Will we always be second fiddle to the banks?

The situation regarding the banks is one that has dominated the credit crunch era as we started with some spectacular failures combined with spectacular bailouts. Yet even a decade or so later we are still in a spider’s web that if we look at say Deutsche Bank or many of the Italian banks still looks like a trap. Economic life has been twisted to suit the banks such that these days a new Coolio would be likely to replace gangsta with bankster.

Keep spending most our lives, living in the gangsta’s paradise
Keep spending most our lives, living in the gangsta’s paradise

Power and the money, money and the power
Minute after minute, hour after hour

Although upon reflection with all the financial crime that the banks have intermediated perhaps he was right all along with Gangsta. This morning has brought more news on this front as we note this from Sky News about HSBC.

HSBC has agreed to pay $765m (£588m) to the US Department of Justice (DoJ) to settle a probe into the sale of mortgage-backed securities in the run-up to the financial crisis.

It is the latest bank to settle claims of mis-selling toxic debt before the financial crisis.

HSBC has paid a lot less than the  Royal Bank of Scotlandwhich agreed to pay $4.9bn in May and Barclays’ $2bn settlement with the DoJ in March.

This is just one example of the many criminal episodes emanating from the banks and if we stay with HSBC there was also this reported by The New Yorker.

 In 2012, a U.S. Senate investigation concluded that H.S.B.C. had worked with rogue regimes, terrorist financiers, and narco-traffickers. The bank eventually acknowledged having laundered more than eight hundred million dollars in drug proceeds for Mexican and Colombian cartels. Carl Levin, of Michigan, who chaired the Senate investigation, said that H.S.B.C. had a “pervasively polluted” culture that placed profit ahead of due diligence. In December, 2012, H.S.B.C. avoided criminal charges by agreeing to pay a $1.9-billion penalty.

The tale of what happened next is also familiar.

The company’s C.E.O., Stuart Gulliver, said that he was “profoundly sorry” for the bank’s transgressions. No executives faced penalties.

Yet in spite of all the evidence of tax evasion and money laundering in the banking sector the establishment bring forwards people like Kenneth Rogoff to try to deflect the blame elsewhere. First blame cash.

Of course, as I note in my recent book on past, present, and future currencies, governments that issue large-denomination bills also risk aiding tax evasion and crime. ( The Guardian )

Then should anything look like being some sort of competition raise fears about it too.

But it is an entirely different matter for governments to allow large-scale anonymous payments, which would make it extremely difficult to collect taxes or counter criminal activity.

Does he mean like the banks do?

Competition seems to get blocked

This morning has seen this reported by the Financial Times.

Britain’s peer-to-peer lending industry fears being stripped of one of its key advantages after the UK regulator proposed to block the access of many retail investors, alarming some senior executives in the nascent sector. “This is a moment,” said Rhydian Lewis, chief executive of RateSetter, one of the UK’s biggest peer-to-peer lending platforms. “They are looking to restrict this new industry and it is wrong. This is how things get stymied.”

Still in some ways it is a relief to see the Financial Conduct Authority or FCA actually have some powers as after all it was only last week they were telling us they were short of them.

Given the serious concerns that were identified in the independent review it was only right that we launched a comprehensive and forensic investigation to see if there was any action that could be taken against senior management or RBS. It is important to recognise that the business of GRG was largely unregulated and the FCA’s powers to take action in such circumstances, even where the mistreatment of customers has been identified and accepted, are very limited.

It is important to recall that this was a very serious business involving miss selling and then quite a cover up which the ordinary person would regard as at the upper end of serious crime. Businesses were heavily affected and some were forced into bankruptcy. Yet apparently there were no powers to do anything about what is one of the largest financial scandals of this era in the UK. It is hard not to mull on the fact that a few years ago the FCA was able to ban someone for life from working in the City of London because of evading rail fares.

However if you are a competitor to the banking sector you find that inquiries and regulation do apply to you. However what was the selling of derivative style products to small businesses somehow escapes the net.

It is not the banks fault

A very familiar theme has been played out since the Bank of England announced a rise in UK interest-rates at midday on Thursday. The reality is that many mortgage rate rises were announced immediately but as social media was quick to point out there was something of a shortage of increases in savings rates. Here is one way this was reported by the BBC over the weekend.

Millions of people could get a better return on savings by switching deals rather than waiting for banks to increase rates, experts say.

A huge number of savers leave money languishing in old accounts with poor rates of interest, often with the same provider as their current account.

The City regulator says they are missing out on up to £480m in interest.

So it’s our own fault and we need to sharpen up! As us amateurs limber up the professionals seem to be playing a sort of get out of jail free card that in spite of being well-thumbed still works.

Following the previous Bank rate rise in March, interest paid on half of all savings accounts failed to rise at all. Of those that did, the average rise did not match the Bank of England’s increase.Since Thursday’s rise there has been very little movement in rates,………..

Oh and March seems to be the new November at least at the BBC.

We also got a hint as to why the environment might be getting tougher for peer-to-peer lenders.

