Tuesday, May 13, 2014

Banksters ( and their enablers ) in focus May 13 , 2014 -- JUNEAU -- Paychecks for 15,000 state employees failed to arrive in their bank accounts as scheduled Monday morning, according to the Alaska Department of Administration.... State officials are blaming the failure on errors by U.S. Bank, an outside contractor ........ The High Frequency Trading Lawsuit That Has Wall Street Running Scared ...... Former President of the Federal Reserve Bank of Kansas City Thomas Hoenig: Wall Street Banks “Excessively Leveraged” at 22 to 1 Ratios


( Bail in is a fancy word for theft .... )


Max Keiser Interviews Mark O’Byrne, GoldCore Director of Research on Bail-Ins
Keiser: Mark, you have a new report on bail-ins - From Bail-Outs to Bail-Ins: Risks and Ramifications  ...  Ok so the era of bondholder bailouts is ending and that of depositor bail-ins is coming. Tell us about your report.

O’Byrne: The risk of bail-ins has been coming in a very stealthy manner and under-the-radar way. Most people aren't actually aware of it. It is very much on the radar now and is coming from the very top and the Bank of International Settlements, through the various central banks, and the legislation is there.

Only last week, the European Union and Dutch Finance Minister, Dijsselbloem, the Chairman of the Eurogroup Finance Ministers, confirmed that in the EU, they are ready to go in 2015 … The concern is, the legislation is there but if something happens and you have a ‘Black Swan’ event, you have a Lehman Brothers type of event, the legislation could be expedited and you could see them happen sooner rather than later.
That’s just the EU, it is also coming in the UK through the Bank of England, they have legislation  in conjunction with the FDIC and so the bail-ins are coming in the UK, in the U.S. and indeed throughout most of the western world. Most G20 nations have signed up for bail-ins - not all of them but most of them.
So it is a real risk and it has happened in Cyprus. And in Cyprus when it happened, the authorities said it was a once-off, because of all of the hot Russian money that is in Cyprus, and this will not happen anywhere else...but meanwhile they are planning for that scenario in most of our countries and people need to be aware of that and they need to prepare.

Although they said that Cyprus was a one-off, most G20 countries are all legislating and preparing for a similar scenario in their home countries.
Keiser: Yes. Just this past weekend, David Cameron, UK Prime Minister, here in the UK was making some interesting comments, can you talk about that a little bit?
O’Byrne: Yes. It was just yesterday, actually. Cameron was talking on Sky News and in the recent UK Budget, again it was quietly put in there, almost  in the p.p.s, down the bottom in the small print, they basically brought in new powers whereby HM Revenue can actually go in and raid people’s bank accounts, on the basis that they may not have paid taxes but the authorities do not have to prove it. So it is simply the word of the Revenue versus the individual and they don’t have to have any proof whatsoever.

There are various people in the UK Parliament, opposition MPs, have begun asking questions about this and indeed people in the financial services industry in the UK, including the Chartered Accountants body, they are asking questions about this and saying ‘hang on a second’, this goes against basic principles of law.

It creates a new power that is quite a dangerous power for a government to have. We have seen throughout history that when governments have such powers they tend to use them.

It was interesting that Cameron justified it in the context of...he said that if we do not do this then we will have to increase taxes.  He is basically trying to scare people by saying let us have these powers...these extraordinary, extraordinary powers and if you do not give us these powers, we will increase your taxes so it was almost an implied threat and again it is another threat to people’s deposits and savings and it shows how risky and vulnerable the banking system is .

People need to be aware of that and not have all of their savings in these banks.
Protecting Your Savings In the Coming Bail-in Era is the guide we compiled to protect people from bail-ins.

Keiser:  Right, well, of course governments have a history of political prosecution using these techniques. We have seen this in the U.S. and around the world. When the government doesn't like what people are saying, whether it is Julian Assange or others. And now they have the sanctions and blockage against Russia and Iran, they use the financial and the banking system for political ends.

Clearly, the UK now has the ability to do that. And the idea that a government can just come in and steal money and confiscate money is a recurring theme. We have seen it, as you point out, in Cyprus and elsewhere.  So your point is that laws around the world and for the G20 nations have now been changed over the last year or two so that bankrupt or kleptocrat governments can start stealing money out of people’s accounts directly.

