Markets Don't Trust Banks, and They're Right
The financial crisis should have led to fundamental change. It hasn’t happened.
by Mark Whitehouse Bloomberg.com May 30, 2017, 2:00 AM EDT
Almost a decade after a crisis that nearly brought down the global financial system, markets still aren’t showing much confidence in banks. It’s a troubling phenomenon that U.S. and European leaders ignore at their peril.
It’s understandable that, after years of wrangling and thousands of pages of new rules, regulators might want to consider their mission accomplished. They have changed the way they supervise the system, reorganized derivatives markets, subjected banks to regular stress tests and instituted myriad new reporting requirements. To bolster banks’ loss-absorbing capacity, they have required hundreds of billions of dollars in added capital.
Yet, as former U.S. Treasury Secretary Larry Summers has taken to pointing out, markets don’t appear to believe that banks are much healthier. This is evident in how they value equity -- that is, the amount by which a bank says its assets exceed its liabilities. Back in the early 2000s, investors often paid $2 or more for each dollar in book equity, a sign that they trusted banks’ accounting and expected to reap significant profits. Now, though, even after the mini-boom following Donald Trump’s election, they’re valuing the largest five U.S. banks at about $1.16 per dollar of book equity, and the top five European banks even less.
What gives? Declining profitability is one explanation. With forecasts of long-term economic growth much lower than they were in 2007, investors can’t expect banks to make as much money. Also, new regulations require a lot more employees to gather data, assess risks and imagine worst-case scenarios. Although one could argue that banks should always have been doing these things, the added cost means there’s less money left over for shareholders.
Smaller returns, though, can’t explain the whole gap. Trust matters, too. After a crisis in which supposedly well-capitalized institutions suddenly found themselves in distress, it stands to reason that investors wouldn’t have much faith in the numbers banks produce -- particularly given how opaque the accounting tends to be. Investors might also have come to recognize what Mervyn King, the former head of the Bank of England, calls “radical uncertainty”: It’s just impossible to foresee and assign probabilities to all the things that can go wrong with a bank.
What to do? Simplifying regulation could help. A lot of the most burdensome rules arose because banks have been so resistant to the elegant approach of sharply increasing loss-absorbing equity. Even with all they’ve raised in recent years, the largest banks’ equity amounts to about 6 percent of total assets on average (measured according to international accounting standards). If they had closer to 20 percent, enough to weather an unforeseeable disaster and still be well-capitalized, they would inspire greater confidence and require less supervision. By making shareholders more fully responsible for losses, the added equity might also create an incentive to unlock value by dividing the largest, most complex banks into more manageable and understandable pieces.
Equity alone, though, probably isn’t enough. Any institution that depends on short-term borrowing to make long-term investments -- be it a bank, a hedge fund or a money-market fund -- can become the target of a panic, with economy-wide repercussions. Only a much more radical restructuring of the financial system can address this weakness. King, for example, has proposed a system in which the central bank would effectively guarantee all short-term debt and stringently limit the kinds of investments that could be financed with it. Together with higher equity requirements, such an approach could allow most other regulations to be scrapped.
Markets are sending a warning: The fundamental change that the crisis called for has not happened. The battle to achieve incremental change has left everyone fatigued without fixing a flawed system. It may take another big disaster to drive that lesson home.
"This Market Is Crazy": Hedge Fund Returns Hundreds Of Millions To Clients Citing Imminent "Calamity"
ZeroHedge.com May 29, 2017 2:39 PM
While hardly a novel claim - in the past many have warned that Australia's housing and stock market are massive asset bubbles (which local banks were have been forced to deny as their fates are closely intertwined with asset prices even as the RBA is increasingly worried) - so far few if any have gone the distance of putting their money where their mouth was. That changed, when Australian asset manager Altair Asset Management made the extraordinary decision to liquidate its Australian shares funds and return "hundreds of millions" of dollars to its clients according to the Sydney Morning Herald, citing an impending property market "calamity" and the "overvalued and dangerous time in this cycle".
"Giving up management and performance fees and handing back cash from investments managed by us is a seminal decision, however preserving client's assets is what all fund managers should put before their own interests," Philip Parker, who serves as Altair's chairman and chief investment officer, said in a statement on Monday quoted by the SMH.
The 30-year investing veteran said that on May 15 he had advised Altair clients that he planned to "sell all the underlying shares in the Altair unit trusts and to then hand back the cash to those same managed fund investors." Parker also said he had "disbanded the team for time being", including his investment committee comprising of several prominent bears such as former Morgan Stanley chief economist and noted bear Gerard Minack and former UBS economist Stephen Roberts.
