Thursday, January 17, 2013


Germany's Gold.  It was announced today that all or a large portion of  the gold stored in the vault of the Federal Reserve Bank of New York--for free, mind you--would be heading back across the pond to its new home in the Bundesbank.  So I asked myself, self, why would they be doing that?  I didn't have an answer and the reason given by the Germans, "For reasons of security," didn't quite have the ring of full honesty to it.  Perhaps they have been reading Midwest Musings I thought, what with me wondering the other day just what things are worth.  What a happy thought, but whatever the reason it certainly is part of a trend that began last year with central banks around the world increasing their purchases and holdings of gold.  While this action is not an increase, keeping what is yours closer to one's self is not in contradiction to what we have been seeing.  But it is still odd for if settlements or simple sales in gold between nations or central banks are required it is as simple of moving the requisite amount from one end of the floor in the Fed basement to the other and this from time to time occurs.   Change afoot or a portent of things to come?  Haven't a clue, but in light of Monday's effort, I thought interesting.

I've been doing a bit more thinking about the role of "banks" in today's market know that musing about whether Goldman and Citi should be talked about in the same breath and how we got to where we are and why.  There's part of this story that most people don't know but is is critical if one is to understand the answer to the question.  It has everything to do with competition...oh not competition between investment banks and commercial banks but the competition between the afore-mentioned institutions and the so called "Universal" banks of Europe beginning in the early 1970ies in Europe.

It was in the late sixties that the great expansion of American Banks began in Europe, primarily in London.  The New York institutions and one or two others had been there long before but by 1980 there was an American bank on every corner in the City except for where there was a Japanese.  The investment banks arrived as well but the businesses of the two types of entities remained separate although  wholly owned subsidiaries of commercial banks were set up in order to allow the institutions to engage in investment banking but only outside of the United States and to "learn the business" so to speak.  Even then, there were thoughts of the time when the limiting Glass-Steagall Act would be no more.

One of the strongest arguments against Glass-Steagall was that of the competitive imbalance given the existence of the Universal banks who were under no such restrictions.  The Swiss could, for example,  make loans and underwrite securities--either in separate transactions or combined--creating a "bridge loan" to a future bond issuance which would pay off the original loan in what was in effect an internal syndication of risk.  The Universal banks, especially the Swiss, were also huge managers of funds and therefor had a built-in distribution system for issues which they managed.  As I used to say at the time, "You didn't have to be smart to be Swiss."  I was not particularly well-received along Hauptbanhoffstrasse in Zurich in those days but what the hell, the Swiss didn't have a sense of humor...still don't except for my friend Helene who is and does but that's another story.

Well, Glass-Steagall went away and the brave new world of universal banks came to the United States.  Banks had to decide what they wanted to be and how to get there and unfortunately, many made the wrong decisions whilst investment banks, having been run in the best of all business models the partnership, decided to "go public" not only to obtain the requisite capital for this new form of business model but, because they are not run by stupid people, to insure that the individuals would be insulated from personal liability and risk in a model that they knew was to be more risky.  Mergers abounded as it was believed one had to be "big" and create "synergistic values" and of course more profit.  Not surprisingly, there were monumental clashes of culture resulting in huge failures creating more mergers and institutions that grew so rapidly that they became almost impossible to manage.  Add to that the explosion of technology to the assessment of risk--understood by few and lied about by many--and we arrived at 2007 ready for a real catastrophe, aided and abetted such craven politicians such as Messrs. Dodd and Frank who made it easy for the debacle that to occur.

Now what is this all about?  Simply that we stand at a rather important juncture which few recognize.  What is our financial system going to look like in the future and the near future to boot.  If we don't know the business of an institution, governance is all but impossible and risk assessment becomes a guessing game.  Does access to the Fed Window for an institution such as Goldman which has no retail business make sense as it does for Wells Fargo?  What signal does this sent to the markets?  Why does Goldman require implied Governmental support?  Who does that protect, Saudi Arabia and IBM who list themselves among Goldman's clients?  We are still unsure of what walks out there in this new world we are busily creating, and by distorting the assessment of what risks there might be certainly doesn't help.

Tomorrow, I want to talk about the above in the context of Citicorp which reported today--not good according to the street.  It is, IMHO, a microcosm of the industry today.  Dial in.


  1. You are prescient. This will develop in a manner that causes our country's bankruptcy. The German know that socialism will destroy our country.

    Prof Ed

  2. Post euro-disalution gold-backed Deutsche Mark?

    Or gold-backed DM after China backs its Yuan with the shiny metal?