It remains Christmas in August for the banking business as the Fed announced that they aint doin' nuttin' for the foreseeable future in regard to interest rates. As the saying goes, even a banker can make money when his cost is zero, so look for continued excellent bank earnings through the third quarter. Having said that, I don't mean to imply that ALL banks are looking at a rosy future for earnings. As we pointed out a month or so ago, those banks with large trading business will be the ones coining it but perhaps things might not be so cut and dry for main street and what we have taken to call the regionals.
The world is still not a happy place, and while corporate earnings have been good, the results come as a response to massive cost-cutting and an exceptional rise in the productivity index of well over 6.00%. There has been little to no top line (revenue) growth and without that, an upward tic in the employment picture is not on. The economy is fragile at best and while it is universally agreed that the worst may be behind us a bright economic picture is not ready to be painted. I am worried about regional bank earnings, opportunities to extend credit on a sound basis and deteriorating credit portfolios especially in the commercial real estate sector. The big guys got a bail-out and rightfully so, (more about that in a bit) but I doubt if the same kind of largess is going to be available to their regional brethren.
This dichotomy, to an extent explains why the papers have been full of stories of a scramble for talent on the street with exceptional compensation packages being offered especially to capital market mavens. Make hay while the sun shines seems to be the rule and the bet is that in these exceptional times, exceptional performers can earn their weight in gold. This was reinforced today when The Leader's pay czar, Mr. Feinberg, refused to intervene in the $100,000,000 reportedly owed to the afor-mentioned head of the Citigroup subsdiary, Phibro under his employment contract. Look for rock-solid contracts to be the future norm--until interest rates move up. Funny, the big bucks get paid when it's a sure thing, not when you really have to earn it. One would have thought that it should be the other way around, but hen, what do I know.
So, in past weeks I've been knocking the Too Big To Fail theory of regulation and as a result, I got a call from a friend of mine, a very senior regulator Somewhere Out There in the great world of finance.
"You're mad, you know."
'Why?"
"Do you have any idea how many clearing functions Citibank performs worldwide?"
"More than a handful I suspect"
"A handful?! It's in the hundreds!"
"I should be impressed?"
"No. You should be bloody terrified! They stop, everything stops. Same with B of A. In the U.S., 39% of credit card are issued by them. God know what the number is outside the U.S."
"Hummm. You mean if they go sneakers up, I probably wont have to pay my bill for months, if ever?"
"Means nobody pays you either if your damn pension is paid through them."
"Ah. I see."
"Now you know what systemic means, not just your bloody stupid, "That's when everyone gets the crap scared out of them at the same time."
"You make a point. I might have to revisit my reasoning a bit."
"A bit!" You sound like that fool Krugman."
"He has a Nobel."
"So does Yasir bloody Arafat."
"A valid evaluation of the award I must admit. But tell me, would you not concede that things have gotten a bit out of hand? Institutions have gotten perhaps a bit too big?"
"And if I say I would, do you have a solution?"
"No."
"THEN DON'T BLOODY PRINT THAT!!!"......."Oh, and Charlie..."
"Yeah?"
"Your description of systemic risk."
"Yeah?"
"We use it all the time. Stay well."
I'll try.
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