How much will it cost to end the “Too Big to Fail” era? Up to $1.2 TRILLION.
Market Roundup
That’s the conclusion of global banking regulators, who just released a comprehensive plan to deal with the TBTF problem. Their plan will potentially require the world’s largest megabanks to sell hundreds of billions of dollars in debt securities over the next several years.
The debt would convert to equity in times of financial stress. That would force bank creditors and stockholders to eat losses, rather than stick taxpayers with the bill.
This plan is coming from the Financial Stability Board, a Switzerland-based group that includes regulatory representatives from the Group of 20 nations. It will apply to 30 major world banks in the U.S., the European Union, Japan, Switzerland and elsewhere.
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| No one’s predicting a 1930s-style bank crisis, but regulators are warning that the world’s biggest banks are in need of billions of dollars to bolster their balance sheets. |
They include HSBC Holdings (HSBC), J.P. Morgan Chase (JPM), and Deutsche Bank (DB). The targeted banks will have through 2022 to restructure their balance sheets and sell debt to meet the new standards.
Emerging market and Chinese banks will get a few extra years to meet the higher threshold, though that timeline could be accelerated under certain circumstances. While the ultimate cost won’t be known until the process is complete, the high-end figure of $1.2 trillion is definitely a plausible estimate.
What does this mean for investors like you? Well, we’ve already seen liquidity in portions of the bond and derivative markets tighten up. That’s because post-crisis regulations make it more expensive and difficult for banks to hold large inventories of securities on balance sheets in order to facilitate trading. We’ve also seen many large banks announce plans to shed billions of dollars in assets, and raise billions of dollars in shareholder-diluting capital.
| “Post-crisis regulations make it more expensive and difficult for banks to hold large inventories of securities on balance sheets.” |
Those trends could get worse in the next couple of years. That could lead to higher loan rates when you go to borrow money, wider bid-ask spreads on orders when you look to buy certain bonds, and other hits to your wallet. The higher capital and loss-absorbing standards governments are pushing through could also serve to dampen the share prices of large banks, which have been generally underperforming anyway.
But I wouldn’t shed too many tears for these guys. After all, they brought it on themselves by blowing up the world’s credit and equity markets in 2007-09 — and sticking all of us taxpayers with the bill.
And of course, it seems like every day we learn of some new government investigation of banking shenanigans. Bloomberg is reporting today that some of the 22 primary dealers who facilitate Treasury auctions may have rigged that corner of the debt market, too. You gotta love it.
Now it’s your turn to talk about these new regulations. Will they actually help eliminate the TBTF problem? Or is it mere lip service?
What impact will this have on lending and/or trading? Will it make it tougher to get loans, more expensive to trade bonds, or otherwise hurt our bottom lines and the economy? Or are the banks just overestimating the negative side effects to avoid a fresh hit to profits? Let me know what you’re thinking over at the Money and Markets website.
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Was the October jobs report a fluke? A case of fudged numbers? Or a genuine signal of economic strength. I’m fairly skeptical on the matter, and clearly, many of you are, too.
Reader Robert K. said: “As Dent Research pointed out, a majority (58%) of October’s private-sector hires (268,000) fell under the median wage. The trend of hiring workers below the measured median wage shows continued demand in the labor market for low-wage work.
“It’s a positive development to see wage gains in the lowest-paying sectors. But we can’t just rely on increased employment in these industries to spur consumer borrowing and spending to drive the economy out of this long-running recovery. These jobs still don’t pay enough.”
Reader PMB added: “The latest jobs report is nothing — we should be seeing 500,000+ new jobs every month at least. And it should have begun years ago for a healthy recovery. All the Keynesian money printing is a complete flop and in fact has caused great damage, such as inflated asset bubbles and income inequality. No cheering here.”
Reader Kenn L. zeroed in on the sector divergences that were evident in the data, saying: “The jobs report does nothing to change my view of the economy. One just has to look at what sectors the jobs are being created in, and where they are flat or falling (manufacturing, mining, et al.). You can see that stable, well-paying jobs with upside are still not being added in the U.S. to make a significant difference in the direction of the economy.”
Lastly, Reader Chuck B. offered this take: “Those hiring stats seem highly suspicious. How would hiring double in one month? Also, how did that balance with the many recent layoffs by major companies and others? We haven’t gotten the last word yet. Did some clerk punch a 2 instead of a 1?”
Thanks for sharing. We’re definitely going to have to watch the incoming numbers to see if they confirm the strength in the October jobs figures. They definitely seem out of line with other reports we’ve gotten in recent weeks, and the overall trends apparent in the global economy.
