US Fed Helps the Middle Class?
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Category Archives: Big Banks
Liquidity Risks Across the Globe
The common methodology better explains cross-sectional differences in lending by internationally active banks than lending by purely domestic banks.
The channels of transmission of liquidity shocks to bank lending differ across banks. Deposit funding matters more for the domestically oriented banks. In contrast, internal liquidity management strategies and official liquidity support matter more for the banks with foreign affiliates.
The common empirical model explains more of the cross-sectional and time-series variation in domestic lending than in net-due-to (such as intrabank lending) or foreign lending. This finding suggests higher stability of domestic lending. At the same time, we see cross-border lending growth is more sensitive to liquidity risk in relation to the balance sheet characteristics of the banks. An interpretation is that cross-border lending tends to be subordinated to domestic lending activity as stress conditions change. Liquidity Risk
Events in Germany Post Bail-outs
This anti-ECB sentiment in Germany has swelled during 2014, as Draghi’s attempts to increase the eurozone’s low inflation have departed further and further from economic orthodoxy. German conservatives have greeted each new policy with displeasure. The German media has called negative interest rates “penalty rates,” claiming they redistribute billions of euros from German savers to Southern European spenders. On Sept. 25, German Finance Minister Wolfgang Schauble spoke in the Bundestag of his displeasure with Draghi’s program to buy asset-backed securities. Judging from the German hostility to even “quantitative easing-lite” measures, the ECB’s attempts to rope Germany into further stimulus measures could prove troublesome indeed.
All of the measures the ECB has announced so far, however, are mere appetizers. Financial markets have been demanding quantitative easing, a broad-based program of buying sovereign bonds in order to inject a large quantity of money into the market. Up to this stage, three major impediments have existed to such a policy: the German government’s ideological aversion to spending taxpayers’ money on peripheral economies; the political conception that quantitative easing would ease the pressure on peripheral economies to reform; and the court case that has been hanging over OMT (the only existing mechanism available to the ECB for undertaking sovereign bond purchases). Notably, the OMT in its original guise and quantitative easing are not precisely the same thing. In the original conception of OMT, the ECB would offset any purchases in full by taking an equivalent amount of money out of circulation, (i.e., not increasing the money supply itself). Nonetheless, any declaration that OMT is illegal would severely inhibit Draghi’s room for maneuver should he wish to undertake full quantitative easing.
This confluence of events leaves Merkel nervously awaiting the decision of the European Court of Justice. In truth, she is in a no-win situation. If the Luxembourg court holds OMT illegal, Draghi’s promise would be weakened, removing the force that has kept many sovereign bond yields at artificially low levels and permitting the desperate days of 2011-2012 to surge back. If the European Court of Justice takes up the German court’s three suggestions and undercuts OMT to the extent that the market deems it to be of little consequence, the same outcome could occur. And if the European Court of Justice rules that OMT is legal, a sizable inhibitor to quantitative easing will have been removed, and the possibility of a fully fledged bond-buying campaign will loom ever closer, much to the chagrin of the German voter and to the political gain of the Alternative for Germany. Germany’s Fight
Why QE Does Not Work Post Crisis
Stephen S. Roach writes: QE may have been a resounding success in some ways – namely, arresting the riskiest phase of the crisis. But it did little to revive household consumption, which accounts for about 70% of the US economy. In fact, since early 2008, annualized growth in real consumer expenditure has averaged a mere 1.3% – the most anemic period of consumption growth on record.
This is corroborated by a glaring shortfall in the “GDP dividend” from Fed liquidity injections. Though $3.6 trillion of incremental liquidity has been added to the Fed’s balance sheet since late 2008, nominal GDP was up by just $2.5 trillion from the third quarter of 2008 to the second quarter of this year. As John Maynard Keynes famously pointed out after the Great Depression, when an economy is locked in a “liquidity trap,” with low interest rates unable to induce investment or consumption, attempting to use monetary policy to spur demand is like pushing on a string.
This approach also has serious financial-market consequences. Having more than doubled since its crisis-induced trough, the US equity market – not to mention its amply rewarded upper-income shareholders – has been the principal beneficiary of the Fed’s unconventional policy gambit. The same is true for a variety of once-risky fixed-income instruments – from high-yield corporate “junk” bonds to sovereign debt in crisis-torn Europe.