Bank of England governor Mark Carney suggests new entrants are increasing competition, creating better deals.

Comment

There is quite a bit to consider here as we look around UK banking. Looking at RBS there is the problem that the UK is invested at much higher levels. The 251 pence of this morning is around half the level that the UK government paid back in the day. Perhaps that explains at least some of the lack of enthusiasm for prosecuting it for past misdemeanours. Especially as the sale of 7.7% of its shares back in June illustrated a wish to get it off the books of the UK public-sector which still holds around 62%.

I note over the weekend the social media output of HSBC finds itself under fire reminding us of an ongoing issue..

Planning your next trip? Get cash before you go, to make the most of your holiday time.

The response is from Paul Lewis who presents Radio 4’s MoneyBox.

Dreadful advice. (a) HSBC rates not great (b) using a HSBC card abroad is subject to a hefty surcharge but using a Halifax Clarity card is not. This is why never go to a bank for advice it’ll only give you sales.

The old sales/advice issue rears its ugly head again as we note that the advice will of course be rather good for the profits of HSBC.

Moving onto the FCA and the Bank of England it is hard to see a clearer case of regulatory capture or as Juvenal put it so aptly back in the day.

Quis custodiet ipsos custodes?

Or who regulates the regulators?

 

 

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It is all about the banks yet again

If there is a prime feature of the credit crunch in the financial world it is the woes and travails of the banks. That is quite an anti-achievement when you consider that if you count from the first signs of trouble at the mortgage book of Bear Stearns we are now in out second decade of this period having lost one already. Before we come to today’s main course delightfully prepared first by chefs in Italy and then finished off in Brussels I have a starter for you from the UK.

The Co-op Bank

Back on the 13th of February I gave my views on this institution being put up for sale.

So the bank is up for sale and my immediate thought is who would buy it and frankly would they pay anything? Only last week Bloomberg put out some concerning analysis……..Co-Operative Bank Plc, the British lender that ceded control to its creditors three years ago, has plunged in value to as little as 45 million pounds ($56 million), according to people familiar with the matter.

Since then we have had regular reports in places like the Financial Times that a deal was just around the corner whereas I feared it might end up in the hands of the Bank of England. This morning has come news that the ill-fated sale plans have been abandoned and replaced by a doubling-down by the existing investors. From Sky News.

The beleaguered Co-operative Bank is closing in on a £700m rescue deal with US hedge funds amid ongoing talks about the separation of the vast pension scheme it shares with the Co-op Group.

Much of the issue revolves around funding the pension scheme and if I was worker at the Co-op I would be watching that like a hawk. Also the name may need some review as the shareholding of the Co-operative group falls below 5%.

We have also seen in the UK how a bailed out bank boosts the economy in return for taxpayers largesse. From Reuters.

British lender Royal Bank of Scotland (RBS.L) is planning to cut 443 jobs dealing with business loans and many of them will move to India, the bank said

The Veneto Banks

As we move from our starter to the main course we find ourselves facing a menu which has taken nearly a decade to be drawn up. The Italian response to the banking crisis was to adopt the ostrich position and ignore it for as long as possible. Indeed for a while the Italian establishment boasted that only 0.2% of GDP ( Gross Domestic Product) had been spent on bank bailouts compared to much higher numbers elsewhere. Such Schadenfreude came back to haunt them driven by one main factor which was the rise and rise of non-performing loans in the Italian banking sector which ended up with more zombies than you might expect to see in a Hammer House of Horror production. Even worse this was a drag on the already anaemic Italian rate of economic growth meaning that its economy is now pretty much the same size as when it joined the Euro.

There has been a long program of disinformation on this subject and I am sure that regular readers will recall the claims that Monte Paschi was a good investment made by then Prime Minister Matteo Renzi. There have also been the regular statements by Finance Minister Padoan along the lines of this from Politico EU in January.

Italian Finance Minister Pier Carlo Padoan has defended the way his country dealt with its banking crisis, saying the government had “only spent €3 billion” on bailouts, in an interview with Die Welt published today.

If we are being ultra polite that was especially “odd” as Monte Paschi was in state hands but of course over this weekend came more woe for Padoan. From the European Commission.

On 24 June 2017, Italy notified to the Commission its plans to grant State aid to wind-down BPVI and Veneto Banca. The measures will enable the sale of parts of the two banks’ activities to Intesa, including the transfer of employees. Italy selected Intesa Sanpaolo (Intesa) as the buyer in an open, fair and transparent sales procedure:

I will come to the issue of Intesa in a moment but let us first look at the cost to Italy from this.

In particular, the Italian State will grant the following measures:

  • Cash injections of about €4.785 billion; and
  • State guarantees of a maximum of about €12 billion, notably on Intesa’s financing of the liquidation mass. The State guarantees would be called upon notably, if the liquidation mass is insufficient to pay back Intesa for its financing of the liquidation mass.

This has opened up a rather large can of worms and as Bloomberg points out we can start with this.

Rome will effectively by-pass the EU’s “single resolution board” which is supposed to handle bank failures in an orderly way and the “Banking Recovery and Resolution Directive,” which should act as the euro zone’s single rulebook.