If you weighed in already, thanks. If you didn’t, feel free to add more comments to this thread when you have time. This link will get you pointed in the right direction.
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Credit tightening is a months-long process, not a one-day event. We just got more evidence the cycle has turned from a Wall Street Journal story, which notes that banks are having a hard time unloading takeover loans.
Bank of America (BAC), Credit Suisse (CS), Morgan Stanley (MS) and others are finding that investors are less willing to buy up pieces of the riskier loans they made to finance corporate takeovers. That’s forcing the banks to cut the price of those loans, discount fees, eat losses, or otherwise suffer the consequences of too much easy lending.
The BRICs are crumbling, at least at Goldman Sachs (GS). The investment bank threw in the towel on its BRIC fund, folding it into a more diversified emerging market fund it runs.
The acronym stands for Brazil, Russia, India and China, and investing in those countries as one group was all the rage a few years ago. But lousy performance, economic recession, and a strong dollar have led to massive outflows from those countries and funds that invest in them.
Will energy sector consolidation pick up? It’s been a little like waiting for Godot there. But oil and natural gas giant Apache Corp. (APA) is reportedly in play. The firm received an unsolicited buyout offer for an undisclosed price, and is reportedly debating how to proceed.
Three police trainers, two U.S. and the other South African, were shot and killed in Jordan by a Jordanian police officer. The assailant was then killed in the incident at the Jordan International Police Training Center, which may be linked to Jordan’s close support of U.S. anti-terrorism policy in the Middle East.
What do you think about energy sector consolidation, the news that it might be getting tougher to finance takeovers, or the latest potential terrorist act in the troubled Middle East? Share your thoughts on these or other stories I didn’t cover over at the website when you have a minute.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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All the bonds and loans need to take their losses sooner rather than later rather than the US taxpayer “refinancing” the deals that the hedge funds and the finance industry pushed to the limit for their own benefit. The politics should not give away “equity” to the ones that have profited at the cost of the taxpayer paying the cost of inflation
RE: October jobs numbers…You are all over analyzing. While I don’t disagree with anything others said, the fact is that it’s hiring time in anticipation of holiday shoppers. And of course those workers would be paid at the lower end of the scale which explains at least some of the jobs numbers. As for the rest, well, I am always skeptical of numbers advanced by our government.
THE DAY BEFORE THE JOB NUMBERS JOHN CRUEDEL WRITER FOR THE NEW YORK POST WROTE THAT LAST OCTOBER 160,000 JOBS WERE ADDED BECAUSE OF SOMETHING CALLED THE BIRTH /DEATH RATIO.HE SAID HE EXPECTED THE SAME THIS OCTOBER.DID IT HAPPEN? THOSE ARE JOBS THEY CANNOT PROVE EXIST.
The whole discussion of “To big to let fail” is absurd. These big banks should simply be broken into pieces. Don’t let anybody tell you we need megabanks for megaprojects – that is just BS. The old syndicated loan mechanism worked just fine. I was involved in putting the first 1 billion dollar loan together in the early 70s when 1 billion $ was real money. It was for BP to fund the North Sea exploration.
Today, if you look at the abomination called Citibank for example, it makes your hair stand up.
These guys are so incompetent, they are a danger to the taxpayer. If they were broken up into about 25 units, you would have some real businesses and the threat to the taxpayer would be gone.
But since we put the guys who got us into this mess in charge of getting us out of it (rather than putting them into jail), they come up with all kinds of excuses, why this cannot be done.
GR
I agree with Gernot. The gigabanks crowded out honest mortgage bankers, got into mortgage originations and packaging for the fee income knowing they could sell them with little recourse in the secondary market through Wall Street whores who bundled and diced them into packages by region, rate and maturity then bought “A” ratings on the packages from the rating agencies and sold them to unsuspecting foreign and domestic institutions.
Unlike portfolio lenders, they didn’t need to worry about risk underwriting! They should not have received a bail out.
Lending them $1.2 trillion more in bond sales will not solve their problem. Break them up and limit their investment in derivatives.
Who in their right mind would buy those bonds??
Not one of these smart guys has felt the full force of the law and the public has been left holding the bag. Send them to jail if we want confidence restored in the system.
Hi Mike
We could have a bigger problem as these loans to other governments like Greece may well be covered by C.D.S. in the derivatives markets. This market is unregulated and has our banks like the JPM’s fingerprints all over it. We may well find when the S hits the F that $1.2trillion just doesn’t nearly cover it
Mike
With great respect to the global banking regulators and their just released comprehensive plan, they are amateurs. Some time ago the derivative’s market was worth somewhere north of $600 trillion. Where is this increasing debt load covered in their equations? We the people, our savings and funds are at risk because of this.
