Monday, November 9, 2015 |
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YOUR BEST SOURCE FOR THE UNBIASED MARKET COMMENTARY YOU WON’T GET FROM WALL STREET | |||||||||||||||
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A $1.2 TRILLION Problem!
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By Mike Larson | |||||||||||||||
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.
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.
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.
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.
● 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
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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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Thursday, November 12, 2015
A $1.2 TRILLION Problem!
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