Why? Well as we have looked at before there was the misselling of bonds to retail investors.

The government could have taken a less expensive route, involving the “bail in” of senior bondholders. It chose not to: Many of these instruments are in the hands of retail investors, who bought them without being fully aware of the risks involved. The government wants to avoid a political backlash and the risk of contagion spreading across the system.

Privatisation of profits and socialisation of losses yet again. Also only on the June 8th we were told this.

Italian banks are considering assisting in a rescue of troubled lenders Popolare di Vicenza and Veneto Banca by pumping 1.2 billion euros (1.1 billion pounds) of private capital into the two regional banks

Good job they said no as they would have been over 3 billion short! Oh and Padoan described the problems as “exaggerated” whereas if we return to reality this was always the real problem.

A bail in has the problem of the retail depositors who were persuaded to invest in bank bonds.

Intesa

This seems to have got something of a free lunch here provided courtesy of the Italian taxpayer. From Reuters.

The government will pay 5.2 billion euros ($5.82 billion) to Intesa, and give it guarantees of up 12 billion euros, so that it will take over the remains of the banks.

So it can clear up the mess? Er not quite.

will leave the lenders’ good assets in the hands of Intesa,

So it is being paid to take the good bits. Heads it wins if things turns out okay and tails the Italian taxpayer loses if they do not as it will use the guarantees. Also as you can see it seems to have thought of everything.

You think Santander made a killing with Pop until you realise will even make the state pay for the redundancy package of V&V staff ( @jeuasommenulle )

It may even be able to gain from some Deferred Tax Assets but chasing down that thread is only in very technical Italian.

Comment

There is much to consider here so let me open with the two main issues. The European Banking Union has just been torpedoed by the Italian financial navy. The promised bail in has become a bailout. Next comes the issue of how much all the dilatory dithering has cost the Italian taxpayer? As in the end the cost is way above the sums that Financial Minister Padoan was calling “exaggerated”. I note that BBC Breakfast called the cost 5 billion Euros this morning ignoring the 12 billion Euros of guarantees which no doubt Italy in a by now familiar attempted swerve will try to keep it out of the national debt numbers. Although to be fair Eurostat has mostly shot down such efforts.

Over the next few days we will no doubt be assailed with promises that the money will come back. For some it already has. From the FT.

Intesa Sanpaolo, the country’s strongest lender that will take over the failed banks’ good assets, was the second biggest riser on the eurozone-wide Stoxx 600 index. Shares in the bank were up 3.6 per cent at publication time, to €2.71.

 

 

 

 

 

The ongoing disaster that is Novo Banco of Portugal

A constant theme of this website is an ongoing consequence of the credit crunch where more than a few banks have not been reformed and are still damaged goods. They are banks which were somewhat presciently sung about by the Cranberries.

Zombie, zombie, zombie

Certainly in that list was Banco Espirito Santo of Portugal which found itself in a spider’s web of corruption and bad loans. This led to this being announced by the Bank of Portugal in August 2014.

The Board of Directors of Banco de Portugal has decided on 3 August 2014 to apply a resolution measure to Banco Espírito Santo, S.A.. The general activity and assets of Banco Espírito Santo, S.A. are transferred, immediately and definitively, to Novo Banco, which is duly capitalised and clean of problem assets.

The point of this was supposed to be that Novo Banco would then be like its name, a New Bank. It would be clean of the past problems and would then thrive and the bad bank elements would be removed. Reuters took up the story.

Novo Banco, or New Bank – will be recapitalised to the tune of 4.9 billion euros by a special bank resolution fund created in 2012. The Portuguese state will lend the fund 4.4 billion euros.

At the time there were various issues as Portugal itself had only recently departed an IMF bailout so was not keen to explicitly bailout BES. Thus the bank resolution fund was used except of course it had nowhere near enough money so the state lent it most of it. These sort of Special Purpose vehicles are invariably employed to try to keep the debt out of the national debt. To be fair to Eurostat that usually does not work but left an awkward situation going forwards where in theory the other Portuguese banks created Novo Banco but in reality the Portuguese taxpayer provided most of the cash.

Novo Banco

As regular readers will be aware investors in Novo Banco later discovered that the word “clean” was a relative and not an absolute term.

The nominal amount of the bonds retransferred to Banco Espírito Santo, S.A. totals 1,941 million euros and corresponds to a balance-sheet amount of 1,985 million euros………This measure has a positive impact, in net terms, on the equity of Novo Banco of approximately 1,985 million euros.

This may have happened just after Christmas 2015 but there was no present here for the holders of these bonds who found them worth zero. To say that institutional investors were unhappy would be an understatement and I will return to this later but for now I just wish to point out that the bill is escalating and also how can a clean new bank have to do this?

The sale of Novo Banco

There were various efforts to sell Novo Banco which went nowhere and of course trust in the Bank of Portugal was damaged by what happened above which added to the misrepresentations issued by it as BES declined. Just over a year ago it published this.