It was seen in the USA with Jamie Dimon and JP Morgan and Jon Corzine in the MF Global case when the bankers took clients’ money. Many bankers are committing suicide because they are ashamed of their industry. So this is giving the bankers more power. Governments are still giving the bankers more power to be more psychotic in their behaviour. I would anticipate that the banker suicide rate would skyrocket so there is a silver lining to this.

Keiser: … Who actually had their deposits taken in Cyprus and what is a bail-in, Mark?
O’Byrne: Basically, in Cyprus it was people with deposits over €100,000 who were bailed in. People think, well, bail-ins only affect rich people and it was actually justified on that basis and the authorities said that this is just...initially, they said this would only hit the ‘hot’ Russian money and then there was the realisation that Russian money was only a tiny minority of the deposits that were confiscated.

People don't understand and think it was just the rich who were affected. It is not. Your average-sized, small or medium-sized enterprise business (SMEs) could easily have €100,000 to €300,000 on deposit and that is what they use to pay the salaries of their employees.

This is the key thing that people are not understanding and the ramifications of this...It is justified as almost a socialist measure whereby we are redistributing wealth from the very wealthy 1% (or the 0.1%) to the middle classes who are suffering from austerity. Nothing could be further from the truth. They are actually penalising and going after the savings of the middle classes and again protecting the interests of the 1% (or the 0.1%) and they are basically protecting the interests of large banks at the expense of small banks and smaller institutions and of the SMEs.

The other ramifications of bail-ins are that there are capital controls. So even in Cyprus today they still have not relaxed capital controls. So with bail-ins come capital controls and again it speaks to the need to have your savings outside of the banking system, to own gold and silver, physical coins and bars  and own them in the safest way possible either in your possession or in vaults, outside the banking system, in allocated gold accounts, in safer jurisdictions around the world.
Keiser: Let’s give some historical context here. The banking system collapsed because of massive fraud. Recall 2004 the U.S. Fed gave their blessing to QE and near zero percent interest rates and a way to ‘stimulate’ the economy as a way to get things going again. Six years later and we're in a huge asset bubble but the underlying economic numbers are still atrocious, but they cannot lower rates anymore, so they have two options. Option A -  negative interest rates where they store people’s money at bank or option B, they just steal it out of their accounts through the bail-in process that you are describing.

So is this a way to soften people up to the idea of accepting negative interest rates? In other words, the governments will say, “Either you let us charge you negative interest rates, that is to say, you have got to pay us to keep your money in the bank at 2 or 3% per year, or we are just going to take it outright and we have the legal basis to do that and if you do not let us do that - you are a terrorist.”

Isn’t that what they are setting everyone up for Mark?

O’Byrne: Well, it is an interesting angle. It is a way that they could justify that. In effect, we have negative real interest rates right now - when you take into account the real rate of inflation. The official measures of inflation appear very compromised to many of us who have looked at them.  

If you look at the actual deposit rate that you're getting from the bank, it is below the real rate of inflation. And then on top of it you have taxes levied on that as well.

It is just absolutely incredible and it is bizarre as they claim that they are putting these measures in place as they are trying to protect the banks and avoid what they call the “doom loop” which is a connection between the sovereign and the banks but by doing what they are doing, they are actually making the banks more vulnerable. They are more likely to cause bank runs.

It would make a cynical person wonder what is the real agenda here? Is it to strengthen the Wall Street banks instead of the small banks?

And the negative interest rate scenario is just incredible, people will soon take their money out of their deposit accounts, like the runs on banks we’ve seen in recent years.
Keiser: Mark, what we're saying is that if somebody calls their bank and says, "I need to move my money out because now you're charging me a negative interest rate", they're gonna say, "to hell with you, we're gonna penalise...you're a terrorist for supporting Bitcoin". They've already used the language to equate Bitcoin with terrorism. "So we're just gonna take money out of your account." So, first of all, any money in a bank, any of the big four banks in the UK or in the U.S. or in Europe -- only keep money in those banks that you are willing to lose. Lesson number two, if you want to maintain your wealth going forward -- by wealth I mean economic sovereignty against the pernicious plutocratic kleptocrat nightmare --- it's got to be held outside a bank, in a vault, in gold, in silver or in Bitcoin or another like-minded cryptocurrency.
Mark, we've got about a minute left. Different countries are of course approaching this bail-in scenario differently. Can you give us a little idea of which country is and how far along they are and which is the worst and which is becoming the worst. We have about a minute left. Go ahead.
O’Byrne: I wouldn't say the worst, I mean, in terms of the scenario, it is the same everywhere. In terms of being more advanced with legislation and that, the European Union seems to be more advanced. But it is in, as I said, the Bank of England and the FDIC legislation. And they are, I suppose...the driving force is, as I said, from the Bank of International Settlements. So that's coming down into the Bank of England and the ECB, and indeed the Federal Reserve. But it is very much...because it is the Bank of International Settlements, it's obviously more the western central banks. The Chinese, the Russians have been slow to, ... they are non-committal and there is no...

