IMF Chief Asks Banks To Halt All Buybacks And Dividends
by Tyler Durden
Thu, 05/21/2020 - 14:00
While certain companies have continued with their buybacks even if it might seem ill-advised from a corporate strategy standpoint, banks have mostly abstained, while plunging profits have prompted some to suspend their dividends.
That's probably for the best, according to a new opinion column published in the FT by the head of the IMF. As shares of banks around the world take a pounding thanks to the twin headwinds of low interest rates and a bleak economic outlook, we suspect more management teams - perhaps at the behest of activists nipping at their heels, or simply to try and hit their performance targets - might relapse and indulge once again in corporate America's favorite mechanism for returning capital to shareholders.
Unfortunately, returning capital to shareholders is not what banks should be doing right now, according to the IMF's Kristalina Georgieva, who penned a column in today's FT calling on banks to stop all buybacks and dividends and shore up cash to ensure they have adequate capital buffers to withstand any turbulence that might be coming down the pike.
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After the 2008 financial crisis, global regulators required banks to increase their prudential buffers of high-quality capital and liquidity. That significantly strengthened the resilience of the financial system. Many observers now cite those buffers as a bulwark against the adverse effects of the Covid-19 pandemic. But as we brace ourselves for a deep recession in 2020, and only partial recovery in 2021, this resilience will be tested. Having in place strong capital and liquidity positions to support fresh credit will be essential. One of the steps needed to reinforce bank buffers is retaining earnings from ongoing operations.
These are not insignificant. IMF staff calculate that the 30 global systemically important banks distributed about $250bn in dividends and share buybacks last year. This year they should retain earnings to build capital in the system. Of course, this has unpleasant implications for shareholders, including retail and small institutional investors, for whom bank dividends may be an important source of regular income.
Nonetheless, in the face of the abrupt economic contraction, there is a strong case for further strengthening banks’ capital base. Here are the reasons. Building stronger buffers is aligned with the array of actions undertaken to stabilise the economy. Governments are deploying fiscal measures in trillions of dollars, including financing that provides a backstop for borrowers who are tapping bank loans.
Central banks have innovated and provided extraordinary liquidity support to a wide range of markets. Bank supervisors have exercised flexibility to the fullest possible extent by encouraging banks to restructure loan repayments, easing regulatory requirements, and allowing banks to draw down their buffers temporarily.
The interests of bank shareholders are aligned with those of bank supervisors and customers. All stakeholders will ultimately benefit if banks preserve capital instead of paying out to shareholders during the pandemic. Protecting the banking sector’s strength now means that, once the recovery picks up, shareholders can expect large payouts — indeed the more profits retained now, the larger the eventual payout.
The need to preserve capital is already being recognised and needs to be so more widely. In some countries, banks have voluntarily decided to collectively suspend shareholder payouts and buybacks. In others, supervisors have had to push. In March, the Bank of England asked banks to suspend plans to pay dividends and cash bonuses to executives, indicating it was ready to use its supervisory powers if anyone refused. Eventually the banks all complied. In Brazil, supervisors have had to use their authority to suspend payouts in a collective manner.
Collective decisions are vital. Banks that take action on their own could be penalised by investors who fail to understand the need to restrict payouts. All banks should be covered - whether state-owned or private, whether commercial or investment. But no bank can do it alone, and if banks’ collective will is not there, then supervisors should take the decision for them.
Today, supervisors in many countries use stress tests to determine whether - and by how much - payouts should be restricted.
Pioneered by the IMF more than 20 years ago, these tests quantify the additional capital needed to keep banks resilient in the face of crisis, and are a vital guidepost helping us now to traverse an unfamiliar territory. It is time to update these tests to take into account the increased likelihood of more adverse economic scenarios caused by the pandemic.
To ensure global consistency, international co-ordination is key. The IMF and the Financial Stability Board can help achieve this. Memories from the last global crisis still linger. The public sector is doing what it can to help prevent another banking crisis from happening again. Shareholders have both an interest and an obligation to do the same.
The writer is managing director of the IMF
The Collapse Will Be Very Visible: "For Lease" And "Space Available" Signs Are Going Up All Across America
by Tyler Durden
Thu, 05/21/2020 - 14:50
Authored by Michael Snyder via TheMostImportantNews.com,
Initially, we were told that the coronavirus lockdowns would just “temporarily” disrupt the U.S. economy, but now it is becoming clear that a lot of the damage will be permanent.
We are starting to see businesses go belly up all over the country, and this includes some of the most iconic names in the retail world. When J.C. Penney announced that it would be declaring bankruptcy and closing hundreds of stores, I warned that would just be the tip of the iceberg, and that has definitely turned out to be the case. In fact, on Wednesday many analysts were absolutely shocked when news broke that Victoria’s Secret has decided to shut down about 250 stores…
Victoria’s Secret plans to permanently close approximately 250 stores in the U.S. and Canada in 2020, its parent company L Brands announced Wednesday.