Parker said he wanted "to make clear this is not a winding up of Altair, but a decision to hand back client monies out of equities which I deem to be far too risky at this point."
"We think that there is too much risk in this market at the moment, we think it's crazy," Parker said with a candidness few of his colleagues are capable of, at least when still managing money.
"Valuations are stretched, property is massively overstretched and most of the companies that we follow are at our one-year rolling returns targets – and that's after we've ticked them up over the past year. Now we are asking 'is there any more juice in these companies valuations?' and the answer is stridently, and with very few exceptions, 'no there isn't'."
Parker outlined a list of "the more obvious reasons to exit the riskier asset markets of shares and property". These include:
"If they get a property downturn anything similar to 1989 to 1991 then they are going to have all sorts of issues," Parker said.
Parker's decision comes after a robust year of double-digit gains on the ASX. Not only that, but he is acting on his convictions by returning money to clients and abandoning the fees attached to a $2 billion advisory agreement. Parker, however, displayed little nervousness about making such a significant decision. In fact, he said he has never been more certain of anything.
"Let me tell you I've never been more certain of anything in my life," Parker said. "I am absolutely certain we are in a bubble in this property market. Mortgage fraud is endemic, it's systemic, it's just terrible what's going on. When you've got 30-year-olds, who have never seen a property downturn before, borrowing up to 80 per cent to buy three and four apartments, it's a bubble."
In a rather dire forecast, Parker outlined a situation where the stock market could fall as low as 5200 points in the coming months, depending on the confluence of his identified risk factors.
"Australia hasn't had its GFC event, we've been living in this fool's paradise. But if China slows down the way the guys think it will towards the end of this year, then that's 70 per cent of our exports [affected]. You can see already that the commodity market is turning down."
Some speculated whether there is another motive behind the sudden shuttering, but Parker stridently denied any suggestion that there were other factors at play other than a pure investment decision. No personal issues, no position that has blown up and forced his hand. "No, God no," he said. "We've sold out all of our positions at huge profits for our clients."
"This game is all about reputation. I feel that we are right."
For now, Mr Parker said he was happy to take some time off. "I've never had more than five weeks off in a row. I'm probably going to have four months in a row, and if something happens in between, I'll think about it. Otherwise I'll enjoy the time off."
Come to think of it, in this "market", that may be the smartest thing to do.
Medicaid Blows $109 Billion on Promotional “Demonstrations”
Judicial Watch.com MAY 10, 2017
In a classic example of government waste, the taxpayer-funded program (Medicaid) that provides health insurance for the poor spends over $100 billion on “demonstrations” to promote the benefit that already covers millions of people nationwide. That’s an astounding 33% of Medicaid’s total federal budget for experiments and projects that supposedly help states test and evaluate new approaches to deliver the welfare benefit, which is already spread thin.
Medicaid is administered by states and is jointly funded by the federal government and states. Millions of low-income adults, children, pregnant women and people with disabilities are covered under the program, which cost American taxpayers an eye-popping $545.1 billion in 2015, according to government figures. A little-known section of the Social Security Act gives the Secretary of Health and Human Services (HHS) authority to approve experimental, pilot or demonstration projects that promote the objectives of Medicaid and its counterpart, the Children’s Health Insurance Program (CHIP), as if they really need to be further publicized. The purpose of the demonstrations, according to the Social Security Act, is to expand eligibility to individuals who are not otherwise Medicaid or CHIP eligible, provide services not typically covered by Medicaid and use innovative service delivery systems that improve care, increase efficiency and reduce costs.
Ultimately, the goal is to increase and strengthen states’ overall coverage of low-income individuals, enhance access to provider networks that serve low-income populations and boost the efficiency and quality of medical care through “initiatives” that “transform service delivery networks.” This could mean anything. The only restriction is that the demonstrations must be “budget neutral,” which means that the money comes out of the federal portion Medicaid’s budget. In fiscal year 2015 Uncle Sam blew $109 billion to promote Medicaid, according to a scathing federal audit, that blasts the program for wasting 33% of its budget on such nonsense. Medicaid’s demonstration spending ballooned from $29 billion in 2005 to the $109 billion in 2015, the audit reveals. In ten states demonstration expenditures comprised 75% or more of total Medicaid expenditures, the probe reveals. Six other states spent between 50% and 75% of their Medicaid budget on demonstrations.