Keiser: Let me jump in there for a second. You just mentioned the Chinese, the Russians, the Iranians...oh, wait a minute, that's the Shanghai Cooperation Organization, oh, wait a minute, that's where the NATO, the USA, the EU are going to war with them in Ukraine! Gee, I wonder if there's any connection? That those are the only independent central banks in the world and the US is bombing them and, you know, Victoria Nuland is claiming that they're, you know, "terrorists". Gee, I wonder if there's a connection, Mark? I wonder. Anyway, that's all the time we have. Mark, thanks again for being on the Keiser Report.

The video of the interview can be watched here

Bank glitches once again ????


State workers missing paychecks Monday morning due to glitch

Pat Forgey

JUNEAU -- Paychecks for 15,000 state employees failed to arrive in their bank accounts as scheduled Monday morning, according to the Alaska Department of Administration.
State officials are blaming the failure on errors by U.S. Bank, an outside contractor, but are saying the checks should be there by 9 a.m.Tuesday.
"We are working with U.S. Bank to determine how this happened on their end," said Curtis Thayer, commissioner of the Alaska Department of Administration. That department handles numerous mundane but critical functions that keep state government working.
Thayer said the bank had taken responsibility for the failure, and will make whole any employees hit with banking fees because the deposit delay.
"We've been working with them to get a root cause analysis to determine what the problem is," he said.
One clue: U.S. Bank is new at the paycheck depositing function for the state, having handled it only since March. Monday was the first time that the process straddled a weekend, he said.
Friday, the state transmitted to U.S. Bank a file listing who was to be paid, while the bank took the money to make the payments from a state account. But Monday morning, the checks didn't arrive.
The state's contract with U.S. Bank calls for work over weekends to allow for unimpeded check deposits, Thayer said.
"We do pay for a service to allow banking over a weekend," he said.
Thayer's department provides paychecks for most state employees, including the executive, legislative and court branches. It does not cover the University of Alaska. About 15,000 of 16,700 state employees were scheduled to get their paychecks direct deposited Monday, he said.
Thayer said the president of the bank has taken responsibility and apologized.