L Brands also plans to permanently close 50 Bath & Body Works stores in the U.S. and one in Canada, according to information the company posted online as part of its quarterly earnings.
If this pandemic had passed quickly, perhaps those stores wouldn’t have needed to be shut down. But at this point it has become obvious that this virus is going to be with us for a long time to come. In fact, the WHO just announced that on a global basis we just witnessed the largest number of newly confirmed cases on a single day so far.
Another major retailer that is closing down stores is Pier 1 Imports. In fact, it is being reported that not a single one of their locations will survive…
Pier 1 Imports, which previously said it would close half of its fleet of stores, now plans to close all of its locations.
The retailer, based in Fort Worth, Texas, announced in a news release Tuesday that it was seeking bankruptcy court approval to begin an “orderly wind-down” when stores are able to reopen “following the government-mandated closures during the COVID-19 pandemic.”
I was never a huge fan of Pier 1 Import, but my wife liked to visit and see what they had, but now we will never be able to do that again.
Something about that really saddens me.
Of course it isn’t just retailers that are collapsing. Car rental giant Hertz “is on the verge of bankruptcy”, and things are not looking good at all…
Hertz is on the verge of bankruptcy. At the end of April, it disclosed it had missed a large amount of lease payments on its rental cars. Since then, it has entered into forbearance and waiver agreements with these lenders that give it until May 22 to come up with the money and a plan. Its cars, now parked at various parking lots around the country, are collateral for this debt.
Some of you old timers might remember the old Hertz commercials featuring O.J. Simpson. Those were much simpler times, and to be honest I really miss them. Unfortunately, times have really changed, and I seriously doubt that Hertz will be able to survive much longer in this very harsh economic environment.
Needless to say, a lot of businesses are going to die in the weeks and months ahead of us. As I discussed the other day, it is now being projected that approximately one out of every four restaurants in the United States will be closing down permanently.
Can you imagine what this is going to look like?
We are going to have abandoned buildings all over the place, and this will especially be true in our more impoverished communities.
The only chance we have of pulling out of this economic death spiral is if there is a full scale return to normal economic activity all across America, but that isn’t going to happen any time soon.
Fear of COVID-19 is going to paralyze small and big businesses alike for the foreseeable future, and every new outbreak is going to spark more overreactions. For instance, Ford just shut down two major production facilities just a few days after “reopening” them… Just days after reopening its American assembly plants, Ford temporarily shut down two separate factories because employees tested positive for Covid-19.
One plant in Chicago that builds the Ford Explorer, the Lincoln Aviator and the Ford Interceptor police car stopped operations Tuesday afternoon after two employees tested positive for Covid-19. Then, Ford’s plant in Dearborn Michigan that makes its bestselling F-150 pickup, shut down Wednesday.
If we keep shutting things down every time someone gets sick, our economic problems are just going to get worse and worse.
Look, the truth is that lots more people are going to get sick and lots more people are going to die. In fact, one new study has concluded that the U.S. death toll will more than triple by the end of 2020 “even if current social distancing habits continue for months on end”…
Americans who will die after contracting the novel coronavirus is likely to more than triple by the end of the year, even if current social distancing habits continue for months on end.
The study, conducted by the Comparative Health Outcomes, Policy and Economics Institute at the University of Washington’s School of Pharmacy, found that 1.3 percent of those who show symptoms of COVID-19 die, an infection fatality rate that is 13 times higher than a bad influenza season.
Of course it certainly doesn’t help that we continue to allow people from other countries where COVID-19 is raging to fly into the U.S. without any special screening whatsoever…
A glamorous Russian blogger says she has proved that the US is open for foreign tourism again, despite the pandemic, according to video obtained by DailyMail.com.
Sofia Semyonova, 33, a fitness model, told how she traveled on a crammed Aeroflot flight with 500-plus passengers with ‘no social distancing’ from Moscow to New York City.
She used her B2 tourist visa to enter America from Russia’s coronavirus epicentre ‘in 30 seconds without any extra questions’.
I don’t know how this could possibly be happening, but apparently it is.
Eventually, COVID-19 will literally be just about everywhere, and almost everyone in the entire country will be exposed to it.
And fear of this virus will paralyze our economy for the foreseeable future.
So the truth is that the “for lease” and “space available” signs that you are now seeing are just the start.
A lot more are coming, and it is going to be a very dark chapter for our nation.
