AS ADVERTISED

Big Danny was on the front page of the Journal's business section today just as advertised.  The "most Powerful Man in Banking" was the title.  Ya gotta wonder.  Big Danny never spent a minute of his life working for or in a bank.  In fact, there is no secret as to the fact that taking his marching orders from Crazy Lizzy Warren he pretty much hates banks...well, not all banks, just the ones he doesn't like or who he thinks are too big.

How does he reach these conclusions?

"Nonaya business.  He's Big Danny Tarullo the chief of supervision for the Federal Reserve."

"Whoa!  How did he get that title?"

"Shutupayouface.  He's Big Danny."

"But isn't there a process where...

"Yeah, but he's Big Danny."

"So you mean he just assumed the position?"

"You might say that but it wouldn't be a healthy thing to do."

Danny was a law professor which means he has a fine legal and academic understanding of the operations of the Federal Reserve and of banking.  Which means he doesn't know a damn thing. And therein is the problem.   With the exception of Stanley Fisher there is no one...or very few left...in our Federal Reserve system who knows the business of central banking and in the place which is the point of the spear for the business, the New York Fed, we are rapidly approaching the point where we must ask for the last person leaving to turn off the lights.  Tom Baxter is about to retire as General Counsel.   With his departure there is but Billy the Dud and only memories of what was one of the great financial institutions in the history of finance.

Tarullo and his ilk have no appreciation nor understanding of the business of central banks nor there function.  The present management is little better than a collection of social and political scientists who come to their jobs every days fully convinced that their purpose is to install their particular beliefs on a variety of issues and to try to figure out how best to use the institution to achieve those goals.  They are very smart and very good at so doing but along the way the very fabric of the business of finance in this country (and abroad if the truth be known) is being forever changed through crushing regulation which directs businesses in which a bank can participate and those in which they cannot by simply removing all profitability from the exercise.  As a result we find ourselves faced with "stress tests" supposedly designed to determine how an institution will react to a manufactured set of economic conditions.  We have another one coming in a month.  The last go-round cost the big institutions an estimated $500 million in order to prepare.  I wonder if that capital could have been put to better use.  At best they are an academic exercise created by academics leading to academic conclusions supposedly giving institutions an opportunity to plan for adverse times.  To once again quote Mike Tyson: "Everybody's got a plan until you get hit in the mouth."

Some things are quite clear, however.  Big Danny don't like no international stuff so he don't like Citigroup which if one gets down to it is the only remaining truly international financial entity in the United States.  Why doesn't he like it?  Simple.  He doesn't understand it.  Danny is a simple man or simple likes and dislikes.

Danny don't like complexity and he don't like big.  Why?  One person can't manage it.  Of course did he ever ask himself why must the management be left to one person?  Jamie Dimond knows damn well he can't manage all of J.P Morgan but he knows he has to be responsible for its management.  It is the responsibility that gets him the big bucks...and his choice of managers.  Big Danny doesn't understand that.  He never managed anything.

I think you can see where this is going.  The greatest threat to today's financial institutions is not internal; it is the very entities that are in place to keep them safe...their regulators.  The political influence and sheer incompetence in many cases on the part of the Tarullos of the world is what keeps me up at night.  Autocrats enraptured by their own sense of importance and emboldened by complete belief in their beliefs!  Many years ago whilst serving some time in London I became reasonably close to a very senior official at the Bank of England.  More than once had received a call beginning with, "Charlie, do come 'round this afternoon would you?  Something I want to talk to you about."  My friend knew damn well what it was about which he wished to talk but he never missed the opportunity to run it past a few practitioners he trusted just to be sure.  Same thing used to happen at the NY Fed.  Today?  I doubt it.   They were both very, very good.  But the Old Lady was special.  After five there was always a bottle of Bolly or a special single malt that would turn up.  Regulator?  What regulator?  And his picture never made the paper.

JAMIE AND JEFFREY

Diamon and Immelt, that is, the respective CEOs of J.P. Morgan and General Electric.  They were the big story of the last two days...note I said story because they said one in the same thing.

In a letter to shareholder of Thursday, Jamie rightfully pointed out that as a result primarily of Dodd/Frank, the banking business was stinko with even more to come in the future.  Whole business lines had been greatly curtailed and as a result the net result of the legislation may have been to make the business even more risky in some respects; i.e. the dramatic reduction in liquidity in capital markets which in case you missed it, it was our capital markets, unmatched by any in the world, that has allowed for the recovery that we have experienced...such as it is.  Problem is Jamie runs a bank and when you are regularly blackmailed, over regulated, threatened with criminal prosecution unless you pay up (funny, there has NEVER been a successful prosecution), confronted with conflicting rule and nut cases (Crazy Lizzy) at every turn makes doing your job rather difficult.  Now I have taken Jamie to task in the past but this time I have to give him high marks for, well, telling the truth and having the guts to do so.  We should have more like him and we should have had them earlier both within and without the government.  As is well known, Jamie faced his biggest foe a year ago in the Big C and seems to have come out on top inn that battle.  Hope he does as well in this one.  Good on ye, mate.

And then there is Jeffrey.  Jeffrey has tried desperately for ten years to convince people that he is the CEO of a manufacturing company.  No one bought it.  He ran a bank...and a pretty good one as a matter of fact.  GE Capital still contributes about 40% to the bottom line if I am not mistaken, but running a bank and remaining a good friend of Il Duce (he signed up as AK #1 at the beginning along with Buffet) is a really hard thing to do.  So today, Jeff called it quits.  He announced that for all intents and purposes, GE Capital will be sold.  Stock market loved it; GE was up almost 10%.  Now it's going to cost a touch.  To begin, he's bringing money back home on which he will pay Il Duce's button men in the IRS about $6 Billion.  Then he's on one side of the market so you know he's going to get low-balled.  Then he's promising to buy back $50 Billion worth of shares of a company that just sold 40% of its earnings undoubtedly a discount in order to keep his EPS up there and which benefits...to the greatest extent, Jeffrey Immelt et Cie.   But Duce will be happy.  Betcha Jeff gets a shout-out on Twitter and maybe that is good for the shareholders.  Of course they could use some love; in ten years the stock hasn't moved an inch.  You know, maybe he should have kept GE Capital and sold GE.  Buying Citigroup or JP Morgan a few years back might have been a better trade, but it just goes to show one the effect of regulation, stupidly enacted and stupidly applied.  To wit, stupid results.