The High Frequency Trading Lawsuit That Has Wall Street Running Scared

By Pam Martens: May 13, 2014
Variety reports that Sony Pictures is close to snagging the movie rights to the new book by Michael Lewis, “Flash Boys,” which builds the case that high frequency trading firms and Wall Street mega banks are conspiring with U.S. stock exchanges to rig the market against the average investor and the pension funds holding their meager retirement benefits.
If Sony is smart, it will delay release of the film until it can replicate some real-life courtroom drama from the epic battle that is likely to ensue from a class-action lawsuit in the matter that was filed last month on April 18 in Federal Court in the Southern District of New York.
The plaintiff in the lawsuit has elicited snickers from the moneyed crowd on Wall Street. It was filed on behalf of the city of Providence, Rhode Island, an area founded in 1636 that became one of the original thirteen colonies, and is not typically known for hobnobbing with the hedge funds of Greenwich, Connecticut or the Wall Street suspender crowd in New York.
A more careful look at the lawsuit, however, is sending shivers across Wall Street. The law firm that made the filing is Robbins Geller Rudman & Dowd LLP – a firm staffed with former prosecutors from the U.S. Justice Department and a legal powerhouse whose bread and butter is securities fraud.
Robbins Geller played a pivotal role in the securities class action against Enron, securing a $7.3 billion recovery; $5.7 billion in the Visa/MasterCard antitrust class action; $2.46 billlion in a Household International class action judgment; $925 million in the UnitedHealth Group stock option backdating case; and $657 million in a securities action involving WorldCom – to name just a few.
The firm’s biggest threat to Wall Street is that it actually knows how to define securities fraud to a court, what to ask for in discovery, and it prepares its cases on the basis that they may go to trial – producing deep archives of smoking gun documents.
The complaint by Robbins Geller in the current high frequency matter names every major stock exchange in the U.S. (including the New York Stock Exchange, Nasdaq, Bats, Direct Edge, etc.) as well as major Wall Street firms (Goldman Sachs, Citigroup, JPMorgan, Bank of America, etc.) along with high frequency trading firms and hedge funds. The lawsuit actually references page numbers in the Michael Lewis book, “Flash Boys.” One section reads:
“Notwithstanding their legal obligations and duties to provide for orderly and honest trading and to match the bids and orders placed on behalf of investors at the best available price, the Exchange Defendants and those Defendants that controlled alternate trading venues demanded and received substantial kickback payments in exchange for providing the HFT [high frequency trading] Defendants access to material trading data via preferred access to exchange floors and/or through proprietary trading products.  Likewise, in exchange for kickback payments, the Brokerage Firm Defendants provided access to their customers’ bids and offers, and directed their customers’ trades to stock exchanges and alternate trading venues that the Brokerage Firm Defendants knew had been rigged and were subject to informational asymmetries as a result of Defendants’ scheme and wrongful course of business, all of which operated to the detriment of Plaintiff and the Class.
“Defendants’ predatory practices included the Brokerage Firm Defendants selling ‘special access’ to material data, including orders made by Plaintiff and the Plaintiff Class so that the HFT Defendants could then trade against them using the informational asymmetries and other market manipulation detailed herein.  Flash Boys at 168-72 and 242-43.” (See High Frequency Trading Lawsuit Filed by City of Providence, Rhode Island (Full Text) )
Filing a Federal lawsuit based on allegations in a book might appear at first blush a bit frivolous. But the Robbins Geller law firm is dead serious about what it does and Michael Lewis is not just any book author.
Lewis holds a degree in economics from the London School of Economics and has first-hand experience working on the trading floor of the iconic Salomon Brothers as a bond salesman situated right next to the traders. He chronicled that experience in the bestselling classic “Liar’s Poker,” and has been documenting Wall Street crimes for the past quarter century in books and articles.
Robbins Geller is no slouch either and here’s where their case gets dicey for Wall Street. They have taken the allegations that have been made by Lewis and a raft of other insiders on Wall Street; dissected the fraud into digestible bites for the court; and provided the correct names and descriptions for the various types of manipulation that have been taking place for the past five years under the nose of the SEC:
The lawsuit explains:
“For at least the last five years, the Defendants routinely engaged in at least the following manipulative, self-dealing and deceptive conduct:
“electronic front-running – where, in exchange for kickback payments, the HFT Defendants are provided early notice of investors’ intentions to transact by being shown initial bids and offers placed on exchanges and other trading venues by their brokers, and then race those bona fide securities investors to the other securities exchanges, transact in the desired securities at better prices, and then go back and transact with the unwitting initial investors to the their financial detriment;
“rebate arbitrage – where the HFT and Brokerage Firm Defendants obtain kickback payments from the securities exchanges without providing the liquidity that the kickback scheme was purportedly designed to entice;
“slow-market (or latency) arbitrage – where the HFT Defendants are shown changes in the price of a stock on one exchange, and pick off orders sitting on other exchanges, before those exchanges are able to react and replace their own bid/offer quotes accordingly, which practices are repeated to generate billions of dollars more a year in illicit profits than front-running and rebate arbitrage combined;
“spoofing – where the HFT Defendants send out orders with corresponding cancellations, often at the opening or closing of the stock market, in order to manipulate the market price of a security and/or induce a particular market reaction;
“layering – where the HFT Defendants send out waves of false orders intended to give the impression that the market for shares of a particular security at that moment is deep in order to take advantage of the market’s reaction to the layering of orders; and
“contemporaneous trading – whereby obtaining material, non-public information concerning the trading intentions of Plaintiff and the Plaintiff Class and then transacting against them,  Defendants violate the federal securities laws, including §20A of the Exchange Act.”
The Civil Docket for the case is #: 1:14-cv-02811 and has been assigned to Judge Kimba Wood.