JPMorgan's U.S. credit card holders spent 40% less due to coronavirus
Elizabeth Dilts Marshal
NEW YORK (Reuters) - Credit card spending among some of JP Morgan Chase & Co’s U.S. customers fell 40% during March and early April compared to last year, as Americans stayed home to protect against the novel coronavirus, according to a new report on Thursday.
The over time as layoffs, furloughs and unemployment insurance further impact families’ bank accounts,” Farrell said in a statement.The overall fall in spending was 8 times larger than the average drop in household credit card spending in the first month of unemployment during regular times, according to the report.
The global outbreak of the coronavirus has forced governments worldwide to impose lockdown orders to contain its rapid spread, crippling economic activity.
In the United States, more than 32 million people have filed for unemployment benefits since March while consumer demand has also been hard hit.
The U.S. Federal Reserve warned this week that the country will likely see weak economic growth for “an extended period”.
The JPMorgan Chase Institute studied anonymized spending data from more than 8 million Chase credit card customers for the period from March 1 to April 11.
Credit card users who report household incomes of less than $39,000 reduced spending by 38%, while wealthier cardholders, with incomes of more than $92,000, reduced spending by 46%. The group says the difference largely reflects higher average spending by wealthier households.
The report showed essential spending, like on groceries and healthcare, initially spiked by 20% before falling back.
Spending on non-essential things fell by 50% and dropped 70% on restaurants.
The group tracked only spending on Chase credit cards, like its Slate, Sapphire and Ink cards. It did not track spending with cash, debit cards or other bank credit cards.
(In 10th paragraph, group changed income figures in subsequent draft of report)
Nationwide Lockdown Sparks Plunge In Local Govt Tax Revenues; Cuts In Services Strike As Demand Soars
Fri, 05/15/2020 - 05:30
Small to medium size cities and counties across the United States are facing huge budget gaps amid the coronavirus shutdown induced record unemployment, drying up crucial tax revenue for local governments.
Bloomberg profiles a domino effect that Jefferson County, Alabama famously went through in 2011 leading to the biggest municipal bankruptcy in US history, saying it's experience portends a tsunami of what will be similar local government collapses. "A massive share of the local government’s tax revenue disappears. Elected officials lay off employees and shutter a health-care facility used by the poorest residents. Road work grinds to a halt. Residents wait in hours-long lines to renew their licenses," Bloomberg introduces of the scene that Alabama's largest county witnessed years ago.
The report notes the picture is apt for today's prolonged coronavirus recession:
Surging unemployment and business closures are causing government revenue to plunge nationwide in a matter of weeks, mirroring the swift hit to Jefferson County when a court struck down a wage tax that covered about 25% of its budget. The 660,000-resident county, which is home to Birmingham, fired 1,300 employees over three years, sold a nursing home and shuttered inpatient services at its hospital that cared for the poor. After closing satellite courthouses, the lines at the main one downtown grew so long that a portable toilet was installed in the park next door. Eventually, the county filed for bankruptcy. At the tipping point wherein the county was locked into a vicious downward cycle, the crisis led to mass furloughs and layoffs of public employees at even essential places like hospitals, jails, police units, and long-term care facilities.
It also left decaying infrastructure in its wake as county crews simply stopped
work on roads, fixing potholes, restoring an incredibly costly botched sewage system project, and public building maintenance.
This scenario which played out in Jefferson County has very likely started in many other places, born out by numbers showing nearly 1 million employees already cut from state and local payrolls last month."Local governments are preparing to cut services, idle employees, raise taxes and sell assets," the report continues. "As a last resort, those burdened by excessive long-term debt and pension obligations could file for bankruptcy, although so far investors and analysts haven’t predicted a wave of insolvencies and not every state even allows it."
In the prior case of Jefferson County, it made drastic and painful austerity-type measures which eventually prepared it to better weather the current economic "pause" brought on by the pandemic:
To generate cash, the county sold its nursing home for $11.3 million. In one of its most politically difficult decisions, it closed inpatient and emergency care at Cooper Green Mercy Hospital, which served the county’s lowest-income residents. The money-losing hospital was underutilized, with typically fewer than 40 patients a day, and received more than $10 million a year in county subsidies, Carrington said.
Although an urgent care facility remained open, the closing of the downtown hospital was hard for some residents because suburban hospitals weren’t on bus lines, said Scott Douglas, executive director of Greater Birmingham Ministries, a community organization.
It ranked as the biggest municipal bankruptcy in US history after a series of local scandals involving corrupt and incompetent officials, a bungled sewage system project that left an enduring billion dollar debt, and toxic bonds, among other things. It was only in 2013 that Jefferson Country finally emerged from bankruptcy.
Bloomberg forecasts ominously that all signs point toward a similar crisis now ready to roll downhill for other local governments across the nation.