If you have been following the banking story in the Journal it is probably becoming quite clear that Big Danny and his boys don't like banks. They don't like other institutions that have some of the traits of banks like insurance companies. Now they just can't say, "There will be no more banks," so the approach they are taking is to simply regulate them to the point where it is very, very hard to make money, at least at the level where one covers one's cost of capital which today is placed--completely without conviction--at 10%. Maybe at that point they will go away.
And maybe they will. If this reign of regulatory terror continues the institutions may remain but they business that has been part and parcel to banking may well move somewhere else of simply disappear. Just the other day Mr. Tarullo announced that there will be new and certainly higher capital requirements on systemic institutions that should be announced right after the results of the stress tests which are expected around June 23. As an aside, one should keep in mind that there are two aspects to these stress test; one objective and one subjective. Yep. Subjective. On top of that no one knows how the rules are set, so passing a stress test is like being told to shoot behind the duck and even if you hit it you still may not pass because the judge didn't like the way you shouldered your gun. That is why Citigroup failee its stress test a couple of years ago. Big Danny doesn't like Citigroup. Why? Who the hell knows but they failed on the subjective measurements.
Unfortunately, the stress tests are to determine, in concert with the "living wills" just how well a bank can absorb adverse environments and if not, how to keep them from costing the taxpayers a bundle of money. One last time (I'm lying of course): living wills are the biggest load of bovine fertilizer ever created in the finance business. There isn't a lawyer alive who will admit otherwise. Yet, when a entity like the Federal Reserve proclaims an institution is "not in compliance," many things happen; the first and most important being a loss of confidence in the marketplace in the affected institution. It also results in a loss of confidence in the entire banking system in which the institution resides. The dumbos in Washington think the effect is the opposite: the Fed is on the job, all are secure! Wrong. To begin, most of the intelligent world knows that the first thing a Central Bank should do is keep it's mouth shut. Quite inspires confidence, not the babbling, headline grabbing, narcissistic bleatings of a self-styled reformer. At the end, stupidity in one's central bank should not be revealed as occurred in the Metropolitan Life law suit when the court simply told the Fed it was clueless in regard to what it was trying to regulate. But onward it goes and if allowed to continue it will win as having the ability to compensate their shareholders, the banks will simply, give up and move to other businesses or in an attempt to save what they have through reduced cost, allow the machines and programmers to do it, battling furiously against each other to prove that "My algorithm is better that yours." We have seen how that has worked out. Mark to model///what's wrong with that? Of course when mistakes...or heaven forbid, stupidity... occurs in nano-seconds...Never it seems has it crossed the mind of the Fed that they may be increasing future risk rather than reducing the same.
And so, the future of banking? The lines of business will be there but in the hands of others. Hedge funds are heavily in the lending business as we speak. "Wealth Managers" are a major factor in trading. The distribution of risk is alive and well but to the clients of hedge funds...in some cases whether thy know it or not, and in many cases whether they understand the risk or not makes them the intermediators. The Fed rants against Jamie Dimond and his compensation of $26,000,000; how do you deal with a hedggie whose comp is $1,000,000,000. Well, you can't because you don't regulate him and more importantly, you don't regulate his business nor can you because he's private, you see and there are no depositors or shareholders to worry about. You might also think about the over $11 billion is publicly held debt outstanding whose liquidity has already been greatly reduced because the Fed has made it too expensive for a bank to be in that business in the size required. When that effort is increasingly left in privately held hands will the holder of the same or the overall taxpayer benefit? Not from where I sit, but I've been wrong before. Not this time I think.
Some smart guy once said, "Power corrupts and absolute power corrupts absolutely." Somebody had best try to stop these guys before they do truly serious damage not just to the system but to the country as a whole. We might start to pay attention to this seemingly growing myth that the Federal Reserve is this vast wealth of information and knowledge, inhabited by the smartest people we have. It never was although in the past it was far more in approaching this status than it is today. Then, it was inhabited by people who understood the true role and more importantly, understood their limitations in an increasingly complex world. Today, we have poor Janet who seemingly wants to do good and Billy the Dud who is incapable of speaking in other than profound terms as to the wisdom and truth of his models proving that all that has been done was fully in the right............except that......
.........May Jobs came in today at 38,000.......Those not looking for work was at the highest percentage in over 40 years--93,000,000 Americans who have dropped out......March and April revisions were down 58,000. And just a week ago EVERYBODY was alerted to a "normalization" in June because of the rosy outlook. And you guys are charged with guiding the American financial system? Where the hell did we go wrong?
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