Banking

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Who says that Europeans don’t get Halloween?  After more than a year in the making, the European Central Bank (“ECB”) just finished its most recent stress test and found that pretty much everything was kinda OK.  Sure, a few banks here and there in the nether regions flunked, but perhaps with the exception of that most wonderful Banca Monte dei Paschi di Siena, no one flunked that badly.
Continue Reading The Continuing European Banking Crisis and Hidden Capital Shortfalls

Have you heard the following thought expressed recently in one way or the another, “I’m less worried about what new black swans might swim onto our screens and more worried that we will just wake up one day, peer out of our bunker of habituated indifferences to the drumbeat of troubling news and decide, suddenly, that things actually are terrible!”  Bad news seems to pile upon bad news in the larger world.  We are off the map of the known universe in terms of monetary and fiscal norms, and yet when the last worse headline comes across the ticker, and the newsreaders do their level best to create drama, the debt and equity markets seem to, well, yawn.  What happens if one day we wake up and all of a sudden all that which was benign yesterday is terrible today?  It’s like one of those sci-fi movies where the doughy earthlings encounter a race of beautiful, peaceful people and then, in a blink, see them as the multi-arm, walking crustaceans with eyes on stalks and a distinct preference for space hero tapas that they really are. 
Continue Reading The Grand Illusion: A Strategy

Long ago and far away, a radio show gave birth to the catchphrase “Who know what evil lurks in the hearts and minds of men?  The Shadow knows.”  I think, although I’m not entirely certain at this point, that the Shadow was a good guy, but deeply misunderstood and viewed with enormous suspicion by more main stream enforcers of right thinking and morality.  Shadows are where bad things happen, where the bad guy hides and jumps out when the teenage starlet inevitably walks into the darkened derelict house, saying in a little voice, “Hello, hello?  Billy, are you there?”  Bad things inevitably ensue.  Shadows are bad.

Okay, what’s this all about?  We need to stop the narrative right now that all financial market participants; funds, specialty finance companies, advisors, BDCs, etc., which are not insured depository institutions (let’s call them non-banks for short) are creatures of the shadows.  Shadows are bad, non-banks are in the shadows…ok, you get the picture.  Our traditional banks, which take deposits guaranteed by the US of A are under the loving and protective wing of the FDIC, the Federal Reserve or the Office of the Comptroller of the Currency (and yes dear Lord, the FSOC).  That makes sense, they take Caesar’s coin and Caesar is entitled to a bit of supervision.  But the non-banks do not; they risk private capital.  That makes a difference.
Continue Reading The Shadow: What’s in a Name – The Maleficence of Shadow Banking

The Financial Times reported on April 2 that the Eurozone Banks continue to load up on sovereign debt; generally, the debt of their respective host countries.  A few days later, the Financial Times reported a bevy of talking heads crowing over the end of the EC financial crisis.  And then on April 16, the European Parliament voted to approve a slew of new laws for the EU banking marketplace, including a single resolution mechanism so comprised to be almost useless and a common rulebook for winding down the banks.  Does anyone here or there think any of this really matters?  First, it’s going to take years to generate the rules that this legislation birthed and even after the Euro apparatchiki spend years creating detailed rules, the dynamics of Brussels will ensure there will be so many loopholes it would make a block of Swiss cheese blush.  Moreover, does anyone actually think the various nation states will honor these rules if a champion bank is in trouble?  I, for one, do not. 
Continue Reading EU Banks –Dog Bites Man, Again

Jens Weidmann, president of Deutsche Bundesbank, recently wrote a terrific piece in the Financial Times, making the point that the Faustian bargain between European sovereigns, their national banks, the ECB and EU policymakers to encourage European banks to gorge on sovereign debt may be politically attractive in the short run while being fundamentally a horrible idea. With a wink and nod, President Draghi of the ECB essentially told the world that the ECB would keep the European banks afloat. With that assurance in their pocket, and the gnomes of Basel III declaring sovereign debt riskless, requiring essentially no capital, the banks continue to buy their sovereign debt – and buy big. By doing so, the banks become enablers of bad fiscal policy, artificially lowering the risk premia on all risk assets (resulting in mispricing), and clogging their balance sheets with government IOUs. The result: The banks are less able to support the real economy.Continue Reading European Sovereign Debt and the Clogging of the Banking System

I told the Blog team that I had sworn off writing about Europe for a while; but really. The FT opinionized last week that the EU ministerial decision to agree on a standard “bail-in” to fix broken European banks was a good thing. The editorial ended with a ringing endorsement “something is, however, better than nothing.” Really? It reminds me of Wile E. Coyote bravely trying to use a handkerchief as a parachute as he falls off the butte, again. Beep, Beep.Continue Reading The Consequences of a Failed Banking Union

I was entertaining myself early this morning by looking over a joint agency report just released entitled “An Analysis of the Impact of the Commercial Real Estate Concentration Guidance”. This report summarizes the performance of bank CRE portfolios following the issuance of interagency guidance in 2006 entitled “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices”. Everyone will be shocked, shocked to know that through the course of the worst recession in post-war history, banks lost money because of commercial real estate exposure and many smaller and regional banks went casters up. Well, there’s startling news. We taxpayers pay for this sort of thing. Where is the sequester when we really need it?Continue Reading Undue Commercial Real Estate Risks Are Bad: The Mathematical Proof of the Blindingly Obvious

Several U.S. banking agencies recently approved a joint final rule, set to go into effect on January 1, 2013, regarding the amount of capital required under risk-based capital rules for banking organizations to cover market risk.  The new rule aims to revise banking organizations’ internal modeling practices to better analyze and calculate their exposure to…

So after another bad news week in Europe, I’m a bit gloomy about the future of the capital markets. As we try to run a business and help our clients, I’ve got this narrative running through my head about Europe. I keep running this movie back and forth in my head hoping it will help me tease out what will be in the last reel. Look, we try to make these blogs contain some bon mots of immediate utility. I’m not sure what follows has any immediate utility, but I hope someone will tell me what I’m missing here.Continue Reading ROME’S BURNING: WHAT AM I MISSING?