Back to The Masters.


Our regular reader, Denny, dropped a line to ask whether yesterday's effort confirmed his thoughts that Russia was a buy (he's long the RFK).  Having thought about it, the answer is probably yes if you can put stops in (I haven't a clue) because the volatility of the situation--not the market--is such that everything can move in gigantic leaps...and if you can afford the loss.  I cannot.  However, keep in mind that the Greek populous does not wish to leave the EZ, a situation which we have not discussed.  One can bet one's boots that any interim measures to keep Greece alive will surely include an agreement that Greece will join in a common policy towards Russia.  Leave the Zone and Alexis has big time trouble with the voter.

THE SILLY SEASON

That's what this time of year is called in the UK, probably because football is done for a full month and there is nothing on which they can concentrate.  Strange things happen and are said.  It kinda holds true Over Here as well especially if you have congressional testimony from the Chairman of the Fed and Crazy Lizzy Warren is around.

Janet Yellen gave folks a whole lot to chew on not the least of which was her advisory warning that certain segments of the market had perhaps gotten ahead of themselves and some decent discussion of where the Fed was and where it was going, not to mention that in her view the jobs picture was not quite as good as some had made it out to be.  Good, solid Central Bank testimony, called for by statute, mostly unexciting but sufficient to satisfy the requirement without putting anybody to sleep. Up rose ol' Crazy Lizzy then, not the least bit interested in all of that monetary stuff but focused solely on whether J.P. Morgan & Co. had presented to the Fed a "living will" as required by the legislative disgrace known as Dodd/Frank and whether Ms. Yellen and her colleagues had accepted it.  Further, if they had not accepted it, then she inquired, why hadn't The Fed exercised the remedies granted to it and broken up J.P Morgan?  Ms. Yellen hung in there long enough so that time ran out on Warren.

Now, one could simply dismiss all this by saying, "stupid is as stupid does," but let's face it the woman is a U.S. Senator and has a hell of a lot of power and influence not to mention her lap dog on the Fed Board of whom we have spoken in the past.  There aren't five people in that august body who believe that a living will could ever work but she is clever enough to recognize that the real lever she has is the possibility to begin reducing the size of financial institutions, as you can be damn sure that a plan, outlined in some 10,000-odd pages covering a financial institution of over $2 trillion in assets under constantly changing markets and conditions will ever be accepted by the Fed. Nobody is that stupid.  But what we saw yesterday is the opening salvo it what is going to become a constant bombardment on the regulatory apparatus and the public to "solve" the "too big to fail" problem by reducing the size of the institutions that fit that category according to the Gospel of St. Lizzy.  And it's going all the way through to 1916 because Lizzy has her sights set on far higher office having now been convinced by the left wing of her party that Hillary must be stopped.

The result will not be success in either the acceptance of her views or her quest, but she has the ability to sure as hell stop the financial legislative process dead in it's tracks.  When recognized, I think we will see the industry itself begin to shrink as a result of this pressure and also as a result of the inability to produce a proper return on the amount of capital required to support a substantial balance sheet.  Once again, I shall be bold in my prediction that within the industry we will see its own form of "inversion"--not for tax reasons but simply to get the hell out from under.  What we shall also see is the migration of corporate financings  from today's institutions to an entirely new breed of financial intermediaries…or principals for that matter…who are far less subject to overall financial regulation or oversight.  The growth of the Blackstones of this world will continue even more unabated.

Perhaps that is a good thing.  I know I'm not smart enough to figure that one out, but it troubles me.   What troubles me even more is that Crazy Lizzy thinks she is.  That's not silly.  That's downright…well…crazy.

BANKS, HERE AND THERE

The focus this week has been on bank earnings which while important are hardly the most important event in the world of banking.  Late last week you may have noticed--or maybe you didn't because it wasn't very well reported--that as predicted in this space a number of times over the last 6 months there was the real possibility that if we didn't stay alert, the  global "understanding" so highly touted by the administration concerning bank regulation might come a cropper…it did.  As suggested and without any warning at all the EU pulled back on it's capital requirements from the levels that had more or less been agreed with the U.S. and allowed continental bank considerable more leeway than had be discussed.  Bank shares across the continent immediately leaped upwards…and a very Happy New Year to you Hans, Francois and Juan.

Meanwhile, back in the lower 48, the talk is all of what other businesses are to be curtailed, eliminated or max-regulated while the ripping off of the shareholders of J.P Morgan winds down in anticipation of a new target (Citigroup?) replacing them in the sights of the government's greatest profit center, the Justice Department and its spawn, any other regulatory entity that can find jurisdiction by means of exchanging a roll of quarters in the petty cash drawer for cash if not less.
Anyway, this week out come the year-end reports of the banks and with the exception of B of A, (which is sort of like the old U.S.S.R. economy where every positive number was 100%), everybody misses their number.  No surprise that a number of institutions reported much lower results in fixed income trading what with the rocket ship (and late burn-out) in the 10 year yield, but the common theme for every institution was the amount set aside for present and future litigation which in some cases was not even fully revealed.  And one sector that was highly touted by the stock boys to show leadership in 2014 fell like a rock.

On the other hand, Blackrock, which seems to have reached mythical status among the cognoscenti, did very well indeed.  Why you ask?  Simple sez I, they're private.  At that brings up a most interesting point of discussion and one of no little concern and even less disclosure.

Since the end of the true crisis period the question of funding the rebirth of the economy has constantly been raised.  the banking system, shattered from loses and under immense--and rightfully so--pressure in regard to their risk management, simply got out of the lending business.  For sure, demand was greatly reduced but you couldn't make a mistake if you didn't do it became the norm and the business of banking, that of taking prudent risk was all but ended.  The Fed in an attempt to kick-start the business, pumped liquidity into the system in unprecedented amounts only to see it round-trip back to the Fed's balance sheet causing untold mischief not only here but especially in emerging markets.  Under attack then, and now, from regulators. lending ceased.