The operative view in central-banking circles has been that the so-called “wealth effect” – when asset appreciation spurs real economic activity – would square the circle for a lagging post-crisis recovery. The persistently anemic recovery and its attendant headwinds in the US labor market belie this assumption.
Nonetheless, the Fed remains fixated on financial-market feedback – and thus ensnared in a potentially deadly trap. Fearful of market disruptions, the Fed has embraced a slow-motion exit from QE. By splitting hairs over the meaning of the words “considerable time” in describing the expected timeline for policy normalization, Fed Chair Janet Yellen is falling into the same trap. Such a fruitless debate borrows a page from the Bernanke-Greenspan incremental norm. QE Post Crisis
Retiring USAG Holder Did Not Hold Individuals Liable for Criminal Activity
Attorney General Eric Holder has efforts and achievements to be proud of, no doubt, but will probably be remembered above all for something he didn’t do: prosecute top executives for their role in the 2008 financial crisis.
He declined to hold senior executives accountable not because he wished to be soft on financial crime but because of a strategic error. In a 1999 memo written when he was deputy attorney general under President Bill Clinton, he’d explained how prosecutors could charge corporations as criminal enterprises. In 2002, the testing of that doctrine on Enron Corp. auditor Arthur Andersen LLP caused the company to fold, and thousands of innocent people lost their jobs.
During and after the financial crisis, Holder kept the focus on corporations, but moved more cautiously. Fearing a repeat of the Arthur Andersen debacle, prosecutors were careful to leave companies standing, even as they extracted tens of billions of dollars from banks for transgressions ranging from mortgage-related fraud to laundering money for drug cartels.
The inhibition was understandable. Yet it arose because, under Holder’s leadership, prosecutors lost sight of what mattered most: holding individuals, not companies, accountable for crimes. Of 21 separate actions against major financial companies from 2009 through May 2014, only eight were accompanied by charges against individuals, and none of them were high-level executives. The authors of any offenses related to the 2008 financial crisis can relax: In most of the cases, the statute of limitations now applies.
Could it be that nobody went to prison because no crimes were committed? This seems unlikely, at the very least.
Holder’s successor should strive to put this right. First, insist that prosecutors taking action against companies charge individuals, too. Second, eliminate non-prosecution agreements, in which prosecutors settle without pressing charges. These make it too easy to hide bad behavior or subject companies to shakedowns. Third, ask Congress or the Judicial Conference which drafts changes to the rules of criminal procedure — to give judges power to review deferred prosecution agreements, in which prosecutors file and settle charges, to make sure these serve the public interest.
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US Educated Mubarak Rashad Khamis to head Central Bank of UAE
The UAE said on Monday that Mubarak Rashid Khamis Al Mansouri has been appointed as the new governor of the country’s central bank, replacing Sultan Nasser Al Suweidi.
The move was announced as part of a federal decree issued by UAE President Sheikh Khalifa bin Zayed Al Nahyan to restructure the board of directors of the Central Bank of the UAE. Mansouri is the chief executive of Emirates Investment Authority, a federal investment fund.
According to the decree, Khalifa Mohammed Al Kindi will be chairman, Khalid Juma Al Majid, vice chairman, and Younis Haji Al Khoori, Khalid Ahmed Al Tayer, Khalid Mohammed Salem Balama and Hamad Mubarak Bu Amim will be board members. All will serve a four-year term, official news agency WAM reported.
Mansouri, who served as a central bank board member in the past, also sits on the board of the stock market regulator, the Securities and Commodities Authority, as well as telecom operator Etisalat, Abu Dhabi Securities Exchange and some other Abu Dhabi entities.