Banco de Portugal has defined the terms of the new sale process of Novo Banco, following the re-launch announced on 15 January 2016.

This January the Lex Column of the Financial Times pointed out why buyers have been in short supply.

Available for purchase: one crippled bank suffering from poor credit quality and high costs. Location: Portugal. Important information: Potential for future damages arising from litigious creditors. The sale prospectus for Novo Banco does not look enticing.

It gets worse.

Quarterly losses since Novo’s creation have averaged €250m. A quarter of all loans are delinquent or “at risk” of being so.

Again we are left wondering exactly how the Bank of Portugal defines the word “clean”?! But whilst the FT thought there were bidders it looks to me that the only player was the appropriately named Lone Star.

Lone Star

What happened late on Friday was summarised by Patricia Kowsman of the Wall Street Journal.

Dallas-based Lone Star will inject €1 billion ($1.07 billion) in Novo Banco for a 75% stake, while a resolution fund supported by the system’s banks will hold the remainder. The setup could ultimately leave Portuguese taxpayers exposed to losses, which is what the country’s central bank had tried to avoid when it imposed a resolution on the lender almost three years ago.

Actually they are only paying 750 million Euros up front with the rest by 2020. But as we number crunch this there are a lot of problems.

  1. The nearly 2 billion Euros of bonds written off do not seem to have made the situation much better.
  2. The Portuguese Resolution Fund put in 4.9 billion Euros for a bank which is now apparently worth 1 and 1/3 billion.

The Resolution Fund took steps last September to cover this.

the maturity date of the loan will be adjusted so as to ensure that it will not be necessary to raise special contributions,

I would like to take you back to August 2014 when it told us this.

Therefore this operation will eventually involve no costs for public funds………..This applies even in exceptional cases, such as this one, in which the State is called upon to provide temporary financial support to the Resolution Fund, as that support will later be repaid (and remunerated through payment of interest) by the Fund.

The use of the word “temporary” was a warning as its official use is invariably the complete opposite of that to be found in a dictionary. Also I am reminded of my time line for a banking collapse.

5. The relevant government(s) tell us that they are stepping in to help the bank but the problems are both minor and short-term and are of no public concern.

6. The relevant government(s) tell us that the bank needs taxpayer support but through clever use of special purpose vehicles there will be no cost and indeed a profit is virtually certain.

Back in August 2014 we were told this. From Reuters.

“The plan carries no risk to public finances or taxpayers,” Carlos Costa, the central bank governor, told reporters in a late night news conference in Lisbon.

Litigation

You might think that things could not get much worse. Yet apparently they continue to do so. From Reuters.

Blackrock and other asset management institutions are seeking an injunction this week to block the sale of Portugal’s Novo Banco to U.S. private equity firm Lone Star.

Okay why?

The bond transfer had caused losses of about 1.5 billion for ordinary retail investors and pensioners

Comment

A critique of the banking bailouts has been the phrase “privatisation of profits and socialisation of losses ” and we see this at play here. Whilst there is a veil of a Special Purpose Vehicle ( the Resolution Fund) the Portuguese taxpayer has had to borrow money to back most of it. It is plain that we were not told the truth or anything remotely like the truth when a “clean” bank was created. As no cash at all has been returned from the sale of Novo Banco – the funds are to boost bank capital – they are left hoping that one day the money will be repaid except they have been diluted by a factor of four.

Let us take a happy scenario where Novo Banco now does well the majority of the gains will go to Lone Star and a minority to the Resolution Fund. So the minor stakeholder gets the majority of the returns? Oh and even worse the Fund is backing another sector of potential losses. From the Algarve Daily News.

In a statement issued today, PS party leader Carlos César says MPs “should know in detail all the preparatory and contractual aspects of the sale operation” – bearing in mind the State has no say in the bank’s management, but is guaranteeing to underwrite extraordinary losses of up to €4 billion.

In a happy scenario the other Portuguese banks will be likely to be able to put some extra money into the Resolution Fund but of course many of them have their own problems and the Portuguese economy could do with them backing it.

And a bad scenario? Well look at the sums above……..

 

 

 

Could the Bank of England end up taking over the Co-op Bank?

One of the consequences of the credit crunch and the consequent banking bailouts is the way that the banks dominate financial life. We can in fact take that further because in the same way that British Airways was described as a pension fund with an airline subsidiary can we now be described as a financial sector with a real economy subsidiary? It so often feels like that.

Actually there is some fascinating number-crunching we can do as banks interact with central banks and as so often ECB (European Central Bank) gives us food for thought. Earlier @insidegame pointed out this.

ECB deposit facility usage €495.763 billion.

Interesting that banks are so willing to deposit at an interest-rate of -0.4% is it not? That hardly suggests confidence in the system. Well there is another 955.27 billion Euros held by them in the ECB current account at the same -0.4% interest-rate. Indeed at a time of apparent economic success someone is also borrowing some 590 million from the Marginal Lending Facility.

Marginal lending facility in order to obtain overnight liquidity from the central bank, against the presentation of sufficient eligible assets;

There is more to consider as we note that what is supposed to be a penal interest-rate is a mere 0.25%.