Regarding the job report, don’t forget that of the total new jobs about 160,000 jobs (if I recall well) are the result of the death/birth model. It’s a model where they estimate the jobs created by new businesses that don’t report yet. I’ve read that this estimate is usually fairly accurate but it’s a model…
The derivatives market is much larger today than back in the financial crisis and the big banks were also allowed to grow much larger. So much for reducing the risk these banks create without hurting the economy and Mr Taxpayer. In essence, its all lip-service because if Europe blew up there would be no amount of equity to cover it, simply because there isn’t — its ALL DEBT and too far gone!
I know 99% of all banks are deep in it,and getting deeper,but, a big but,everything is just plain crazy right now,where do you start,Japan,Europe more QE big style.OK we are not confided in(the real s”’t they are in)but surely the there must be a better way,Just thinking
In about the 2nd paragraph of this 1.2 trillion dollar problem article you recently posted: When future bailouts are necessary the depositors will be the creditors. I remember reading that the rules have been changed at some int’l banking conference such that ALL DEPOSITORS are now considered “UNSECURED CREDITORS” of the bank. Therefore, they will confiscate a portion of your account. This is part and parcel of the negative “interest” scam they are concocting. Couple that with the cashless society program also being concocted requiring all transactions to be digital (and printed cash being discontinued) and the picture of global slavery (or revolution) is complete.
You failed to mentioned this in your article.
Consider that the derivatives market’s notional value is approximately $1 quadrillion, Creating a $1.2 trillion fund is nothing more than petty cash. The real problem is that all those contracts are denominated in American Dollars and with only about $15 trillion in the banking system … “do the math.”
Mike
I think we need a bit more direction and a little less reporting on the current state of the world economies.
Taking all the data at Weiss Research whats are your recommendations on EU Investments, UK Investments and US investments.. Where are the opportunities or do we sit back and wait for these bubbles to implode ?
JD
Banks are overestimating nothing new.
October jobs report is fudged we have no economy.
As of December 31, 2014 the top 25 U.S. banks, Savings Associations and Trust Companies reported owning $220,239,775 million in Derivative Contracts! That reads 220.239 trillion! Please show me how $1.2 trillion more bank debt is going to keep these banks solvent.
Countries make bad economic decisions then get IMF money to bail them out then default, get more money and the cycle continues. The major banks made bad decisions leading up to 2008 then got government money to bail them out. They are still making bad decisions and the government is ready to pay another $1.2 trillion if things go south again. In 1920 there was a bad recession and hundreds of banks went belly up because Harding and Coolidge did nothing to bail them out. Eighteen mos later, in 1921, things got better and fueled the Roaring Twenties big economic boom. This recession was hardly a blip on the radar but should have taught us that you don’t reward bad behavior because it will continue as it is now. The next recession could be twice as bad as 2008.
According to the Austrians, for an economy to remain healthy it must periodically rid itself of incompetence, dishonesty, and debt. The incompetent should be sacked, the dishonest imprisoned, and the debt wiped out. Hopefully, the remaining assets will be controlled by the competent and the honest, rebuilding on a solid base. In 2008 we did none if this. By attempting to save a broken system we have only guaranteed the next event to be much worse than the one we should have experienced then. Virtually no one seems to want to admit that the amount of debt we have now is impossible to repay. Sooner or later this system must fail. It would have been very painful, but we would have a normal, healthy, growing economy that we certainly don’t have now. Jim
Agreed Jim
I have been saying the same as Jim for years.The politicians and banksters have no interest in solving a problem that continues to line their pockets. They don’t care because they have purchased millions in gold and silver that most of the average persons cannot afford and will remain relatively unhurt when the 10.0 financial quake hits. It may take more a decade to recover…..if the right things are done to prevent another episode. But you know politicians, they never want to do what should be done because it would spell the end of their careers in D.C.
Banks have contributed to current problems. However, it appears to me that professional(?) politicians with little or no understanding of financial matters and markets are the major cause of our malaise. Add in our Federal Reserve with its inept handling of interest rate policy (or lack thereof ) and we will soon be joining Europe and the BRIC in the looming recession/depression. Just hope that China does not decide to stop buying our debt.
China has already sold maybe a third of the debt they bought from us, while the selling was good. They have also said they will buy less in future, I understand. That alone should help to effectively raise rates through lowering the bids. Possibly a payback of sorts for nosing around in what she considers her backyard. (S. China Sea) Ms. Yellen isn’t the only one who has a say about the rates, when it comes down to it. The buyers are the ultimate rate setters.
