http://www.zerohedge.com/news/2013-01-17/big-three-banks-are-gambling-860-billion-deposits
Submitted by Tyler Durden on 01/17/2013 19:15 -0500
http://globaleconomicanalysis.blogspot.com/2013/01/fed-governor-proposes-reorganizing.html
"I'm a little reluctant just given my philosophical bent to artificially engineer size," he said, arguing that markets would do a better job of making that judgment.
The outspoken Texan policymaker, blaming such "behemoth" firms for massive bad bets on the U.S. housing market at the root of the crisis and subsequent taxpayer bank bailout, said the Fed should protect their core commercial lending operations -- and nothing else.
He identified 12 "megabanks" with assets of over $250 billion as too big to fail.
"Only the resulting downsized commercial banking operations, and not shadow banking affiliates or the parent company, would benefit from the safety net of federal deposit insurance and access to the Federal Reserve's discount window," Fisher said.
The 12 "megabanks" Fisher identified together account for 69 percent of all U.S. banking assets, but represent only 0.2 percent of the country's 5,600 banks.
"The 12 institutions ... are candidates to be considered TBTF because of the threat they could pose to the financial system and the economy should one or more of them get into trouble," he said.
He did not name them all, but showed a slide displaying the names of five top U.S. banks: JPMorgan Chase , Bank of America , Goldman Sachs , Citigroup and Morgan Stanley .
My first concern is they do not do this at all. My second concern is they do it wrong, leaving loop-holes all over the place as happened with Dood-Frank. They could also target size alone rather than operations.
Glass-Steagall provided physical walls of separation that have since been rescinded. Moreover, banks should be banks not hedge funds.
Much of what Goldman Sachs does is not banking at all. The legislation should not consist of some arbitrary size limit, but rather provide walls of separation and limit banks to be banks.
Of course the real problem here is fractional reserve lending that enables banks to supersize at will, but don't expect that to be fixed.
Mike "Mish" Shedlock
The "Big Three" Banks Are Gambling With $860 Billion In Deposits
- Asset-Backed Securities
- Bank of America
- Bank of America
- Collateralized Loan Obligations
- Counterparties
- Credit Default Swaps
- default
- Fail
- Gambling
- Goldman Sachs
- goldman sachs
- Jamie Dimon
- Prop Trading
- Too Big To Fail
- Trading Strategies
- Wells Fargo
A week ago, when Wells Fargo unleashed the so far quite disappointing earnings season for commercial banks (connected hedge funds like Goldman Sachs excluded) we reportedthat the bank's deposits had risen to a record $176 billion over loans on its books. Today we conduct the same analysis for the other big two commercial banks: Bank of America and JPMorgan (we ignore Citi as it is still a partially nationalized disaster). The results are presented below, together with a rather stunning observation.
First, Wells again - deposits over loans:record $176 billion.
Next: Bank of America: unlike Wells, BofA is not even trying as its deposits are soaring while the loans have been declining for 6 quarters in a row. Deposits over Loans:record $221 billion.
Finally: JP Morgan, or the bank that started it all when the CIO blew up and made it all too clear what happens with the "Excess deposit over loans" cash. December 31 Deposits over Loans: record $460 billion.
And this is how the consolidated deposit and loan data for the Big Three banks looks:some $858 billion, or nearly half of the $2 trillion in total excess deposits over loans in the entire US commercial banking system (speaking of Too Big To Fail).
Why is all of the above important? Because as we have explained repeatedly in the past several weeks, the "excess deposit cash over loans" is nothing more or less than additional prop trading capital, that banks can use as they see fit. The traditional regulatory explanation is that the cash is to be used for safe, responsible investment. Alas, as the JPM CIO debacle taught us, said cash is used for anything but, and is in fact used to fund prop trading operations deep inside these commercial banks.
But don't take our word for it. Take the word of the Task Force charged with explaining away the 2012 CIO Losses, released yesterday.
JPMorgan’s businesses take in more in deposits than they make in loans and, as a result, the Firm has excess cash that must be invested to meet future liquidity needs and provide a reasonable return. The primary responsibility of CIO, working with JPMorgan’s Treasury, is to manage this excess cash. CIO is part of the Corporate sector at JPMorgan and, as of December 31, 2011, it had 428 employees, consisting of 140 traders and 288 middle and back office employees. Ms. Drew ran CIO from 2005 until May 2012 and had significant experience in CIO’s core functions.19 Until the end of her tenure, she was viewed by senior Firm management as a highly skilled manager and executive with a strong and detailed command of her business, and someone in whom they had a great deal of confidence.
CIO invests the bulk of JPMorgan’s excess cash in high credit quality, fixed-income securities, such as municipal bonds, whole loans, and asset-backed securities, mortgage-backed securities, corporate securities, sovereign securities, and collateralized loan obligations. The bulk of these assets are accounted for on an available-for-sale basis (“AFS”),although CIO also holds certain other assets that are accounted for on a mark-to-market basis.