Co-op Bank

This is an institution about which Taylor Swift might well have written “trouble,trouble,trouble” for. This morning the Co-op group has announced this.

As a minority investor in The Co-operative Bank, the Co-op Group is supportive of the plan to find the Bank a new home. We will continue to work with the Bank and other investors through the process. We are focused on finding the best outcome for our members, two million of whom are Bank customers, as well as the members of our shared pension scheme which is well funded and supported by the Group. Our goal is to ensure the continued provision of the type of co-operative banking products our members want.

So the bank is up for sale and my immediate thought is who would buy it and frankly would they pay anything? Only last week Bloomberg put out some concerning analysis.

Co-Operative Bank Plc, the British lender that ceded control to its creditors three years ago, has plunged in value to as little as 45 million pounds ($56 million), according to people familiar with the matter.

The shares are privately owned so prices are not published but we are told this about trading and prices.

Shares in the Manchester, England-based lender, which don’t trade publicly, are quoted between 10 pence and 30 pence by investment banks offering private trading among institutional investors, said the people who asked not to be identified because they weren’t authorized to speak publicly. The shares were worth about 3 pounds after the bank was rescued by bondholders in 2013, falling to about 50 pence in September before plummeting in recent weeks amid questions over its financial strength, the people added.

There are two initial issues raised by this. The first is that “worth” is not the same as price and related to that I would say that the £3 price after the 2013 rescue was a combination of a false market and wishful thinking. In a closed private market, how can I put this? You can pretty much price it as you like and wait and see if anyone is silly enough to buy at that price? I think we are clear now that the answer was no! So the fall in the price has in my opinion been more an acquaintance with reality than any real change.

The institution would already have been on the radar of the Bank of England.

Co-Op Bank will probably operate below regulatory capital guidance until at least 2020, the bank said Jan. 26, as it replaces crumbling IT systems and separates its pension fund from its former parent.

One thing that raises a wry smile is that the banks are always described as having “crumbling IT systems”. How can this be when pre credit crunch we were told that they were run by people of such talent that they deserved vast salaries and remuneration packages? Someone should try a case for miss selling there. I believe the Co-op Bank has now outsourced such matters to IBM.

The Prudential Regulation Authority or PRA has been looking into this although its moves are awkward in the sense that they give the Co-op bank another downwards push.

The PRA increased its so-called Pillar 2A capital requirements, financial buffers linked to a lender’s idiosyncratic risks, to 14.1 percent of risk-weighted assets in November. By contrast, the level set for Lloyds Banking Group Plc, Britain’s largest mortgage lender, is 4.5 percent.

Bonds,Bonds Bonds

There is no bull market here indeed we see the reverse as the Co-op Bank’s bonds have seen quite a bear market.

The bank’s 206 million pounds of junior bonds due December 2023 dropped 4 pence to 45 pence on the pound on Wednesday, according to data compiled by Bloomberg, while 400 million pounds of senior bonds maturing in September this year were little changed at 85 pence, with a yield of 34.5 percent.

In these times of zero and indeed negative interest-rates which we reminded ourselves about at the opening of this article an interest-rate of 34.5% can be described thus.

Danger, Will Robinson! Danger!

The official view is quite different as the BBC explains.

The bank has four million customers and is well known for its ethical standpoint, which it says makes it “a strong franchise with significant potential” when it comes to a sale.

This seems like a reality was a friend of mine moment, or of course perhaps viewed through the prism of its previous drug-taking chairman Paul Flowers, who pursued the new methods of counting GDP with quite an enthusiasm. Meanwhile the last Fitch Report told a different tale.

Co-op Bank’s relaunch is crucial for it to become a viable business, but losses and capital erosion continue to hamper its progress. We expect Co-op Bank to report losses until at least 2017, and significant investment in new systems could extend losses into the medium term. Profitability should begin to benefit in 2018 when fair value adjustments related to the 2009 acquisition of Britannia Building Society are fully unwound.

Comment

This is a sad, sad story as there is much to recommend mutual organisations although of course much of that disappeared in the 2013 rescue. When the credit crunch hit there were hopes ( including mine) that the mutual system might help but sadly it has done little if any better than the share owned banks. The same greed culture ravaged it and may yet ravage us as taxpayers. This is particularly disappointing from an organisation which has promoted itself ad being based on ethical foundations.

Right now the Bank of England will be trying to encourage and goad someone into buying this. The problem is that the shortlist at the moment has one maybe which is the TSB. The problem in my opinion is that when a bank has trouble the record is simply that so far we have never been told the full truth at the beginning. A bit like the rule that you never buy a share until the third profit warning. After all if the outlook was good the hedge funds would keep it wouldn’t they? So there remains a genuine danger that the Bank of England will end up stepping up and apply its new bank resolution procedure. At such a time it would be on my timeline for such events.

5. The relevant government(s) tell us that they are stepping in to help the bank but the problems are both minor and short-term and are of no public concern.