Two comments:
1. If Ronald Reagan’s budget led to the so-called “credit card recovery” which stimulated real growth through the 80’s and 90’s, what do you call the Fed money-printing and balance sheet corruption producing a nearly stagnant “job recovery” we are supposedly experiencing now? It’s a de facto “downsizing recovery.”
2. So much for the free market bringing balance to the financial sector. The first sensible proposal making banks responsible for their own malfeasance by holding shareholders financially.liable (after fleecing taxpayers for the recent debacle) comes from an international banking regulator. For all those who say we don’t need more regulation, I say this industry screams the need for more regulation.
Best regards,
Caine
To the comments by John above:
Some people may just want Mike to tell them what to do, but I appreciate his presenting the facts for us to consider and use to draw our own conclusions. If I do not know the foundation on which conclusions were made then I can not become a stakeholder of those conclusions. There is no one size fits all regarding finances. If you need that kind of guidance it needs to be customized to your situation alone, and you should pay for that.
Agreed. You can get good info on these boards and posts and if you are fair minded…..you will reciprocate and provide info back in. Specific guidance is available for a fee. It is also only fair that you subscribe to one of the Weiss services for the info you gather thru their organization.
It seems like Xmas ?lots of work low wages do not buy a car
Michael, it is nothing more than lip service, with a few dog biscuits thrown in to keep the masses thinking something is being done to clean up all the financial corruption. etc…
How do we arrive at a “Median” wage. Here is a guess – some are below it and some are above it. Is the “Median wage” falling? ‘Bull markets are built on a wall of worry’. ‘When all pundits agree – watch out – they are usually all wrong’.
Mike,
To allow these same culprits who have been at the heart of every shenanigan of huge proportions since way before 2008 to have any part of new things developing is absolutely asinine. These TBTF banks have absolutely NO INTEGRITY. If they are included in the best new sloutions it’s time to exit this planet. Certainly some think tanks oozing with integrity can step forward with a new system that most asuradly will bury these heads of TBTF’s FOR EVER!
Mike,
I like the bit on the Jordon policeman, don’t get that news in the uk.
Years ago I use to subscribe to the fleet street letter, they forecast back in 1994 about what was going to happen in the middle east.
I’ve been fortunate to have lived in a very fast paced growth area since 1976. I came here to go to college and remained. We’ve never really experienced any hiccups, even through national downturns. The growth has been almost exponential since that time, until 2008. Since then it has been a very slow, malignant type “growth”. Our county is now throwing all sorts of “free money” and grants towards “new” businesses. They’ve NEVER done this since I started living here over 40 years ago. All the businesses that ARE opening are all “consumer” oriented, nothing being “made”; this is economically unhealthy. They’ve always instituted “no/slow growth” measures to keep things at an acceptable, manageable level. Not anymore. This is very serious and tells me that our country has a very bad cancer in which the patient is just now starting to realize, “there’s something wrong with me”, but hasn’t been discovered it’s a terminal situation. The day of reckoning is fast becoming a reality. Hope you are prepared.
Congress brags that they have the “power of the purse”, so that is where the buck stops for over spending. The Fed is just trying to keep the government solvent. Government gets it’s money when taxes are paid which happens when money changes hands. They also get money the Fed creates. Therefore they like inflation. Inflation raises the cost of living for ordinary citizens so it creates political demands for higher wages. However, productivity reduces the need for more workers and saturates the market with goods and services. Then there is no economic reason to raise wages. I could say more, but I stop here for now.
If you doubt that there are jobs available you should take a trip to Silicon Valley. There are help wanted signs all over the place for low paying jobs in retail such as Home Depot, Dollar tree and what is left of Sears/K-Mart.
Seems all good; Right? But before you head west looking for work you may want to check out the rental listings in the that area. One bedroom apartments are currently going for $2000-$2500/mo. I don’t know how one earns enough money at $15.00 per hour, once they pay their taxes and the rent, to even eat.
Add to that the crowding, traffic and general stress and if this is what a virtuous cycle looks like I don’t want to know what hell is. It is definitely a game for people younger than myself.
I’ve been around long enough to know one thing: Consumers ALWAYS get stuck with the bill where banks are concerned. This is particularly true when gov’t says that won’t happen.
Sheeple…..the Fed needs something it can feed to you. This whole economy is hanging on the breath of the decision makers. Hope you are prepared….the passing of air should be enormous.
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