Hoenig: Wall Street Banks “Excessively Leveraged” at 22 to 1 Ratios

By Pam Martens: May 9, 2014

Thomas Hoenig, Vice Chair of the FDIC, Testifying Before the House Financial Services Committee On June 26, 2013
This past Wednesday, Thomas Hoenig, the Vice Chairman of the FDIC and former President of the Federal Reserve Bank of Kansas City, gave a presentation to the Boston Economic Club warning that Dodd-Frank has not put an end to taxpayer bailouts. Hoenig explained why in plain-spoken language the average person can absorb.
Hoenig has consistently shown the courage of his convictions in calling for breaking up the biggest Wall Street banks through the restoration of the Glass-Steagall Act (strongly advocated by Wall Street On Parade as well) and warning that the complexity, leverage and interconnectedness of Wall Street banks that brought on the 2008 financial collapse has not ended.
In his Wednesday talk, Hoenig makes the following key points:
Mega banks are now “larger and more complex than they were pre-crisis”;
“The eight largest banking firms have assets that are the equivalent to 65 percent of GDP”;
“The average notional value of derivatives for the three largest U.S. banking firms at year-end 2013 exceeded $60 trillion, a 30 percent increase over their level at the start of the crisis”;
The largest banks are “excessively leveraged with ratios, on average, of nearly 22 to 1”;
Taxpayer bailouts have not ended under Title II of Dodd-Frank and, most likely, not under Title I as well;
Smaller regional banks “are smothering under layers of new regulations” even though they are holding “significantly higher levels of capital than the largest banking and financial firms”;
Breaking up the mega banks – separating the insured depository institution from trading activities – “might be the better choice”;
We highly encourage our readers to take the time to read Hoenig’s full remarks, printed in their entirety below.
Can We End Financial Bailouts?
By Thomas M. Hoenig
May 7, 2014
The views expressed are those of the author and not necessarily those of the FDIC.
The goal and hope of the Dodd-Frank Wall Street Reform and Consumer Protection Act, as the name implies, is to make financial bailouts and, thus, too big to fail relics of the past. With the mere passage of the Act, some argue the goal is achieved. However, the accuracy of such a statement lies not in assertions, but in the actions and changes that follow the law’s enactment. Titles I and II of Dodd-Frank are the provisions that outline how regulators are to assure an orderly wind down of failing systemically important financial firms when those firms are, in fact, larger and more complex than they were pre-crisis. This is no simple task, and it is on these two provisions that I will focus my remarks today.
What the Law Requires
Dodd-Frank’s Title I requires that the largest systemically important financial institutions provide a written resolution plan called a Living Will to the Federal Reserve and FDIC. The Living Will outlines the process by which that institution would complete rapid and orderly resolution relying on bankruptcy law in the event of material financial distress or failure.
Congress intended this provision to be the principle means for resolution. Bankruptcy is a market-based solution that puts non-federally insured creditors on notice that they are not protected because a taxpayer bailout is unavailable in the event of failure. To make this provision enforceable for a firm that does not provide a credible plan, the Federal Reserve and FDIC may increase their supervision and eventually may require these firms to divest assets to facilitate resolution under bankruptcy. I take special note of the word “may” as opposed to “must”.
Title II of Dodd-Frank is an alternative to Title I bankruptcy. It is discretionary and triggered when the Secretary of Treasury, with the concurrence of the President, declares that a financial firm is in danger of default and that its failure would be systemic and detrimental to financial stability and harmful to the public. The law provides that the FDIC be appointed receiver to carry out the liquidation of not only the commercial bank but also the financial company.
It is important to note that in bankruptcy, the cost of the resolution goes against the stockholders and uninsured creditors. In a government resolution, costs go against stockholders, some creditors, and eventually to the financial industry through assessments. The taxpayer also plays a role in providing necessary funding during the transition. In my view, this provision has the same consequences of the bailout process we just went through, but with advance notice.
