Friday, February 5, 2016


Before we go there, the jobs report came out today and to call it a mixed bag would be understating the case by a wind margin.  The were 151,000 jobs created, well below estimates.  Nevertheless the unemployment number ticked below 5% to 4.9% and hourly wages rose by 12 cents. You know what I think about the jobs report.   Il Duce called this brilliant and mocked Republicans for complaining about the economy.  Oh yeah, there was improvement in labor force participation from 62.6% to 62.7%  The guy is doing great.  Of course all this occurred against the background of the GDP number of 0.7% for the last quarter.  And the jobs?  Rings instead of fries please.

And now, back to the banks, but this time those Over There and in other places.

Many years ago in the last century, myself and a couple of colleagues figured out a pretty cool way to help out banks with troubled assets under certain conditions.  We sold it to a number of banks in Latin America and though it might be applicable to a certain Japanese Bank with whom we had a very close relationship, so we approached our friends and had a very expansive and detailed discussion as to what might be done.  And we waited...and waited.

The response was curt almost to rudeness.  I have to this day continued to hope that the Japanese simply didn't know how to say "no" that prompted this kind of response (they tend to ignore unpleasantness until it goes away) but in any case it was never spoken of again.  To this day, the Japanese banking system, after God knows how many mergers, swaps, re-assessment and whatever, is still dogged by lousy assets which limits it's ability to assist in Economic development.  Unfortunately, Europe is suffering from the same failure of proper management.  In this environment, the shareholders are being brutalized.

Allow me to digress for a moment.  For all the difficulty Over There, I suspect the situation is even more dire in China.  So why not discuss China?  Simple. I don't know much about it and what I do know I'm not sure I understand.  But, with the understanding that if the lid blows off there, it might not make any difference any where else, we return to Europe...where, with the possible exception of the Brits, they haven't done anywhere near enough (Switzerland is a tale unto its own like everything is in that country).   Why?  how do they differ from us Over Here?

I have mentioned it before but one must understand the one, overriding difference in the financial system of the U.S. as opposed to anywhere else: it is immense and within it the banking system plays a smaller role every year which has been the case for at least the last 25 years.  It is a superb example of the free market at work; one man's meat is another man's poison (to coin a phrase).  Under almost all scenarios, except in singular markets at particular times, there is always a bid and an offer for every type of asset imaginable.  What limits liquidity as we have seen recently is almost always regulation which is why the most flourishing piece of financial markets in recent years have been those areas that have remained most free on government intervention.  We can certainly debate as to whether this has been a good thing but it is clearly observable and its growth has been spurred on by self-limitations imposed upon the use of one's capital creating lower barriers to entry than in more mature businesses.

Let me digress again.  As you know I think Dodd/Frank is a dreadful piece of legislation for the damage it does to the banking system.  But consider this: what it also does, provided you are prepared to live within its strictures (what choice do you have), it damn near guarantees you a job because nobody out there is fool enough to say, "I want to be J.P. Morgan & Co. when I grow up."  Dodd/Frank is the best defense against competition outside the top tier or from anywhere for that matter that could have been devised.  The cost of entry and compliance is simply too high.  This, IMHO, is not a good thing.  But back to the matter at hand.

Europe never--and to this day does not--have anything like the diversity of the financial system of the United States and therein lies a big part of the problem.  I have used this as an example before, but in 5 years Citigroup shed over one trillion dollars of assets deemed either not central to its business or risk assets that were non-performing or in many cases which had been written off.  Remarkably, it wasn't that hard to do,   It lost a hell of a lot of money in so-doing but what has emerged is an extraordinarily well-capitalized institution...not one without future issues...but certainly one able to weather storms in the foreseeable future.  European institutions do not exist in a market where this could be attempted, but at the same time, they didn't even try even when approached by vast pools of capital, primarily from Over Here, choosing to stay insular, much like my Japanese friends of the past.

To be fair, a lot of this has to do with Euro government and the too-close association of politics to the banking system.  Again, Over There, there are few alternatives.  If Euro governments wish to finance themselves it is to the banks they must turn and given the need to finance the deficits which emerge in the social democracies, the entire system of the Euro zone was needed, hence the foolish allowance for all governmental credits to be treated alike.  Greece with a 3% coupon was no different from Germany...except when things go south.  You can sell Germany but you'll be wearing Greece for a long, long time to the exclusion of all other intelligent allocations of credit.

Are there Euro banks in trouble with cluttered up balance sheets and a lack of sufficient tangible capital?  You bet.  The list is known and probably growing and can be found in any newspaper these days.  One name mentioned by everyone is DeutscheBank.  Unfortunately, in addition to many of the problems listed above, DB as we pros call it, may well have a derivative portfolio of unknown quality but which is certainly bigger than a bread box.  That could really hurt but if that is the case is there a contagion worry?  If you think the German Government will allow a default on the part of DB, you my son  are on another planet.  Which brings us damn near full circle.  We could lose a bank here and a bank there, but a big one in a major country?  Not happening.  But what of the talk of no more too big to fail?  Talk is cheap, decisions are expensive and non-decisions are the most expensive.  This is going to get worse, I think, before it gets better but if there is a lesson to be learned, as the good ol' Dane put it: "If 'tis be done what is to be done, twer best it be done quickly."  The Japanese are where they were 30 years ago.  The Euros....

Have a great Super Bowl Weekend.

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