Mr. Mubarak Rashed Khamis Al Mansouri has been the Chief Executive Officer of Emirates Investment Authority since May 2008. Mr. Al Mansouri has been Governor of Central Bank of United Arab Emirates since September 23, 2014. He served as General Manager of The Abu Dhabi Retirement Pensions & Benefits Fund. He serves as Director at Arab International Bank, Abu Dhabi National Co., Securities & Commodities Authority of UAE (SCA), Etisalat Misr in Egypt, Emirates Telecommunications Corporation and Etihad Etisalat Company. Mr. Al Mansouri has been Director at Abu Dhabi Securities Exchange since May 2010. He has been a Director of Central Bank of United Arab Emirates since September 23, 2014. He served as Director at Abu Dhabi Holding and National Central Cooling Company PJSC. In 1994, he worked on establishing the âEURË UAESwitchâ which started operations in 1996 and was able to connect all bank ATMs in the UAE. He has Master’s degree in Finance from University of West Florida, USA.
Barclays Fined for Failing to Safeguard Customer Assets
British bank Barclays was fined 38 million pounds ($62 million) on Tuesday for exposing customers to unnecessary risks by failing to ensure client assets were properly safeguarded and adequate records kept.
Imposing its highest fine for client asset breaches, Britain’s financial regulator said there were “significant weaknesses” in Barclays’ systems and controls between November 2007 and January 2012 that put 16.5 billion pounds of client’s assets at risk.
The Financial Conduct Authority (FCA), which has tightened rules governing client asset protection since the collapse of Wall Street bank Lehman Brothers in 2008, said that customers risked incurring extra costs, lengthy delays or losing their assets if the bank had become insolvent.
“Barclays failed to apply the lessons from our previous enforcement actions, numerous industry-wide warnings and exposed its clients to unnecessary risk,” said Tracey McDermott, the head of enforcement and financial crime at the FCA.
UK to Make Market Manipulation a Criminal Offense
Bloomberg notes: Amid a spate of scandals over the rigging of financial benchmarks ranging from commodities to currencies to interest rates, the U.K. government is making a bold move toward restoring confidence: By the end of this year, it plans to make manipulation a criminal offense in all the affected markets.
The U.K.’s plan — aimed at maintaining London’s role as a major financial center — raises some questions. Can’t investors look out for themselves? Wouldn’t tweaking the way markets are designed, combined with the risk of damage to reputation, suffice to keep traders in line? No and no.
“Buyer beware” doesn’t apply. These markets aren’t casinos, where people can choose whether to play. Trade in money and commodities is central to the functioning of the global economy. The prices set in these markets affect what people pay for everything from gasoline to mortgages. If insiders manipulate them for personal gain, they do so at the expense of millions of ordinary consumers.
And reputation, by itself, isn’t enough of an incentive to keep traders honest. The profits from manipulation — and the bonuses they entail — can be huge, and traders and executives change jobs too often for the good name of an institution to carry much weight. Consider: Many of the world’s largest banks lied about their borrowing costs for years, in some cases with the knowledge of senior executives.
Regulators are rightly taking steps to make benchmarks less vulnerable to manipulation, in part by requiring them to be based on observable transactions (rather than relying on traders to tell the truth) and administered by independent parties (rather than by the same banks that set the prices). Good market design will help, but it’s no panacea. Traders managed to rig currency benchmarks that already met regulators’ guidelines.
Stronger deterrents are needed. Fines alone fall short: The billions of dollars that banks have paid hit shareholders, whose control over corporate culture and behavior would be limited even if they chose to exert it. The threat of criminal penalties will be much more potent.
US Fed Failed to Regulate Banks
Michael Lewis writes: The US Fed failed to regulate the banks because it did not encourage its employees to ask questions, to speak their minds or to point out problems. These are detailed in 46 hours of tapes obtained by Jake Bernstein.
Just the opposite: The Fed encourages its employees to keep their heads down, to obey their managers and to appease the banks. That is, bank regulators failed to do their jobs properly not because they lacked the tools but because they were discouraged from using them.
The report quotes Fed employees saying things like, “until I know what my boss thinks I don’t want to tell you,” and “no one feels individually accountable for financial crisis mistakes because management is through consensus.” Beim was himself surprised that what he thought was going to be an investigation of financial failure was actually a story of cultural failure.
Swiss Reported Receiving Billions of Russia Rubles Post Sanctions
Reiable sources report that several hundred billion swiss francs were flowing into Switzerland in the last six months. It is speculated that this is the result of sanctions against Russia after they went into the Ukraine.
