Thursday, October 23, 2014


This was to be yesterday's piece, and it was.  You see, we have a restaurant around here named Yesterday's and every once in a while I help them out a bit by tasting wines to be added to their wine list.  So yesterday, and part of the early evening belonged to Yesterday's.  I am happy to say the pallet remains as one belonging to a far younger man; the capacity does not.  Yeah, I know, you're supposed to spit it out but I was brought up to think of the starving children in China and waste not, want not.  It was not the day for blogging.

Sometimes great minds think alike and our old friend, Carter, was on the same page as this edition.

Billy the Dud you might remember, when he came over from Goldman ran what was called the markets group at the Fed.  I suppose there could be differing views as to his tenure as the group's head (there are), but whether it was good, bad or indifferent is of no matter.  Importantly, Dud was in a position that allowed him to witness a broad range of historical and market driven events, some of which were prominently highlighted in his speech of the other day.  It also put him in a position to witness, albeit late in the game, the seismic shift in what was called banking by the old guys in the business like me, especially in regard to entry of players into out little sand box who, 20 years ago, were no where to be found in  either the heavens or firmament.  He also seems to have missed, or paid little attention to, one of the primary missions of the market group; the international payments system.  More importantly, what Dud and the dreadful twosome of Lizzy and Danny Tarulo simply ignore is the development of the "shadow banking system" which is no longer in the shadows any more.  Indeed, it is the banking system, vibrant, powerful, rich and for the most part unregulated.

Let's be honest, or as the late, great funny lady used to say, "Can we talk?"  This mob is not the least bit interested in the growth and development of the U.S. banking system; they want a political scalp and to them the "system" consists of J.P. Morgan, Citigroup and Bank of America.  Any one will do but the easiest is Citigroup which just happens to be the only real international bank this country has left and therefore the most vulnerable.  This is not a defense of Citibank which since I've been around has had a history of going damn near bust every 15 years, but when Dud starts talking about "breaking up banks that are too big to manage," he's talking about Citigroup because how easy is it to say, "they have 4000 subsidiaries, how can you manage that?"  Good question Billy, but those subsidiaries are located in 120 different countries and a hell of a lot of them are managed really well locally.  In addition, probably half of them are in existence because some dumb regulator somewhere, but often in Washington, decided that you had to have a subsidiary to do whatever the hell you were doing.  For example, in my career I had to form a number of off-shore subsidiaries just to be in compliance with the Investment Act of 1940, about which I have told you that little is known and none of it any good.  It remains on the books today, a monument to another time.

Citibank also handles over 500 payment systems out of its foreign locations.  Now Billy knows this..or should…because that is one of the responsibilities of the markets group through its oversight of central bank payment which is closely intergrated.  Who's gonna love ya when they're gone, Billy-boy?  Oh sure, there will be a new system but do you have any idea what an absolute bitch that will be to put in place.  I'm sure he does as he's not unintelligent; he just doesn't care.  It doesn't fit the ideology.  Then again, you can bet your boots that whatever replaces it will not come under the full supervision of the U.S. regulators. A goodly portion of it may not even be in dollars, and if we lose that, we probably lose everything.  We are the reserve currency; we have the settlements system; we have the payments system.  Think about it.

So, what is preferred in the Lizzy/Danny/Billy world is something real simple; the Wells Fargo's of the world.  A great, big, Savings and Loan as I said the other day, that does simple things  community banking and makes mortgage loans that are hugely liked to things like Fanny and Freddie which are wards of the state and massive users of public capital.  More importantly, they are politically controlled and the threesome likes that.  So here's where I have a problem of understanding.  Remember Goldman Sachs where Dud was making probably about $10 million a year in cash and God knows what else as a partner before he "retired" to the Fed on some basis in which certainly Bob Rubin and Co. were involved?  In 2008, Goldman Sachs was toast.  Not because they were stupid but because, as regular readers will remember, 2008 was a liquidity crisis and banks die of the liability side of the balance sheet.  Goldman Sachs, like everyone else, couldn't fund themselves, but unlike everyone else, Goldman wasn't a "bank" as defined, making the Federal Reserve discount window unavailable.  Goodness, gracious, what do you do about that?  Well, you change the charter of the institution, changing Goldman from an investment bank to a commercial bank overnight and voila, the discount window opens as though by magic.  In the first instance, who at the Fed looks at that.  Yep,  the markets group.  Waddaya think, Billy?  Can we talk?  Like about deferred comp from Goldman, clawbacks, and conflict of interests.  And why isn't Goldman as dead as Marley's ghost?  Or Lehman for that matter.  There are a lot of good reasons for the latter but explaining them may get awkward.  No?  Well then my friend do us a favor and shut up.

No comments:

Post a Comment