California takes the prize for wasting $76.4 million on Medicaid demonstrations in a five-year period analyzed by investigators from the Government Accountability Office (GAO), the investigative arm of the U.S. Congress. The Golden State went from spending 2.6% of its Medicaid expenditures on demonstrations in 2005 to a whopping 55% in 2015. California’s exorbitant demonstration budget caught the attention of congressional investigators who flagged state for having financial compliance issues. “As of the end of fiscal year 2013, California withdrew $1.3 billion more in federal matching funds for its Medicaid program than it reported in actual expenditures and according to CMS officials California could not account for the difference,” the report states, adding that the discrepancy is specifically related to demonstrations.
Like many bloated government programs Medicaid has long been plagued by uncontrollable fraud and corruption that gets worse with time. Less than a year ago Judicial Watch reported that an HHS Inspector General probe found Medicaid spent $26 million to provide dead people with health insurance in one state alone. The investigation centered on Florida and covered a five-year period from 2009 to 2014. The government simply continued making payments to the insurance companies contracted to provide medical coverage for the state’s low-income residents long after beneficiaries had passed away. Years earlier the GAO uncovered tens of thousands of instances of fraud involving Medicaid’s prescription drug program in only a handful of states, estimated to cost U.S. taxpayers about $65 million.
In an embarrassing effort to combat fraud, Medicaid devised a program that cost the government more than five times the amount of scams it identified. The failed anti-fraud project is known as the National Medicaid Audit Program and it was launched to tackle a monstrous epidemic of overbilling for medically unnecessary treatments, services and procedures not covered under Medicaid. Back in 2012 Judicial Watch reported that the National Medicaid Audit Program cost the government $102 million to operate while identifying only $19.4 million in overpayments.
What's The Worst That Could Happen?
ZeroHedge.com May 21, 2017 1:30 PM
Authored by Lance Roberts via RealInvestmentAdvice.com,
A recent article out this past week by Russ Koesterich via BlackRock noted that bond yields had not melted-up as “everyone expected.”
It’s not everyone, just you guys on Wall Street.
As I said, I have been fighting this battle for a long-time while “everyone else” has remained focused on the wrong reasons for higher interest rates. As I stated in “Let’s Be Like Japan:”
“Yellen has become caught in the same liquidity trap as Japan. With the current economic recovery already pushing the long end of the economic cycle, the risk is rising that the next economic downturn is closer than not. The danger is that the Federal Reserve is now potentially trapped with an inability to use monetary policy tools to offset the next economic decline when it occurs.
This is the same problem that Japan has wrestled with for the last 20 years. While Japan has entered into an unprecedented stimulus program (on a relative basis twice as large as the U.S. on an economy 1/3 the size) there is no guarantee that such a program will result in the desired effect of pulling the Japanese economy out of its 30-year deflationary cycle. The problems that face Japan are similar to what we are currently witnessing in the U.S.:
The lynchpin to Japan, and the U.S., remains interest rates. If interest rates rise sharply it is effectively “game over” as borrowing costs surge, deficits balloon, housing falls, revenues weaken and consumer demand wanes. It is the worst thing that can happen to an economy that is currently remaining on life support.”
While Central Banks continue to intervene where possible to support asset prices, the recent decoupling of the market from the underlying rate structure, in hopes of “Trumponomics,” is likely transient. The only question is simply how long it will be before “reality” and “hope” reconnect.
The last time the stock/bond ratio was this elevated, it didn’t work out well for investors as volatility spiked, equity prices plunged and the “sprint for safety” send bond prices surging.
Unfortunately, the Fed is still misdiagnosing what ails the economy and monetary policy is unlikely to change the outcome in the U.S., just as it failed in Japan. The reason is monetary interventions, and government spending, don’t create organic, and sustainable, economic growth. Simply pulling forward future consumption through monetary policy continues to leave an ever growing void in the future that must be filled. Eventually, the void will be too great to fill.
But hey, let’s just keep doing the same thing over and over again, which hasn’t worked for anyone as of yet, hoping for a different result.
What’s the worst that could happen?
Arizona Passes Bill To End Income Taxation On Gold And Silver
ZeroHedge.com May 13, 2017 8:08 PM
Sound money advocates scored a major victory on Wednesday, when the Arizona state senate voted 16-13 to remove all income taxation of precious metals at the state level. The measure heads to Governor Doug Ducey, who is expected to sign it into law.
Under House Bill 2014, introduced by Representative Mark Finchem (R-Tucson), Arizona taxpayers will simply back out all precious metals “gains” and “losses” reported on their federal tax returns from the calculation of their Arizona adjusted gross income (AGI).