6. The relevant government(s) tell us that the bank needs taxpayer support but through clever use of special purpose vehicles there will be no cost and indeed a profit is virtually certain.

7.Part-nationalisation of the bank is announced and taxpayers are told that a profit will result from this sound and wise investment.

8. Full nationalisation is announced to the sound of teeth being pulled without any anaesthetic.

As to the individuals concerned there is this.

It is also announced that nobody could possibly have forseen this and that nobody is to blame apart from some irresponsible rumour mongers who are the equivalent of terrorists. A new law is mooted to help stop such financial terrorism from ever happening again.

12. Some members of the press inform us that bank directors were both “able and skilled” and that none of the blame can possibly be put down to them as they get a new highly paid job elsewhere.

13. Former bank directors often leave the new job due to “unforeseen difficulties”.

 

 

 

It is always the banks isn’t it?

Firstly as we arrive at what is now called  Christmas Eve Eve let me wish all of you a very Merry Christmas. As I will be on the lunchtime show on Share Radio next Thursday I will  post at the end of next week but will take a short break before then. Meanwhile financial markets have raised themselves from annual end of year torpor to review quite a bit of activity in the banking sector. You see governments and regulators invariably wait until this time of year to hand out presents to the banking sector although many of them are not the sort of present we dreamed of as children. In past years we have seen both bailouts and bail ins in Portugal and Italy for example and this year I have been expecting the final chapter of the Monte Paschi story to arrive about now for some time.

The collapse of Monte Paschi

This sad sorry saga is now coming to some sort of climax. Yesterday evening as City-AM reports the board of directors met and decided it was over.

The country’s third-largest bank said it failed to secure investors and sell new shares, so it scrapped a debt-to-equity conversion offer that had raised €2bn. It is returning bonds tendered under the swap.

Monte dei Paschi said it would not pay fees to investment banks that had worked to place its shares or on its planned bad loan sale, including its advisers JPMorgan and Mediobanca.

Investment bankers not be paid is that allowed these days? Anyway that moved us to a situation this morning as described below.

Trading in Monte dei Paschi shares, derivatives and bonds has been suspended today after confirming it has requested state aid from the Italian government.

Paolo Gentiloni, the new Italian prime minister, announced in the early hours of this morning that the country will dip into a €20bn (£16bn) fund to help the world’s oldest bank

The timescale being provided is a little bizarre however as the Bank of Italy should now move in and complete this over the holidays so that people know where they stand.

Local press has said the bailout plan could take two to three months, starting with a government guarantee of Monte dei Paschi’s own borrowings to ensure it doesn’t run out of cash.

The problem of course is balancing Euro area bail in rules with the fact that ordinary Italians bought and in some cases were miss sold the bonds of Monte dei Paschi which will be bailed in and the fact that the Italian taxpayer has to take on yet more debt. So whilst we can say “It’s Gone” we do not know exactly where. However we may find out later as Livesquawk points out.

Italian Government To Meet At 12:00 CET To Discuss Economy & Finance Decree.

Fines Fines Fines

The next section is brought to you with the question what did the US taxpayer do for revenue before they discovered fining foreign banks?

Barclays

There was a little more surprise when this appeared on the news wires yesterday evening. From the BBC.

The US Department of Justice said: “From 2005 to 2007, Barclays personnel repeatedly misrepresented the characteristics of the loans backing securities they sold to investors throughout the world, who incurred billions of dollars in losses as a result of the fraudulent scheme.”……

Federal prosecutors said that as part of the alleged scheme Barclays sold $31bn in securities.

More than half of the mortgages backing the securities defaulted, the suit alleged.

According to Barclays this is all “disconnected with the facts” which looks like an official denial to me and we know what to do with them.  This is a by now familiar tale where denial turns into how much? As I describe below.

Deutsche Bank and Credit Suisse

My old employer regularly features in the news and here it is as the US regulators hand it a grinch style Christmas present. From Sky News.

Deutsche Bank and Credit Suisse have agreed to pay $7.2bn (£5.9bn) and $5.3bn (£4.3bn) respectively in penalties relating to the collapse of the US housing market before the financial crisis.

The Swiss lender announced it had reached a deal with the US Department of Justice hours after a similar move by Deutsche.

So happy days for the US taxpayer and unhappy days for the shareholders of the two companies? Actually the share price of Deutsche Bank is up around 3% this morning at 18.27 Euros meaning this from Sky News must have been a miss read of expectations.

While the German bank’s sum is half the $14bn originally sought by investigators, it is more than $2bn above the amount analysts expected Europe’s third-largest bank to shell out.

It seems that it is Credit Suisse where expectations may not have been met as after an early rally the share price has drifted lower today. For a deeper perspective a pre credit crunch share price just under 90 has been replaced by one of 15.2. As for my old employer a sort of Christmas ghost puts a chill in the air as we note just under 99 Euros being replaced by 18.27.

How many extra nukes for the United States will these fines pay for?

Of Number Crunching and GDP

Let me open with some seasonal cheer for the UK providing by the Office for National Statistics this morning.