Therefore, regulators must enforce Title I by requiring firms to be positioned so they could be resolved through bankruptcy. Not doing so would fail Congress and the public.
Taking Stock
To comply with the law and use a Title I bankruptcy resolution as the preferred option, we should see changes in these firms’ structure and balance sheets that demonstrate they can fail and be placed into bankruptcy without bringing the system down with them. This then begs the questions: ‘Have we made progress?,’ and ‘Where are we today?’
Pre-crisis size, complexity, leverage ratios, and funding mechanisms
Pre-crisis, with the growth in activities among the largest banking firms, the industry became highly concentrated with the eight largest having assets, excluding derivatives, representing the equivalent of 59 percent of the GDP. Their operations became increasingly complex and involved thousands of domestic and global operating subsidiaries. The notional value of derivatives contracts carried by the three largest banking firms averaged a considerable $47 trillion.
In addition, cross-border exposures were significant and no provisions existed to deal with international bankruptcy. The firms were highly interdependent in wholesale funding markets — relying on money market funds and tri-party repos, for example — and they had created major exposures as counter-parties to one another in the derivatives market. Finally, there was a desperate lack of tangible capital to absorb losses. The leverage ratios that once were below 15 to 1 were allowed to exceed, on average, 30 to 1 and in some instances 40 to 1.
When the crisis emerged full force, bankruptcy was set aside as it was believed that the consequences of failure were too great and that the largest financial firms had to be bailed out. This included bank holding companies with direct access to the safety net, and shadow-banks and money market funds that relied on short-term, deposit-like instruments to fund long-term assets. Most importantly, the Lehman Brothers failure seemed to validate worst fears about the impracticality of using bankruptcy to resolve these largest financial companies.
Post-crisis size, complexity, leverage ratios and funding mechanisms
Compared to 2008, the largest financial firms today are in most instances larger, more complicated, and more interconnected. The eight largest banking firms have assets that are the equivalent to 65 percent of GDP. The average notional value of derivatives for the three largest U.S. banking firms at year-end 2013 exceeded $60 trillion, a 30 percent increase over their level at the start of the crisis.
The largest banking firms also have tended to increase their complexity. They have used the safety net subsidy to support their expansion across the globe1. They have further combined commercial, investment banking, and broker-dealer activities. There have been no fundamental changes in the wholesale funding markets, on the reliance of bank-like money market funds, or on the use of repos, which all are major sources of volatility in times of financial stress.
While these largest firms highlight that they have added capital to strengthen their balance sheet, they remain excessively leveraged with ratios, on average, of nearly 22 to 1. The remainder of the industry averages below 12 to 1. Thus, the margin for error for the largest, most systemically important financial firms is nearly half of that of other far less systemically important commercial banks and financial firms.
Private or Public Resolution
In a recent FDIC Advisory Meeting it was noted that given these largest firms’ continued complexity, interdependence, and reliance on volatile funding, it would be unrealistic to presume that in bankruptcy private parties would provide liquidity under debtor-in-possession financing. At the moment of panic, private sector lenders would be unable to determine the availability or reliability of the collateral necessary to secure massive amounts of short-term borrowed funds. Thus, even in bankruptcy, the only source of liquidity for these firms would be the government.2
In addition, despite improved and on-going efforts at international cooperation, there are no international bankruptcy laws sufficient to sort out cross-border creditor rights and no mechanism to assure the reliability of the enormous cross-border flow of funds of just one of these firms. “Ring fencing” assets will be the norm rather than the exception. Under such circumstances, it would be foolish to ignore the fact that countries will protect their domestic creditors and stop outflows of funds when crisis threatens.