Finance, like many other things hates a vacuum.  Filling the absence of bankers came the shadow bankers.  Enter Blackrock et al. No one, anywhere, seems to be talking about the fact that for the second time in not so many years the business of corporate lending, what we used to call Commercial and Industrial  ("C&I") lending is now being led by a whole new group of bank look-alikes except for the fact that for all practical purposes, they are unregulated.  Now this can be a good thing in the sense that the greatest risk management mechanism around is still the placing at risk of one's own funds; generally it is done very carefully.  Of course if you sit in the offices of the Fed or the Controller of the Currency or the FDIC, it's a nightmare.  You have little knowledge and less control.   Monetary tools become far less useful, and risk oversight is non-existent.  For me the scariest thing about this situation is that unlike highly regulated institutions, the shadow banks can turn on a dime creating vastly different images of an economy literally overnight.

What we have is the remarkable situation that as a result of the government through its regulatory system attempting to reduce the "risk" in banking, it is in effect, creating more unregulated risk with far greater volatility within the system.  Now it is true that the attempt a regulation has been explained as an effort to protect the guaranteed deposits of risk-taking institutions by eliminating the type of risk taken, but ponder this for a minute; Blackrock is a fine firm run by very, very smart people.  Dodd/Frank does not apply to them, yet they engage in every activity of a J.P. Morgan/Chase (and then some) except that they are not funded in part by government insured deposits.  But then again, there is not a commercial bank around today whose deposit base is anywhere near 50% of government insured funds.  And anyone who thinks Blackrock is not "Too Big to Fail" has been spending too much time in Colorado.

There is a natural prejudice against "Big" banks.  OK, let's move on.  Problem is the world has moved on as well and with it the fact that community banks and even mid-sized banks cannot satisfy the financial requirements of many of our leading corporations, many a far sight smaller than IBM.  yet, in our quest for "safety in banking" and the politically rage to extract a pound of flesh we are suffocating that which we all admit is necessary to our growth and prosperity, the availability of sound and available credit from a known system and substituting an entirely new group of players, highly competent but completely unregulated…not to mention a group of institutions which we already know playing by an entirely different set of rules.  So welcome Hans, Francois and Juan…by the way do you know Steve Schwartzman and Pete Peterson?

AN OBSERVATION AND A CONFIRMATION

According to reports published today, the banks lost what might be a big one in the argument about the Volker Rule over the strategy known as "portfolio hedging."  You might remember that this was suddenly discovered by regulator and politicians alike (why not before,…who knows) in the debacle in J.P. Morgan's shop in London which became know as the "London Whale" scandal for it was claimed that the activity being undertaken was portfolio hedging.  

Now if Jaime Dimond can be accused of one thing--and I have--is not knowing when to keep his mouth shut.  To claim, as he did, that what happened was "portfolio hedging done badly" was crap.  Worst of all everybody knew it was crap.  Had he said, "these bastards tried to make an extra buck, got it wrong, tried to double down, got that one wrong too and we decided to liquidate the position when everybody in the world knew it was going to be one way traffic and as a result we lost $6 billion, so we fired everyone involved including some seriously senior people," Jamie might have skated…but he didn't.  And given the excuse, the Carl Levins and Crazy Lizzys of the world were give the perfect opening and nailed everybody…maybe.  We'll see how this comes out but if it is as reported, two things will happen: first, the price of credit goes up for everybody.  Remember yesterday's post?  Ain't no competition out there any more or a lot less of it.  Secondly, feeling constrained, banks will look around for something else to do that they know nothing about, immediately become masters of the unknown and at some point screw that up as well.  Hang around to see if I am right.

Which I may be if history is any guide.  Remember a couple of years ago when I suggested that one of the things our buddies the Chinese would love to do is replace the U.S. Dollar as the world's only reserve currency?  As of last month, the Reiminbi or Yuan--take your pick--became the second most used currency in the settlement of international trade replacing the Euro.  It's way behind the dollar to be sure but these guys have been a functioning society for a few thousand years.  They know how to wait.  Repercussions?  heck, I'm not smart enough.  Ask Joe Biden when he resurfaces.  He's our new Sino expert.

THIS IS HARD, MAN

I will not write about politics, I simply will not except to the extent they affect global finance.  But that's all that's out there; Syria, Iran, Obamacare, debt ceiling battles.  Even the Who Runs the Fed argument if off the front pages.  It's funny, everyone expresses to know the outcome of all these events so one would think that it would be business as usual, but the equities Over Here have traded down  for six days in a row and the ten year, just a week ago flirting with a 3 handle closed today at 2.71,...that's 30b.p. in a week!  The reason given?  Political uncertainty.

There can be humor in all of this.  Some clown from the IMF speaking from Bogota expressed relief on the part of Latin America that the long awaited tightening by the Fed did not occur because the prospect of higher U.S. yields would have pulled money out of Latin America needed for investment.  Say what?  Ever try to keep inflation at the door in an emerging market economy when the biggest money printing machine in the world keeps churning it out and it all seems to wind up with YOU, not for investment but for yield?  And this is the mob that tells people how to do what is right.   Most countries in L.A. would breath a huge sign of relief of tapering began today but it will not.  An interesting development over the past week has been that people are beginning to look much more closely at Janet Yellen, Central Banker, rather than Janet Yellen, feminist dream and discovering that

1. She's not quite as universally loved as believed, and

2. If anything she's more "Brace yourself Bridgett, here comes more liquidity" than all, save for Little Paulie Krugman.

But, it looks more and more as if she is the choice as The Leader will soon tell us when he gets over the butt-kicking he's received over the past few weeks by various foreign scuz-buckets and his home town constituency.  He wants to get this one exactly right. He wont of course, but a proclamation of victory is good enough these days.

Another thing that has been going on out there are the questions being raised as to whether J.P. Morgan is really a collection of bad guys or whether it is just a convenient whipping boy on the part of politicians and regulators who can develop great street creds without accomplishing a damn thing.  Nice to see that someone is reading the blog.

