Friday, January 17, 2014


The focus this week has been on bank earnings which while important are hardly the most important event in the world of banking.  Late last week you may have noticed--or maybe you didn't because it wasn't very well reported--that as predicted in this space a number of times over the last 6 months there was the real possibility that if we didn't stay alert, the  global "understanding" so highly touted by the administration concerning bank regulation might come a cropper…it did.  As suggested and without any warning at all the EU pulled back on it's capital requirements from the levels that had more or less been agreed with the U.S. and allowed continental bank considerable more leeway than had be discussed.  Bank shares across the continent immediately leaped upwards…and a very Happy New Year to you Hans, Francois and Juan.

Meanwhile, back in the lower 48, the talk is all of what other businesses are to be curtailed, eliminated or max-regulated while the ripping off of the shareholders of J.P Morgan winds down in anticipation of a new target (Citigroup?) replacing them in the sights of the government's greatest profit center, the Justice Department and its spawn, any other regulatory entity that can find jurisdiction by means of exchanging a roll of quarters in the petty cash drawer for cash if not less.
Anyway, this week out come the year-end reports of the banks and with the exception of B of A, (which is sort of like the old U.S.S.R. economy where every positive number was 100%), everybody misses their number.  No surprise that a number of institutions reported much lower results in fixed income trading what with the rocket ship (and late burn-out) in the 10 year yield, but the common theme for every institution was the amount set aside for present and future litigation which in some cases was not even fully revealed.  And one sector that was highly touted by the stock boys to show leadership in 2014 fell like a rock.

On the other hand, Blackrock, which seems to have reached mythical status among the cognoscenti, did very well indeed.  Why you ask?  Simple sez I, they're private.  At that brings up a most interesting point of discussion and one of no little concern and even less disclosure.

Since the end of the true crisis period the question of funding the rebirth of the economy has constantly been raised.  the banking system, shattered from loses and under immense--and rightfully so--pressure in regard to their risk management, simply got out of the lending business.  For sure, demand was greatly reduced but you couldn't make a mistake if you didn't do it became the norm and the business of banking, that of taking prudent risk was all but ended.  The Fed in an attempt to kick-start the business, pumped liquidity into the system in unprecedented amounts only to see it round-trip back to the Fed's balance sheet causing untold mischief not only here but especially in emerging markets.  Under attack then, and now, from regulators. lending ceased.

Finance, like many other things hates a vacuum.  Filling the absence of bankers came the shadow bankers.  Enter Blackrock et al. No one, anywhere, seems to be talking about the fact that for the second time in not so many years the business of corporate lending, what we used to call Commercial and Industrial  ("C&I") lending is now being led by a whole new group of bank look-alikes except for the fact that for all practical purposes, they are unregulated.  Now this can be a good thing in the sense that the greatest risk management mechanism around is still the placing at risk of one's own funds; generally it is done very carefully.  Of course if you sit in the offices of the Fed or the Controller of the Currency or the FDIC, it's a nightmare.  You have little knowledge and less control.   Monetary tools become far less useful, and risk oversight is non-existent.  For me the scariest thing about this situation is that unlike highly regulated institutions, the shadow banks can turn on a dime creating vastly different images of an economy literally overnight.

What we have is the remarkable situation that as a result of the government through its regulatory system attempting to reduce the "risk" in banking, it is in effect, creating more unregulated risk with far greater volatility within the system.  Now it is true that the attempt a regulation has been explained as an effort to protect the guaranteed deposits of risk-taking institutions by eliminating the type of risk taken, but ponder this for a minute; Blackrock is a fine firm run by very, very smart people.  Dodd/Frank does not apply to them, yet they engage in every activity of a J.P. Morgan/Chase (and then some) except that they are not funded in part by government insured deposits.  But then again, there is not a commercial bank around today whose deposit base is anywhere near 50% of government insured funds.  And anyone who thinks Blackrock is not "Too Big to Fail" has been spending too much time in Colorado.

There is a natural prejudice against "Big" banks.  OK, let's move on.  Problem is the world has moved on as well and with it the fact that community banks and even mid-sized banks cannot satisfy the financial requirements of many of our leading corporations, many a far sight smaller than IBM.  yet, in our quest for "safety in banking" and the politically rage to extract a pound of flesh we are suffocating that which we all admit is necessary to our growth and prosperity, the availability of sound and available credit from a known system and substituting an entirely new group of players, highly competent but completely unregulated…not to mention a group of institutions which we already know playing by an entirely different set of rules.  So welcome Hans, Francois and Juan…by the way do you know Steve Schwartzman and Pete Peterson?

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