In considering these circumstances, a view is being nurtured by some, unfortunately, that bankruptcy for the largest firms is impractical because current bankruptcy laws won’t work. Rather than require that these most complicated firms be made bankruptcy compliant through the strict use of the Living Will process, it has been argued that the government can rely on Title II to most successfully resolve any systemically important firm that fails.3 This view serves us poorly, delaying changes needed to assert market discipline and reduce systemic risk, and it undermines bankruptcy as a viable option for resolving these firms.
While Title II drives toward resolution and requires that stockholders and some long-term debt holders lose their investment, it requires public assistance to make it work. Unlike in bankruptcy, the Treasury is empowered to fund short-term creditors who, for example, would avoid becoming general creditors as they exit at the firm’s operating units — broker dealers, insurance companies, finance companies, trading companies that remain open. This only serves to perpetuate too big to fail, incentivizing creditors to redirect their investment from the holding company to the affiliates, where they will be “safe”.4
The industry clearly prefers the Title II solution because it requires nothing fundamentally transformational to its operations. Taxpayers are assured that any loss to the Treasury would be recovered through assessments against the industry, but I would caution that this would occur only after the fact, and only after political pressure and intrigue designed to avoid such assessment have had their effects. As I noted earlier, this process has a strikingly familiar ring to it.
Ending Bailouts
For the market to serve as disciplinarian and for bankruptcy to be a viable means for resolving systemically important financial firms, these largest most complicated firms must become eligible for bankruptcy. Ending bailouts using the tools authorized in Dodd-Frank requires that the Living Will process be vigorously implemented. Each systemically important financial firm must provide a credible plan for orderly resolution through bankruptcy. Any institution that fails to do so should receive increased supervisory oversight and enhanced prudential standards. Ultimately, if a credible plan is not produced, supervisors should be prepared to require an institution to sell assets and simplify operations until it shows itself to be bankruptcy compliant.
In advocating this approach, it is critical to also recognize and address its challenges. For example, Living Wills are prepared on an individual institution basis. Each firm’s plan is judged separately and is dependent on assumptions regarding individual structure and business activities. To generalize and implement this process and to assure that bankruptcy can be executed uniformly across the industry is problematic. If the process is subject to extensive political maneuvering, there is greater risk of inconsistent application of divestiture requirements and uneven outcomes. We gain a sense of this challenge from our experience with the Volcker Rule. It was resisted from the outset and continues to be challenged after the final rules have been adopted.5
To be sure, having regulatory agencies rather than legislators define the nation’s financial structure and business activities is less than ideal. In the end, legislating the separation of highly subsidized commercial banks from non-bank trading and similar activities might be the better choice. However, among the array of hard choices, it is better to work through such difficulties than to endure another severe crisis and bailout due to lack of resolve to make bankruptcy work as required by the law.
To solve a problem, the first step is to acknowledge that one exists. Dodd-Frank sets a law in place, but it does not solve the problem of bailout so long as firms remain too large, too leveraged, too complicated, and too interconnected to be placed into bankruptcy when they fail.
In the meantime, regional and community banks are smothering under layers of new regulations even though they are not too big to fail, and even though they hold significantly higher levels of capital than the largest banking and financial firms.6
Changing outcomes for the public means enforcing the law to address root causes of instability in the financial system, rather than maintaining the status quo. Our goal should be to create a fair, competitive environment where financial firms can thrive or fail based on the forces of the free market, regardless of size and complexity.
In theory, Title I provisions to resolve these firms make the system safer. In practice, it will be the industry and its regulators that make the law work.