LIFE IS CONFUSING

It is, it really is.  For example, If people without sight wear sun glasses, why don't people who are deaf wear ear muffs?  Or in a negative sense, if the nearly a dozen governmental agencies who now have responsibility for the safety and credit worthiness of our banking system are serious about their mandate why do they keep taking actions that are certain to damage individual institutions or the entire system in general.  I give you the curious case of J.P. Morgan Chase.

Now we all know Jamie Dimon who was up to a few short months ago spoken of in hushed, reverent terms as possibly the greatest banker who ever lived.  Jamie was never that but he is hardly the dim wit that his portrayal today labels him.  And whilst Morgan never was possessed with a "fortress balance sheet," it is hardly the dangerous, ill managed institution that it is being forced into admitting.  All of this stems from the saga of the "London Whale, the head of a derivatives trading team working for the bank's internal investment office who got a big trade the wrong way around and like traders have done over centuries fell in love with his position, doubled down and when jilted for a second time doubled down again trying to make it back while all the time concealing his love affair from his boss.  Truth will out is the old saying, and it did with disastrous consequences for all concerned including our friend Jamie, who, not knowing the full extent of the loss did what Jaime was always prone to do and got his mouth working ahead of his mind.  "No big deal" he proclaimed of a loss that finally came to light as being somewhat north of $6 billion a position which put him at odds with most of the people in the world save for Carlos Slim and Warren Buffett.

Enter, stage left, the SEC led by the new head honcho, Mary Jo White formally of the Justice Department's Second Circuit, a small, brilliant and incredible successful former prosecutor of white collar crime.  Following in her wake, like a school of Remora, came every shape and form of regulator types looking to collect creds from whatever chewed morsels might fall fall from Mary Jo's mighty maw.  You see Mary Jo just wasn't in the business of slapping wrists and collecting a few bucks in fines; oh no.  The new game was to get the perp to admit to wrong-doing...I mean we gotta have us a Bang the drum slowly moment!

When I was in law school a professor of mine gave me a bit of sage advice.  He said the scariest thing I would ever see in my live would be the heading on a piece of paper that said

                                                      The United States of America
                                                                           vs.
                                                                 Charles James

"You don't want to ever see that," said he.  "Just think of the power and might and money arrayed against you."  That goes for corporations as well So, it appears that J.P Morgan & Co. will agree that they were wrong, that they knew they were wrong and will settle for about a billion bucks in order to avoid a trial.  Huzzahs all around and the legend of Mary Jo lives on.  We got the bastards!  A new era dawns!

Of course what happens, now having admitted wrongdoing taking one of the major obstacles to law suits off the table, JPM will be visited by Sue Grabbit and Run, Gonif Gonif and Dreck and every other member of the plaintiff bar, all working on contingency fees, with every possible variation of class action suits that can be conjured up in the fertile minds of trial lawyers which JPM will either have to defend or settle.  Call me curious and confused but I'm having trouble figuring out how tying up this company for 25 years in law suits makes for a better banking system.  I can't seem to understand how giving the Whale immunity in order for him to testify against a couple of guys who worked  for HIM gets us to a better banking system.  Nor do I get how the shareholders, who have already lost about $7.5 billion are going to be better off with this approach.  Doesn't it seem better to incarcerate the highest ranking individuals in the institution if crimes were committed?  THAT gets people's attention and influences future actions.  Of course that's hard to do.  You really have to prove stuff.

Anyway, I'm sure there is joy on Capitol Hill over all of this, with Uber Idiot Lizzy crowing how it takes a woman to get thigs done.  I'm sorry for the rant but the politics that has overtaken reason is getting to me.  When harm is done in the name of good I get a bit irrational.  Sun glasses and ear muffs all around.


Carter:  I'm so confused I didn't get the question.  Explain please.

AN EARLY FALL (FROM GRACE?)

Just a remarkable day in the Fly-Over Zone.  Middle of August and the temperature never rose above 70F under a cloudless sky.  True football weather which, thank goodness, is just around the corner.  A glorious day...but not for Jamie Dimon who was called out--though not by name--by the U.S. Attorney in New York as he announced indictments of two J.P. Morgan employees in the "London Whale" imbroglio.

Jamie has gotten himself trashed by one of many applications of the Law of Large Numbers.  The loss suffered by his bank was a VERY LARGE number to all but perhaps the Warren Buffetts of this world and people take notice.  The larger the number, the higher up goes the blame game and $6 billion gets you pretty much to the top.  Jamie also made the killer mistake of under-stating and under-playing the loss, perhaps even finding a bit of humor in the entire affair before he was in full possession of all the facts and that is a real no-no, completely unappreciated by the regulators and the cops on the beat.  Is he going to recover?  No, not completely.  Once the myth of invincibility is gone, it never comes back.  Jamie is now an ordinary, very bright and very capable guy if there is such a thing, but the minute you start to believe the hype the Gods have a funny way of adjusting reality.  I actually feel a bit sorry for the guy and I never thought I'd be saying that.  I wonder who is next in the blame game environment in which we live?

The other guy I'm beginning to feel sorry for is Larry Summers.  Now as we all know, Larry is not God's first Nice Guy creation, but the manner in which he got trashed today by NYT columnist Maureen Dowd had to be a classic.  Mo must be going through another bad relationship or something because this was most vicious I Hate Men rant in quite a while, focusing on Summers but involving Bob Rubin and even Bill Clinton as well, as the responsible parties in the Crash of '08.    Of course she doesn't know what she's talking about but I must say it was a kick to have that mob attacked by Mo in the Times.  The girls are really pulling out all the stops to get Janet Yellen the Chairgirlship,  and speaking of Janet, her guys at her bank in San Francisco didn't, IMHO, help her a lot in releasing a study which concluded the all the QEs and balance sheet build-up don't have an effect one way or the other.  Their boss is a BIG supporter of the program you see, and that and being a nice person are the two most quoted reason for the support she receives from the street.  The study also states that there is a kind of direct linkage between Fed directional other-speak and market reaction, which of course isn't the case and which hobbles the entire argument, but Fed studies and the Real World are generally not found in space occupied by Real People.  Nevertheless, it wasn't helpful but then again neither is the battle royal going on over who is the next person to occupy what is now the most influencial financial position around.  I say now because with a continued effort to infuse even higher levels of stupidity into the selection process, this administration seems bound and determined to belittle the Fed and present it as just another political component run by a political hack.  Only thing I can compair this to is a day in the 60ies in August in the Mid West.  Weird.

