And because the “sickouts” likely constitute a strike or a work stoppage, the plaintiffs have failed to demonstrate a likelihood of success of showing that Secretary Dickerson acted outside the scope of his authority by issuing the subpoenas…. Here, the teachers were likely participating in a strike or work stoppage in violation of KRS 336.130, and the teachers’ constitutional rights do not allow them to violate the law….

The opinion concluded thus:

Some may think that the claims asserted in this action stand logic on its head—and they may be correct. Students are expected to attend classes. If they fail to do so without a valid excuse, their absence is duly-noted and appropriate action is taken. But the teachers at the center of this controversy expect different treatment. They assert through the Attorney General that the Secretary of the Labor Cabinet should look the other way when they avoid their employment obligations by improperly claiming to be sick.

Whether the plaintiffs will ultimately prevail on one or more of their claims by asserting violations of the First Amendment or other related rights on behalf of this group of educators is yet to be decided. It is clear, however, that at this point in the case, the plaintiffs are not entitled to [preliminary] injunctive relief to essentially halt the Labor Cabinet’s investigation….

from Latest – Reason.com http://bit.ly/2Kb35Mx
via IFTTT