Monday, September 8, 2014


…And a lot poorer. That little repair cost a bundle but I think we are in good shape, hopefully for a long time.

During the absence, the Regulators finally came out with their suggested new guidelines for bank liquidity mandated by Dodd/Frank.  The good news is they spelled liquidity correctly; the bad news is they still haven't a clue.  Daniel Tarullo, the Fed Governor and created of more half-baked ideas came up with this beaut a few days ago.  I have put it in quotes but it is not direct.  "The Liquidity Coverage Ratio will prevent large banks from taking on excess liquidity risk in advance of periods of financial stress."   OooooooooooK.  I guess that could be expanded to a general rule that large banks should avoid taking on ALL excessive risk in advance of periods of financial stress.  And of course in hindsight we will be able to designate that precise period when financial stress began so as to pin the blame where the blame lies on those institutions that did not invest in a Predict the Future machine when it's time to act like regulators after-the-fact like we did last time.  Of all the stupid, non-sensible statements in central banking history, this one is waaaaay up there towards first place.
By definition, one has systemic risk when everybody misses it and realizes it at the same time.  And that, Mr. Tarullo, is what central banks are for…to eliminate the liquidity risk.  If that were not the case, I can see no reason for the existence of Mr. Tarullo.  Indeed, I can see little reason for him at all.

Anyway, there are different levels of Liquidity Coverage depending on the size of the institution which might make sense, but the one thing common throughout the entire sector is the fact that the more liquid a portfolio, the less overall risk will accrue and the less risk, the less yield.  In my old shop, we developed a management tool referred to by the acronym, RAROC--risk adjusted return on capital.  Very clever, very confusing.  Because of the institution's strategy, we were rapidly becoming a large trading organization, RAROC was heavily biased towards short term, government and muni related instruments.  Both maturity and the nature of the issuer weighed heavily on the concept of involved risk.  For example, if you did nothing but trade T-Bills you would have practically no credit risk and very high liquidity..You also wouldn't cover the overhead.for the other business lines.  Now the institution also had a very large C & I book and the natural result of RAROC was for the trading desk to have enormous positions in risk-free but low yielding assets and for the lending groups to take on more and more risk in direct lending and "structured risk" to make the shareholders happy.  We know how that movie ended.  And that is exactly what is going to happen again or else the result will be a further cut-back on bank lending resulting in far lesser regulated institutions (they are called "non-public")  stepping in to fill the gap…or both…and what a fine mess you've gotten us into this time, Danny.  Oh yeah, one other thing.  There may not be much credit risk these days in North Dakota or Texas general obligation bonds or the Ten Year, but if you are holding Ten Year Notes with a coupon of 2.39% for liquidity purpose and the on the run is 5.5% just when we have the Next Big Thing, getting into cash becomes very, very ugly.  Of course Dan never had a real job so he might have missed this, but trust me real bankers haven't.  Watch.

The big news over the weekend was the polling on the Scottish Referendum.  Some say it now actually has a chance and on that news, Sterling absolutely went into the toilet today.  On CNBC, some jerk money manager from Wells Fargo pronounced that this was really no big deal Over Here.   Don't believe it.  This is a very big bloody deal Over Here and a nightmare Over There.  We'll talk more about that tomorrow.

Good to be back.

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