ALL ABOUT THE BANKS

Such was today.  Wells Fargo and J.P. Morgan opened trading with news of far better results than expected with Wells up over 20% per cent on it's net and the Morg a whopping 31% primarily because of investment banking and trading results.  Morg appears to have gotten it just right and suffered little in the last month in the whip-saw environment caused by the babbling from the Fed whilst the success at Wells--after a cursory review--appears to be the result of a dramatic improvement in credit quality resulting in a 50% drop in additions to the loan loss reserve.  As I've often said, I love banking...it's so subjective.  I like Morgan's numbers better; trading results are not subjective, loan loss reserves can be.  But good for the industry all around.

Meanwhile, on another planet, Lizzy Warren was explaining her Back to the Future idea of reestablishing Glass Steagall for the 21st Century.  Enormous brain in this lady's head; no room for any common sense or auditory function.  Keeps saying separate all investment banking type activities from commercial banking and especially from FDIC guaranteed deposits so if the investment banking functions goes toes up taxpayer funds will not be at risk.

Memo to Lizzy:

1.  They are separated as we speak.  Investment banking activities are conducted out of what is known in the trade as Sec. 20 corporations, located in the same holding company but separate from the deposit taking function.

2.  FDIC funds are contributions from banks not the Treasury.  TARP was a political decision.

3.  Investment banking might have been said to have caused the crisis.  Remember Bear, Lehman?

4.  Lizzy you claimed on CNBC today that we had no bank failures between 1933 and 1999 because of Glass Steagall.  Hum.  How 'bout 1974 when half the system was down and out because of REITs.  Bankers Trust stayed alive because of the "subjectivity" of its senior loan guys allowed by the Fed and NY State.  I suspect there were others.  How 'bout 1983 when the world was done because of the Latin American debt crisis?  Subjectivity saved the day there too.  1987? Ditto.  LTCM?  Hardly a Glass Steagall candidate.  2008...well, if you would listen we could talk.  Fact is Liz ol' girl, banks fail because of the riskiest line of business which they practice:  the lending of money...and of course the loss of liquidity which happens when their depositors figure out they stink at pricing credit.

Lizzy is going to be a problem.

Meanwhile, Over There, in a very much bank-related scenario, Portugal's government is about to fall which means the banks will probably run out of cash, which means the Big Guys in Europe will probably lose a bundle as a result of the bail out fund in which they participated, which means Angela is going to have big time problems with the Volk, which means the odds for a default just got very short.  Bye, bye Euroland...maybe.  But are the Brits concerned? Not about that.  The impending birth of HRH whatever is center fold but also occupying everyone's time was the refusal to walk by Stuart Broad after a very thick edge to first slip inexplicable missed by a first class referee in the first test for The Ashes.  All of Oz was furious.

Have a great weekend.

THE GREATEST SHOW ON EARTH

Any hearing in the Senate of the United States but especially any hearing relating to money and banking, money market operations or the operations of banks in general.  Throw in a bit of derivatives, options and cross border management and you have a howler.

The day started with Carl Levin, Dem. from Michigan and chair of the committee, reading a series of questions of which he understood nothing, prepared by his staff who understood only slightly more, to Ina Drew, the former executive at JPM who was responsible for the unit which caused all the fuss.  Now I don't think Ms. Drew is stupid because JPM paid her some $30 million for a couple of years (which she gave back) and JPM is not known for paying that kind of fold to a box of rocks.  She was, however, a lousy witness; halting of speech, uncomfortable and at times looking downright scared.  She also blamed those who worked for her at the time essentially stating that they lied about the true state of their book.  People in her position fall on their sword and move on.  You know the lines, "It happened on my watch" or "I was the one in charge" or the best of them all, I have always been prepared to accept the credit when due to me and the responsibility for failure."  I like that one.  After that comes out is when you blame the lying bastard for not keeping you informed.

OK, let's square up.  Bad trade?  Yep.  Stupid attempt to "double down" to recoup?  Yep.  Stupid to try to cover it up?  Yep.  Anybody get hurt?  Well, the shareholders I suppose but JPM just hit a record high.  Loss of potential capital?  Yep...the shareholder's capital.  Did the bank lie to the regulators?  Who the hell knows.  Mr. Levin is not known as a non-partisan sort.  This report I m sure  contains every piece of mud that could have been dug up and very little exculpatory language as to the actions of the players.  So is the great L'Affair Morgan going down in history as one of the great bank catastrophies of all time?  Nah.  It will have been forgotten in a year or two.  What this is all about is simply another battle in the great Too Big To Fail war, highlighting, unfortunately for Mr. Levin and the Senate--once again I might add-- the codicil to the will of one of the greatest of all known stupidities of  The Financial Reform Act known as Dodd/Frank.

We can go all over this again but to what pont.  Critics on both sides of the argument bring good points from the central issue of size and how big is to big to be managed to the every-day-more-apparent stupidity of Shelia Bair thinking she can close down a $2 trillion institution operating in 100 countries like 7th 8th National Bank of Catpoo, Co.  Some Senator even got into why should we subsidize "too big to fail banks because their cost of funds is actually lower", which

a.   isn't true in all cases and
b.  where it is, in the bidding for wholesale deposits, it's because WITH YOUR STUPID LEGISLATION YOU MADE IT THAT WAY YOU IDIOT!

This will go on for a while with the likes of Levin claiming we need even tougher regulations because the banks will figure out how to get around what we already have given their past actions.  Lunar Base to Carl:  that is the nature of things when you write legislation, and certainly the nature of things when you write stupid legislation.  I once told Charlie Schumer that if you gave me two smart lawyers and three brand, new MBA's who would work 20 hours a day I'd get around any legislation he could write in 72 hours.  He laughed...LAUGHED!  Then again that was before Charlie became a Senator, got filthy rich (how did he do that?) and took a stupid pill.