UK GDP in volume terms was estimated to have increased by 0.6% in Quarter 3 2016, revised up 0.1 percentage points from the second estimate of GDP published on 26 November 2016, due to upward revisions from the output of the business services and finance industries.

We cannot keep the banks out of the news but at least this time it is for something positive! However annual growth fell to 2.2% due to downwards revisions earlier in the year meaning that the post EU vote number was better than the average of the pre EU vote number leaving ever more egg on ever more establishment faces. I did ask about this on Twitter.

Is Professor Sir Charles Bean available to explain how his -0.1% to -1% GDP forecast turned out to be +0.6% please?

It would seem that our professorial knight is ideally equipped to continue the first rule of OBR ( Office of Budget Responsibility) club. Also the more wrong he is will he collect even more impressive sounding titles?

But there is something to provide humility to those who analyse the detail of economic numbers. From Howard Archer.

Welcome news as balance of payments deficit in 2015 revised down markedly to £80.2bn from £100.2bn;

Even in banking terms £20 billion is a tidy sum and a revision from back then gives us some perspective on this.

The trade balance deficit widened from £11.0 billion in Quarter 2 2016 to £16.7 billion in Quarter 3 2016 (Figure 9). The trade position reflects exports minus imports. Following a 1.4% increase in Quarter 2 2016, exports decreased by 2.6% in the latest quarter, while imports increased by 1.4% in Quarter 3 2016 following a 0.4% increase in Quarter 2 2016.

It would be more accurate to say we think we did worse in the quarter in question rather than being absolutely sure of it.

Comment

As I look back over not only this year but the preceding years of the credit crunch era I note how much of this is really a story about the banks and the banking industry. As we compare it to the real economy I feel that our establishment have misunderstood which is the tail and which is the dog. Even when we move to other stories such as UK GDP we see the banks at play again although in a rare occurence the mention is favourable.

The saddest part is that all of this was supposed to have been reformed well before now. I guess it is reflected by this from bitcoin price.

The average price of Bitcoin across all exchanges is 910.16 USD

 

 

 

 

If the Italian economy is to recover then genuine banking reform is needed

A theme of this website is the way that the Italian economy and its banks are trapped in what is at best stalemate and as often as not weakens each other. This has over time led to a situation where we see that the Italian economy has stagnated in the Euro area and in fact has shrunk if we look at GDP (Gross Domestic Product) per capita. In other words the individual experience in terms of the ordinary person has been of an economic depression. Chilling when it is put like that isn’t it? Project Syndicate take us from the aggregate position to the individual one.

Italian real (inflation-adjusted) GDP growth has suffered, averaging just 0.3% per year from 1999 to 2015.

But in spite of Italians leaving the population has grown over the same period meaning that per person output has fallen.

as many as 1.5 million young Italians have left the country, with 90,000 departing in 2014 alone. Meanwhile, five million foreign immigrants have arrived, constituting 8.3% of all residents (and not including undocumented immigrants).

Those who proclaim that immigration is an economic success get plenty of food for thought from the experience of Italy.

There has been a period where some on Twitter have been proclaiming that Italy has been on the cusp of an economic renaissance but this has turned into this as @Livesquawk reported at the end of last month.

Italy PM Renzi says cabinet approve economic forecasts; 2016 GDP forecasts cut to 0.8% (prev. 1.2%), 2017 GDP forecast 1.0% (prev. 1.4%)

As you can see it has turned into a case of “meet the new boss, same as the old boss”. Or as Project Syndicate puts it.

Two years later, far less change than expected has materialized, and Renzi has come to resemble a guarantor of political stability more than a rottamatore – a “scraper of the old,” as he had been nicknamed.

That makes him resemble Shinzo Abe in Japan.

Foreign banks are cutting back

A theme that does not always get the airing it should is that many banks are cutting back on business overseas. The last 24 hours have seen that at play in the banking sector of Italy.

Barclays has today agreed to sell a portfolio of salary secured loans, worth around £260m, in Italy to IBL Banca………Although the bank continues to run investment and corporate banking in Italy, it shed its retail banking network in August.

Those with a wry sense of humour and knowledge of the market timing skills of UK banks may see this as hope for Italy! But Barclays is not alone in retrenching.

BNP Paribas plans to cut 5 percent of the workforce at its BNL Italian business and close more than 10 percent of its branches there…….BNL would cut 700 jobs and close 100 branches under its new business plan to 2020

Again maybe there is some hope as we note that BNP might be a reverse indicator.

BNP Paribas paid 9 billion euros to acquire control of Banca Nazionale del Lavoro (BNL) in 2006 and had to revive the Italian bank from years of underinvestment.

However the theme here is of foreign banks pulling out of the Italian market as we note also that only marginally but the NPL (Non Performing Loan) issue is getting worse again.

Gross bad debts at Italian banks rose to 200.106 billion euros ($224 billion) in August from 198.252 billion euros the month before, though the rate of growth slowed, the Bank of Italy said on Tuesday…..The central bank said gross bad loans increased a yearly 0.1 percent in August compared to a year-on-year rise of 0.3 percent in July.