Rupert Murdoch's Drop Boxes: Where Central Bankers Post Front-Runners On When To "Buy"

Tyler Durden's picture

Submitted by David Stockman via Contra Corner blog,
The Wall Street Journal appears to be saving money by dispensing with journalists and using human drop boxes instead. Thus in the New York markets the “Hilsenramp” signal is already a well-known event which occurs at approximately 3pm on/during/after Fed meeting days, and is posted under the byline of “Jon Hilsenrath”. In simple packaged form it provides fast money speculators with a message from the B-Dud, otherwise known as William Dudley, President of the New York Fed, on why the Fed will back-up another run at still higher record highs.
So today comes a drop box message with respect to ECB policy posted under the byline of “Brian Blackstone”. Self-evidently, the staff of the Bundesbank is negotiating with Mario Draghi in public. The latter backed himself into a corner last meeting by committing to a dramatic new easing round in June in order to avoid being finally called on his 2012 promise to do “whatever it takes”, which so far has been nothing.
But the ECB is still not ready to bend over for outright bond-buying Bernanke/Yellen style—so it has kindly deposited in Murdoch’s drop box alternative measures that would be acceptable. These apparently include negative deposit rates, a year’s extension of the so-called fixed rate full allotment loan facility, a new long-term fixed rate loan program for commercial banks and some purchases of asset-backed securities.
In other words, the Bundesbank is splitting teutonic hairs on the matter of money printing. It resolutely opposes buying government debt directly—least it encourage the demonstrably and incorrigibly debt-addicted politicians of the EU to become even more fiscally inebriated. Instead, it will inject freshly minted funds into EU banks so that they can do the dirty work with the newly opened space on their balance sheets—that is, buy the government debt.
So the Germans are not going make a stand for monetary sanity, either. They are just negotiating the terms of surrender by using Murdoch’s drop box. Specifically, they are painting a bright marker on the ECB staff’s upcoming inflation forecast—the very same marker that Draghi laid-out in his recent post-meeting statement.
In that regard, the ECB staff like all central bank forecasting outfits professes to know the path of European inflation to the decimal point. To wit, 1.0% this year and reaching exactly 1.7% in about 30 months from now by the end of 2016.  But according to today’s drop box message from the Bundesbank that forecast just won’t do. Only if the ECB staff peers more deeply into its crystal ball and finds a more significant shortfall from the ECB’s presumably wholesome target of 2.0% inflation is it willing to bless more oomph on the printing presses:
But these steps aren’t a done deal, and depend critically on the ECB’s forecasts for inflation through 2016 that are due when the ECB meets on June 5. The central bank currently expects inflation to average 1% this year, 1.3% next year and 1.5% in 2016. ECB staff economists expect that, by the end of 2016, inflation will be around 1.7%.
The Bundesbank expects forecasts for this year to be marked down.

If the ECB keeps its 2016 projections unchanged then Germany’s central bank would be reluctant to support new stimulus measures, the person said.

The number of steps on stimulus it would back depends on how far the 2016 inflation projections undershoot current estimates, the person said.
The answer is thus reasonably evident. The ECB staff needs to re-set the inflation path so that the year-end 2016 number does not exceed 1.255%. Presumably then even the historically inflation-phobic bubba would call for moooar money and inflation.
Needless to say, in a world pregnant with geo-political, financial and economic disorder—including the accelerating slide toward meltdown in China, old-age bankruptcy in Japan, and cold war resumption on the Ukrainian front—-the idea that the ECB staff can forecast CPI inflation 30 months down the road to the third decimal place is farcical; it’s the central bankers equivalent to counting the angels on the head of a pin.
But that doesn’t matter because today’s drop box messages are not actually about the distant and unknowable economic future. They are about the need for another surge of front-running by the fast money traders in order to sustain the utterly lunatic  condition under which Spain’s 10-year bond is trading at a lower yield than its equivalent US treasury note.
Obviously, the promise of a new round of easing by the ECB in June is just what the doctor ordered. And today’s drop box messages are just what is needed to “build confidence” among fast money traders so that their current heavily long positions in peripheral government debt will be maintained and  enlarged.
Just to make sure that signals are clear, Murdoch’s drop box carried a second message today under the by-line of “Richard Barley” . After a lot of sophistry as to why five year Spanish debt yielding under 2% (“inflation-adjusted”) is actually a bargain due the fact that headline inflation has computed lower than trend for a few months now, the post gets to the meat of the matter. Spanish, Italian and even Greek bonds are a “buy” because the German’s are caving and the Draghi’s money machine is fixing to crank into a higher gear:
The euro-zone bond rally is remarkable. Spanish 5-year yields have fallen from north of 7% in 2012 to below those of U.S. Treasurys; Irish 10-year yields, which came close to 14% in 2011, are below those of the U.K. The market hasn’t lost the plot on credit risk, though. The current levels reflect the problem of very low euro-zone inflation and the big-bazooka policy response investors think might be coming.

…. On an inflation-adjusted basis, (Spanish) yields are higher than in the U.S. and U.K. Spain’s dollar-denominated bonds due 2018 yield around 2.07%, according to Tradeweb, more than five-year Treasurys due 2019 despite having a shorter maturity.

That reflects the true force driving bond markets…. the European Central Bank seems set to loosen policy in June, with the Bundesbank onside….

Given that array of forces, it wouldn’t be surprising to see euro-zone yields—including Germany, Spain and Ireland—fall further still versus those of the U.S. and U.K.
Once upon a time markets processed real world information and there was a need for independent financial journalists with actual investigative and analytical skills. But Murdoch did not become a multi-billionaire for nothing. In today’s central bank dominated financial markets he has apparently learned that human drop boxes will do just fine.