I couldn't watch it all because I had an appointment with the Doc as we are off for Two Weeks starting tomorrow driving around Va. and points south.  It will not be every day but I'll be here most of the time.  Oh, did you here?  Over There, the Euros told France and Italy that it was fine with them if the two didn't meet their fiscal targets as long as the deficits were used for what amounted to infrastructure development.  I have a feeling somebody in D.C. had the best idea in a loooong time.  I think we must have lent them Joe Biden and his suitcase full of "shovel ready jobs."  How's that for friendship across the waves?  I mean,  after all, why should we have all the yuks?

A TRIFECTA

Finally, something important happened today--well, yesterday and today.  As a matter of fact, three things happened.  Remember the agreement among heads of state Over There of a few months ago? You know, the one on the austerity budget where Angie backed David and Frankie went nuts?  Yesterday, the Euro Parliament rejected it by a wide margin and reaffirmed that austerity is a four letter word in so far as the parliamentarians are concerned (when you are making 200,000 Euros for 6 weeks of work one can see why).  The gang is gathering as we speak and will have the the decision of the Parliament presented to them at this, another two day conference of Heads of State and ministers.  The fireworks should be heard tomorrow.  Reminder: the ECB's umbrella is based on an austerity scenario for Euroland.  While the market watch is on, it is too soon for any firm conclusions as to how this difference of opinion is going to play out.

Important things # 2 & 3 occurred Over Here.  J.P. Morgan got absolutely hammered by a joint committee of the Senate looking into the "London Whale" disaster.  This was an afternoon announcement around the same time as the final Fed report on the latest stress test (couldn't be deliberate, could it?), causing folks like me all kind of problems as there is no time to review it before "going to press."  In that Fed report came the conclusion that the capital structure of both Morgan and Goldman Sachs was inadequate and would have to be corrected before the end of the year.  Mind you, the operative word is "structure." Capital adequacy for both institutions is, well, adequate, but this is a huge double whammy on what everyone was touting as the "best run bank" with the world's greatest banker at the helm and a "fortress balance sheet." Which reminds me of one of the great truism in the financial world told to me by my dear departed friend, Joe Dilworth.  "Charlie," said he, "you have to realize that all banks are screwed up; they're just screwed up differently."  What will be the reaction?  I don't know but I do have some advice.  Hubris, Jamie, hubris.  Find some.

Important thing #3 is the Phoenix-like return of Citibank.  This is a welcome event as it spells out a clear road map as to how these things can be accomplished.  It also provides--hopefully-- much needed confidence in the system and in some of those who manage it.  One thing it should do is point out to our Euro pals how far behind they are in coming to grips with their own problems but of course it will not.  We'll try to have much more on this tomorrow.

HAVE A NICE WEEKEND, YOU JERK

My friend, Gerry, has this great capacity (and propensity) to be a pain in the butt.  He doesn't have much to do, doesn't want to do anything, has too much money to worry about much of anything and therefore has huge amounts of time on his hands to make life miserable for everyone else, especially me.  So it wasn't a surprise that this E-Mail arrives this morning beginning with, "Nice try, Butt-Head, but you left out a couple of things."  Oh, did I mention that Gerry is almost always right?  Well, he is and today was no exception.

The Tale of the Whale has a couple of other chapters that I didn't write about which Gerry, of course, picked up and with great glee shared with me.   He accurately pointed out that in addition to the situation at JPM described yesterday and to which he agrees, there were at least two major structural deficiencies I neglected to point out.  First, it appears that the Investment unit, or CIO in Morgan terms, had its own compliance unit, reporting to the head of the CIO.  At the very least this is not what one would call "best practices," but the mere fact that it reported as such need not be a major event-shaper.  I knew of the existence of this structure but placed little importance on it which is why it went unmentioned.  Perhaps, as Gerry "suggests" more coverage should have been given.  He's probably right and for the oversight, I apologize.

What I did miss, however, was far more serious:  Within the CIO, the head of risk management reported to the head of CIO. In other words, the Hen Keeper was reporting to the Fox.  This is a major failure on the part of Morgan's senior management and should properly fall at the feet of Dimon and his Lieutenants.  The house cleaning that has occurred indicates that Jamie and the Board learned the lesson...of course the tuition was $6.5 Billion but hey, it was worth it.  And as for me, My week-end shall be spent in embarrassed seclusion, thinking evil thoughts and plotting revenge...along with a firm determination to do better.

If you missed it--and you probably did--there was a very important decision handed down today buy the Court of Appeals for the D.C. Circuit involving the so called "Recess Appointments" made by The Leader to the National Labor Relations Board.  There are certain positions that must be approved by the Senate before an individual is confirmed to the post and a member of the NLRB is one.  The President, when the Senate is nor in session may make what is known as a "Recess Appointment, good until the sitting of a new Congress.  The argument here was whether the Senate was in recess as claimed by The Leader or in continuous session.  The fact ruling in the lower court that the appointment were unconstitutional was affirmed by the D.C. Circuit.

So who cares, you ask?  Well, not me, BUT there is another case being heard relating to Richard Cordray, the recess appointee to the position of head of the Consumer Protection Bureau, set up under Dode/Frank and organized by crazy Lizzy Warren who, having not a chance of being confirmed, runs for the Senate and wins  which means she'll have less opportunity to make a meal out of things than she would in this position which, as designed, reports to no one.  Enter Cordray, one step removed from a political hack, placed in office as a recess appointment but under the same set of circumstances as the NLRB 3.  That appointment is presently under judicial review and will probably be torn down as well.  Bye, bye Cordray who will never be confirmed as well.  Both cases will be appealed to the Supremes and if taken up will no doubt be affirmed, IMHO.  Delicious.  We now have this insane piece of crap legislation rudderless, meaning who knows what happens.  However, if The Leader and his mob continues to act in this fashion (see: "Don't Need No Damn Constitution") more of this is going to occur.  Guys, we don't need it.

Over There, the leaders are on their way home from Davos having accomplished nothing...or is it not having accomplished anything?  Probably the latter.  Could have done as much here, in the fly-over zone.  Same cold temperatures, same snow, waaaaay cheaper.  See you next year?  And as for you, Gerry, thanks for making my weekend.