If taxpayers own gold to protect themselves against the devaluation of America’s paper currency, they frequently end up with a “gain” when exchanging those metals back into dollars. However, this is not necessarily a real gain in terms of a gain in actual purchasing power. This “gain” is often a nominal gain because of the slow but steady devaluation of the dollar. Yet the government nevertheless assesses a tax.
Sound Money Defense League, former presidential candidate Congressman Ron Paul, and Campaign for Liberty helped secure passage of HB 2014 because "it begins to dismantle the Federal Reserve’s monopoly on money" according to JP Cortez, an alumnus of Mises University.
Ron Paul noted, “HB 2014 is a very important and timely piece of legislation. The Federal Reserve’s failure to reignite the economy with record-low interest rates since the last crash is a sign that we may soon see the dollar’s collapse. It is therefore imperative that the law protect people’s right to use alternatives to what may soon be virtually worthless Federal Reserve Notes.” In early March, Dr. Paul appeared before the state Senate committee that was considering the proposal. “We ought not to tax money, and that’s a good idea. It makes no sense to tax money,” Paul told the state senators. “Paper is not money, it’s a substitute for money and it’s fraud,” he added, referring to the fractional-reserve banking practiced by the Federal Reserve and other central banks.
Referring to the bill’s elimination of capital gains taxes on gold and silver, the sponsor of the bill, State Representative Mark Finchem, said, “What the IRS has figured out at the federal level is to target inflation as a gain. They call it capital gains.”
Shortly after the vote in the state Senate, the Sound Money Defense League, an organization working to bring back gold and silver as America's constitutional money, issued a press release announcing the good news.
“Arizona is helping lead the way in defending sound money and making it less difficult for citizens to protect themselves from the inflation and financial turmoil that flows from the abusive Federal Reserve System,” said Stefan Gleason, the organization’s director.
As a reminder, in 1813 Thomas Jefferson warned, “paper money is liable to be abused, has been, is, and forever will be abused, in every country in which it is permitted.” This is also why the men who drafted the Constitution empowered Congress to mint gold and silver, sound money, and why they included not a single syllable authorizing the legislature to "surrender that critical power to a plutocracy with a penchant for printing fiat money."
Slowly, states may be summoning back the days when money was actually worth something. At least 20 states are currently considering doing as Arizona is about to do and remove the income tax on the capital gains from the buying and selling of precious metals: some state legislatures, including Utah and Idaho, have taken steps toward eliminating income taxation on the monetary metals. Other states are rolling back sales taxes on gold and silver or setting up precious metals depositories to help citizens save and transact in gold and silver bullion.
Wells Fargo’s Fake Accounts Grow to 3.5 Million in Suit
by Kartikay Mehrotra and Laura J Keller Bloomberg.com
May 12, 2017, 2:43 PM EDT May 12, 2017, 7:22 PM EDT
The bank reached a $110 million deal in late March to resolve a national class-action lawsuit over claims that employees may have opened more than 2 million deposit and credit-card accounts without customers’ permission since 2011. After the bank last month agreed to expand the accord to include dates as early as May 2002, lawyers for consumers on Thursday raised their estimate on the number of fake accounts.
“This number may well be over-inclusive, but provides a reasonable basis on which to estimate a maximum recovery,” the attorneys said in a filing in San Francisco federal court. The new figure is based on public reports, negotiations and bank documents, according to the filing.
Wells Fargo questioned the accuracy of the latest estimate, which comes less than a week before U.S. District Judge Vince Chhabria in San Francisco is slated to consider preliminary approval of the settlement. It was updated last month to provide $142 million.
“The unauthorized account number reported in yesterday’s filing are estimates made by the plaintiffs’ attorneys based on a hypothetical scenario and have not been verified. The number of unauthorized accounts estimated in the filing do not reflect actual unauthorized accounts,” Jim Seitz, a spokesman for the bank, said in an emailed statement.
Bottom of Form
A consultant Wells Fargo hired to determine how many accounts could have been fraudulent found employees may have opened almost 2.1 million unauthorized accounts from May 2011 to July 2015. Regulators used the consultant’s deposit and credit-card account findings when they fined the bank $185 million in September over improper sales practices and a culture that drove employees to create fake accounts.
The class-action settlement, if approved, would cover reimbursement of wrongly charged fees, credit-damage relief and cash compensation amounting to $40 to $70 per fake account, if each consumer harmed by the bank submits claims. Plaintiffs’ attorneys have capped their fees at 15 percent of the deal value -- up to $21 million of the $142 million settlement.
The case is Jabbari v. Wells Fargo & Co., 15-cv-02159, U.S. District Court, California Northern District (San Francisco).