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Thursday, March 27, 2014

Let's Do the Swirl, Kids!

In my morning readings, I ran across a couple of articles that don't give me the warm-and-fuzzies.

First, one of the Too Big To Fail banks has once again, not passed a regulator-mandated 'Stress Test' -
The Federal Reserve dealt an embarrassing blow to Citigroup on Wednesday, attacking the bank’s financial projections for its sprawling operations and denying the bank’s plan to increase dividends and repurchase stock.
They've failed the test 2 out of the last 3 times the test has been done.

Long story short, banks must do periodic testing of their loan portfolios that show what either rising or dropping interest rates would do to their earnings.  Back in my banking days, we had to do the test assuming a 1-, 2- or 3-percent rise or drop in interest rates.

If you don't pass muster, they regulators can impose capital controls (tell you how you can spend your money) and require the bank make changes to how it does business.

While this is an important tool for regulators to use to judge the risk at a bank, it really is moot with  regards to the true stability of a bank.  As I've mentioned before, the key metric is the strength (valuation) of the assets securing your loans.  As we all know, those assets are grotesquely over-valued - as banks are now allowed to carry those loans on their books based upon their outstanding loan balance, and not the value of the underlying property securing the loans.

This is pure insanity, but the regulators know that if they didn't allow this, huge numbers of banks would be technically insolvent, and there would be runs on the banks.

The second story was yet another story about how our historic model of the federal government bailing out failed banks is coming to an end
Due to their sheer size, the economy can ill-afford for these institutions to be washed away in times of financial crisis, with critics fearing that the system has become dependent on taxpayer bailouts to keep the economy afloat.
The new research shows "it is improper to ask the taxpayer to underwrite the non-commercial banking operations of a complex bank holding company," Dallas Fed President Richard Fisher told Reuters in an interview.
As the article correctly notes, this impending mess is due to the Federal Reserve and Congress allowing for the Glass-Steagall Act of 1933 to be ignored.  This depression-era law required that commercial banks (protected by FDIC insurance) not be allowed to own investment banking operations (buying and selling stocks).  

One is old-time banking and savings, and the other is flat-out gambling.  In the early 1990's, Glass-Steagall was effectively eliminated, and the FDIC insurance covered banks that also gambled in the stock market.

After the 2008 crash, the law was changed, and the onus is now on YOU.  What the Fed is saying is, it's now against the law for the FDIC to bail-out the big banks, and you, the depositor (creditor, in the eyes of the government) are now left holding the bag if a bank goes teats-up, and it has insufficient assets to cover the liquidation.

Are you listening?  The powers that be are trying to tell you things are rocky.  Few are listening.

As I noted in a post a couple weeks ago, ("Got Savings?  Maybe not for long.") this freedom of banks to invest in stocks and bonds from around the world has made them vulnerable to economic shocks from anywhere in the world -
The world is one big, interconnected marketplace.  Our banks lend to their banks.  Their banks buy bonds in our banks.  All of them buy government bonds.  All of them are infected with the same malady.
It's like having sex with someone you just met.  "You don't look like you have herpes, but did your previous partners have herpes?"  Who's your bank's been sleeping with...?
It's not just our economy that can bring them down - it's economies from around the world.

Get educated, then act.

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Copyright 2014 Bison Risk Management Associates. All rights reserved. Please note that in addition to owning Bison Risk Management, Chief Instructor is also a partner in a precious metals business. You are encouraged to repost this information so long as it is credited to Bison Risk Management Associates.

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