BAD WEEK TO BE A GREEK

This was going to be the headline yesterday but then things got even better.  Jamie Dimon, idolized genius of banking, delphic oracle to Jim Cramer (The Mouth that Spout), Chairman of J.P. Morgan and son of New York (and a Greek businessman from Astoria screwed the pooch.  Now I could be really unpleasant because I'm in a long line of people who doesn't like Jamie very much at all and say biblical things like. "Pride goeth before the fall," but I'm not going to do that.  He is a pretty smart guy and has probably figured that out by himself but in the meantime it is fair to ask how what was always considered to be a very good bank at risk management got themselves into a mess that will probably have wide ranging ramifications in regard to regulation overall and the stupid Volker Rule in particular.  The howling and screaming by people who know nothing on subjects about which they know less is a sight to behold.  "Gambling with the Public's money!"  "Complete fraud!"  "Thieves!" and things one can't put in a family blog.  Truth in any of them?  I haven't a clue.  Like everyone else including the accusors I haven't any idea what happened but if put on the spot my answer would be a simple, "they got it wrong."

This business of banking these days can get complicated and there is no qestion that a huge, international  risk taker like Morgan faces greater risk profiles in its businesses than the new darling of the talking head set, Wells Fargo.  However, one must also keep in mind that deep dow, what all banks do primarily is service their clients and today few large wholesale clients are without internayional exposure.  We are, for better or worse, a global economy and our banking systems...and I say systems...because the United States is not the only country that is wrestling with the very same problems.

A particular moron on tv today, I will not say who, shouted that there would be no need to hedge anything if, like in the good old days banks just made good loans.  Back then we had no derivatives!  No need!  Well, I was plying my trade in the good old days and indeed, we had no derivatives, but we did have futures both in foreign exchange and own currencies.  We had insurance...we weren't smart enough to call them CDS's...it was just insurance.  We hedged loans, currencies and our foreign branches.  We did a lot of the same stuff but we operated on an age old acronym; K.I.S.S. Keep It Simple Stupid.  Maybe it was because we actually used to go to Church in those days and did believe that Pride did in fact go before the fall.  I will bet that what happened here was that the boys in the risk management unit put on a perfectly good hedge against whatever risk was out there and fell in love with what they had created.  I will bet that they were not a profit center in the normal course of their risk arb business but felt that this hedge was so good (and had probably been profitable on a mark basis for a short term) that they decided, what the hell, let's MAKE a buck for the shareholder rather than just PROTECTING him and doubled down.  Now here's something you might want to keep in mind:  in any kind trading whch involves position taking there is the anticipation that you will sometimes get it wrong and there is a stop/loss number that tell you when to get out.  In other words, the risk manager says to himself, "self, if this goes wrong I expect to lose this amount per hour/day/week."  I can afford to do that, but I cannot lose any more so I close out the position."  Yep, banking is about the only business around where you expect, at some point in time, to lose money.

Another thing you may wish to keep in mind: you cannot hedge volatility.  You can anticipate, indeed expect, negative chages in situations but you cannot predict the speed at which they change.  I will bet that the people at the center of this thing, believing they had a winner, increased their exposure  which alerted the markets (remember the WSJ stories of a month ago about the London "Whale"), who decided that perhaps they were too far out there, shorted the positions against the Morgan Trade and when the overall market roiled as it did in the past month (think Spain, Greece, Euroland in general) the volatility was too great for Morgan to unwind.  The End.  Want to bet me?  Hell,  I'm an old trader but I was never a bold one.  There are no old, BOLD traders.  

And so, poor, ol' Jamie has to explain just why he didn't stop what happened to people who neither understand nor care; they just want a scalp.  The delicious personal thing about all this is that four years ago, Jamie raised more mone for the election of The Leader than anybody on the Street and it is now The Leader's guys who want to collect Jamie's coup.  Pride goeth, baby.  Yeah, you screwed up and I admit to being tickled to death by the slaughter of hubris, but you didn't deserve all this...at least I don't think you do.  Do you?



Next week, the Real Greeks and what happens with bank regulation in light of recent events

MORE OF THE SAME

Oh my.

China's economy grew at an annualized rate of only 8.1% in the last quarter , well below estimates.  The sky didn't fall but the equity markets did.  Italy's 10 year auction didn't help a bit with bids of nearly 6.00% and of all things, J.P Morgan, led by the World's Greatest Banker, beat estimates by just a smidge, along with the World's Greatest Bank, Wells Fargo, who beat by just  2 cents.  Gloom was the highlight emotion on the Street this morning.  It got worse.  The Dow closed down 125 points.

I'm not surprised about China.  China, in the space of just a few years has become a middle-income country and as such you simply can't expect double digit growth from such a higher base.  Italy--well, we've spoken enough about Europe and the box in which they've put themseves  with unrealisticly false assumptions of the overall economic future of the region and a single-minded focus on saving the banks.  But frankly, the less than exciting performance of the two banks considered to be the pick of the litter troubles me.  Given the economic and job numers we saw from the end of 2010 I would have thought that the claimed pick-up in economic activity would have resulted in a stronger performance but that was not to be.  Either the numbers were false or the economy had but a spurt...a false start so to speak...that did not result in increased financing opportunities.  Admittedly, I have not gone through the detail of the numbers but with conditions as favorable as they appeared, I expected better.  As a result, I am now eagerly awaiting Citigroup's release next week.

The conventional opinion is that in the face of the ongoing work-out of the retail housing sector, it has been difficult for the industry to attain personnel reductions and as a consequence, overall cost reductions.  No doubt this is true but I suspect that the projected revenue numbers, even at considerably reduced levels, have been impossible to obtain as well.  Coupled with the still almost complete uncertainty in the implementation of Dodd/Frank, the industry does not find itself in a good place.  Unfortunately, in my opinion, there is nothing on the horizon to make one become optomistic.  This is shaping up as a verry, very tough year.

Anyway, I'm having an early dinner, a bit of wine and off to bed.  Everton/Liverpool tomorrow bright and early in the first semi-final of the FA Cup  followed on Sunday by Tottenham/Chelsea.  Classic cross-town rivalries at Wembly.  For some happy few there are things more important than the financial state of the planet.  Let's go you Whites!

Have a great weekend.