Beginning in 2007, CIO launched the Synthetic Credit Portfolio, which was generally intended to protect the Firm against adverse credit scenarios. The Firm, like other lenders, is structurally “long” credit, including in its AFS portfolio, which means that the Firm tends to perform well when credit markets perform well and to suffer a decline in performance during a credit downturn. Through the Synthetic Credit Portfolio, CIO generally sought to establish positions that would generate revenue during adverse credit scenarios (e.g., widening of credit spreads and corporate defaults) – in short, to provide protection against structural risks inherent in the Firm’s and CIO’s long credit profile.
The positions in the Synthetic Credit Portfolio consisted of standardized indices (and related tranches) based on baskets of credit default swaps (“CDS”) tied to corporate debt issuers. CIO bought, among other things, credit protection on these instruments, which means that it would be entitled to payment from its counterparties whenever any company in the basket defaulted on certain payment obligations, filed for bankruptcy, or in some instances restructured its debt. In exchange for the right to receive these payments, CIO would make regular payments to its counterparties, similar to premiums on insurance policies. As described in greater detail below, the actual trading strategies employed by CIO did not involve exclusively buying protection or always maintaining a net credit short position (under CSW 10%);rather, CIO traded in an array of these products, with long and short positions in different instruments.
In other words, JPM's own task force admitted the CIO was using excess cash for prop trading purposes (there is much more in the full 132 page document). This is when JPM had roughly $400 billion in excess cash over loans. JPM now has a record $460 billion and it most likely continues to invest this cash in any way it sees fit. Sadly, when asked to provide details about what the CIO is doing these days, Jamie Dimon provided no additional information.
Because if JPM was/is doing it, everyone else was/is doing it.
And you, dear savers, are the ones who money is being used by the banks to fund precisely this prop trading, which, among other factors (Fed) is what is causing the relentless stock market melt up.
Fed laugher of the day......
Thursday, January 17, 2013 6:18 PM
Fed Governor Proposes Reorganizing Banks Deemed "Too Big to Fail"
The Chicago Tribune reports Fed's Fisher: Reorganize banks that are "too big to fail"
U.S. authorities should reorganize the country's largest banks to protect against the risk of institutions that are "too big to fail" and that would saddle ordinary Americans with the cost of a bailout the next time they get in trouble, a senior Federal Reserve official said on Wednesday.
"We recommend that TBTF (too-big-to-fail) financial institutions be restructured into multiple business entities," Richard Fisher, president of the Dallas Federal Reserve Bank, told an audience at the National Press Club in Washington.
Critics say Dodd-Frank did not go far enough, including several Fed officials who, like Fisher, want the biggest banks reined in.
Fed Governor Daniel Tarullo in October suggested capping the size of banks according to their proportion of U.S. gross domestic product and said that would require Congress to write new laws. But Fisher did not think dictating how big banks could grow was the right course.
The outspoken Texan policymaker, blaming such "behemoth" firms for massive bad bets on the U.S. housing market at the root of the crisis and subsequent taxpayer bank bailout, said the Fed should protect their core commercial lending operations -- and nothing else.
He identified 12 "megabanks" with assets of over $250 billion as too big to fail.
"Only the resulting downsized commercial banking operations, and not shadow banking affiliates or the parent company, would benefit from the safety net of federal deposit insurance and access to the Federal Reserve's discount window," Fisher said.
The 12 "megabanks" Fisher identified together account for 69 percent of all U.S. banking assets, but represent only 0.2 percent of the country's 5,600 banks.
"The 12 institutions ... are candidates to be considered TBTF because of the threat they could pose to the financial system and the economy should one or more of them get into trouble," he said.
He did not name them all, but showed a slide displaying the names of five top U.S. banks: JPMorgan Chase , Bank of America , Goldman Sachs , Citigroup and Morgan Stanley .
Fisher said he had received support from lawmakers on both sides of the aisle for his views, which the Dallas Fed has been pressing for over a year, and had even heard from famed dealmaker Sandy Weill, who said he agreed with Fisher.Issues and Concerns
My first concern is they do not do this at all. My second concern is they do it wrong, leaving loop-holes all over the place as happened with Dood-Frank. They could also target size alone rather than operations.
Glass-Steagall provided physical walls of separation that have since been rescinded. Moreover, banks should be banks not hedge funds.
Much of what Goldman Sachs does is not banking at all. The legislation should not consist of some arbitrary size limit, but rather provide walls of separation and limit banks to be banks.
Of course the real problem here is fractional reserve lending that enables banks to supersize at will, but don't expect that to be fixed.
Mike "Mish" Shedlock
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