YO, JAMIE! HOW'S EUROPE TREATIN' YA?

J. P. Morgan & Co. released their results for the fourth quarter this morning; they stank.  No surprise there but what was a real surprise was that their chairman, Jamie Dimon blamed it all on Europe.  Now remember a few months back when The World's Greatest Banker since some Medici proclaimed that Europe was a problem for the Europeans and not us, a view that was greated as pure insightful genius by none other than Jim Kramer?  Well, Jamie, if you liked how that worked out for ya you should just love what may be coming down the road as a result of today's events in Euroland.

The sun rose to reports that S & P was going to downgrade everybody except Germany.  As of this writing nothing official has been released but the French have admitted to a downgrade as have the Italians but no one is sure as to whether the downgrades are one or two (or more) notches.  A drop to AA+ for France would be one thing; to AA quite another as double drops at that level are quite unusual.  One thing that is sure is that the price of poker just went up for everybody and the size of the Euro bail-out fund certainly got more expensive on a greatly reduced amount.  However, if Massimo is correct and everything now has been placed on the shoulders of the ECB, the actual effect going forward my well be less than what had been assumed just a few short months ago.  I don't know.

While markets were absorbing this piece of news, came word out of Athens--from the creditor side of all places--that talks on the Greek restructuring had been suspended and no date for resumption had been agreed.  The spokesperson was very open on the reason.  No agreement had yet been reached as to the pricing of the restructured debt which is another way of saying the cost to he creditors was too great for them to agree to a "voluntary" restructuring or as they are now calling it, an orderly default.  As we have often mentioned, this round of sovereign restructurings is a good deal different than those of the past inasmuch as the creditors, a diffuse lot, whose goals are different and who are not easily subjected to pressure from official sources as were the banks in times past.   Call them by their real names:  HEDGE FUNDS.  Now they can be forced into a restructuring by, as we have explained before, the Greek Parliament changing the law and imposing a collateral action clause on the debt agreements enabling the Greeks to force a restructuring with any percentage of the creditors agreeing that is needed.  Just count noses boys and pass the law inserting the number!  This little jewel was dreamed up some time ago by the afore-mention Cleery, Gottleib and used successfully against creditors who were stupid enough to lend money subject to local law and jurisdiction...which is just about everybody today.  As I told you, Cleery is very good.  


Not that the Hedge Funds will care mind you.  You see, if this happens, you are faced with a real, honest-to-God default and that triggers all of the insurance policies or credit default swaps--remember those little guys--that are out there, and---yep, you guessed it--nobody has a real handle on how many, how much, or for that matter issued by whom  there are.  One thing for sure, however, the Hedge guys own them and will expect to be paid.  Now as these items are generally not on the balance sheet it may turn out that institutions with a direct exposure may have indirect exposure as well.  If Oliver Hardy were still around he might be heard to say, "Now isn't this a fine kettle of fish you got us into, Stanley!"   Greek fish stew Jamie, you should know about that.  Hey, have a GREAT weekend!

..TWO FROM COLUMN "B"

Change of plans. We are not going to speak as advertised. Rather, let us take a quick look at the extraordinary statement put out by the Treasury today concerning our friends in Beijing. It was so extraordinary that Our Hero felt it necessary to call selected legislators up on the Hill to warn them that it was coming. What Treasury has decided--despite 2 years of The Leader's comments to the contrary and Our Hero's testimony of 2 months ago--is that the Chinese have not been manipulating their currency after all. Now one would think that a policy reversal such as this would cause a major ruffle in the halls of the popular press, but it seems to have snuck by--at this point at least--with barely an eyebrow raised. Remarkable.

Frankly, it was not an unexpected announcement but one might ask, for example, what did we get in return for giving the Chinese a Get Out of Jail card with not only ourselves but with the IMF who was about to "look into the matter"--no laughter please-- and our European allies with whom we are "entering a new era" of mutual trust and respect. As has been mentioned, uncomfortable is he with a demand note on his house and the prospect of raising God knows how much new debt to fund a massive deficit spending program. I suspect we received bupkus other than vague promises of cooperation in various areas. As with the results of the G20, we are getting rather good at that sort of thing. Make no mistake, this was not a decision reached independently of...ah...discussions with the subject in question. At some point the Chinese will raise the curtain a touch. I'm sure it is just too delicious for them to remain totally quiet. We shall wait and watch.

The other news of the day that gazumped yesterday's intentions was an extremely detailed earnings announcement from J.P Morgan. As suspected Morgan beat the street as did Goldman but with a broader achievement across the lines of their business. It appears to have been a rather good quarter and one should note the rather large addition to the loan loss reserve that resulted. This is of course good news/bad news; the troubles aren't over but this institution at least seems to be dealing aggressively with what is there. I think we will be seeing more of this sort of thing as the earning season progresses, but Our Hero, apparently, still intends to go forward with his plan for the sale of toxic assets perhaps as early as next week. How or why is beyond me, but the Treasury is still a very large creditor of all these banks (indeed, government guarantees or quasi-guarantees of bank debt allows for funding at very attractive levels) and I suspect will be used as a big stick in the negotiations. As we have noted, time tends to heal an awful lot of things if one just doesn't do anything stupid, and allowing banks to earn their way out of problems is a tried and true method of problem solving. We have done it before on multiple occasions. Sadly, I am not optimistic that this group will learn from the past, but hope springs eternal as the complexity and lack of disciplined thinking may doom the effort. Again, we shall wait and watch.

Finally, there seems to be a story a day concerning another rain-maker leaving an institution burdened with TARP money for greener (Yes, a pun) climes of a lesser regulated firm. Keep remembering gang, you pay peanuts, you get monkeys. In the end, it is always about people. This country has built a remarkable financial sector on the hard work , drive and, yes, greed of a number of individuals. Were there bad apples? Of course and I would be proud to pull the lever that opens the trap door. It would be a shame, however, if mindless politicians destroy all the good that has been built and allow it to migrate to far distant climes whose interests do not necessarily mesh with our. Like China, perhaps? Can't happen? Think again. We are about to enter one of the most dangerous and competitive periods we have faced, and...ah, the hell with it, I'm getting preachy. Back to business tomorrow and the Fed.