Presumably this is not what the Governor of the Bank of Italy meant when he told us this at the end of May. From Bloomberg.

 

Italy Bank Non-Performing Loans at Turning Point, Visco Says

Monte dei Paschi de Siena

BMPS was the subject of a private-sector rescue plan but sadly for it that hit stormy waters as its share price fell. It was a response to the Euro area banking stress tests where under one scenario it had capital of -2.44%. According to Euro money this was the plan.

The ambitious deal moves nearly €10 billion of NPLs off-balance sheet and pours another €5 billion of capital into MPS’s coffers. This should increase its CET1 to 11.4% and reduce its NPL ratio from the current eye-watering 34% to around 18%.

This was presented as a triumph and we were told this by the CEO, “We don’t have a plan B; this is our plan,”. Actually there have been several new plans since then usually announced late on a Friday and I guess the new CEO is not bound by the old one. Although as this from Reuters yesterday tells us some of it still exists.

Italian bank bailout fund Atlante confirmed on Wednesday a commitment to invest up to 1.6 billion euros ($1.8 billion) in the planned securitisation of bad loans at ailing bank Monte dei Paschi’s.

I will come to Atlante another time in its various guises as it sees ever more demands on its funds and those who back it are no doubt hopeful that this is true “due diligence of the soured debts had been completed and had confirmed the initial price estimates”.

This morning the story has developed as we have got an official denial and we know what to make of those! From Italy Europe24

Meanwhile the Italian government has taken a new stance on the bank: “Public support measures for MPS are not being envisaged, let alone nationalization,” said Economy Minister Pier Carlo Padoan during question time in the Italian Parliament.
“Any talk of a bail-in is therefore just unfounded speculation,” he said.

Unicredit

This has done better this morning as it has managed this according to the Financial Times.

UniCredit has raised €550m overnight through the sale of a 20 per cent stake in its online bank Fineco, the latest asset sales as Italy’s largest bank by assets seeks to boost laggard capital ratios.

In itself Unicredit needs the cash so it can improve its capital ratios but this sort of action has a consequence as you have to sell-off your better businesses leaving you worse off aftrwards.

Nonetheless, bankers say UniCredit’s sales of its most profitable assets will leave the bank’s return on equity severely weakened posing a knock on problem.

So tactically good but strategically bad seems to be the summary here.

Comment

What is extraordinary about the Italian economy is the way that the expansionary monetary policy of the ECB has helped it so little. A deposit rate of -0.4% and the 80 billion Euros a month of QE bond purchases as well as a lower overall exchange-rate for the Euro seem to have been like a shower in a desert. To this we can add the economic benefits of a lower oil price. Some of these gains are hard to quantify but will have been at play and may be reinforced a little going forwards by the fact that the Euro has dipped below 1.10 versus a strong US Dollar this morning. On the tangible side we have the 176 billion Euros of Italian bond purchases by the ECB which have boosted the economy via the public finances.

Meanwhile the doom loop between the Italian banks and the overall economy just carries on. The banks are happy to invest in Italian government bonds and of course profits have been available there via the ECB. But that is quite different to lending to help companies and businesses as the IMF put it in July.

Alongside anemic demand, impaired balance sheets have weighed down credit growth and the economic recovery

Another issue is related to the high unemployment rate in Italy which is 11.4% and this raises the issue of female participation in the labour force. From the IMF.

Low female labor force participation in Italy is not necessarily the result of unconstrained choice……In 2014, the difference between male and female participation rates was more than 20 percentage points, surpassed only by Malta.

There are many ways of viewing this but on today’s topic it does limit the Italian economy.

 

 

 

Inflation is present in UK services and bubbling away in house prices

Today we receive the last UK consumer inflation report in 2015 albeit that it takes us only up to the end of November. What we now know is that this has been an extremely docile and indeed in my view welcome year for UK consumer inflation which has been pretty much zero on the official measure. The Consumer Price Index was 128.2 in both November and December last year and was 128.3 in November this. The downwards push provided by oil and commodity prices gained a second wind towards the end of the year and so we have seen a disinflationary burst which will affect all of 2015 and seems set to influence the spring of 2016 too.

What about oil and commodity prices?

The last fortnight or so has seen yet another plummet in oil prices such that a barrel of Brent Crude Oil costs US $38 now. The post OPEC meeting disarray means that apart from the dip in January then such a price will see us experience annual oil price falls again especially in late spring and early summer when this year we saw Brent Crude push above US $60 per barrel. So rather than being in Taylor Swift terms “like,over” in fact we will see a reduction in oil price based disinflationary pressure as we stand. If you want some perspective you can see that in terms of diesel prices at the pump we have had disinflationary pressure for some time. End November 2012: 141 pence, 2013: 138 pence, 2014: 128 pence, 2015: 110 pence.

A similar pattern can be seen from commodity prices which have also seen something of a second wind on the downside. The CRB (Commodity Research Bureau) Index is at 380 now as opposed to the 438 at which it started 2015, and that does not give the full picture as it bounced to 430 in May. So since then we have been slip-sliding away. The overall fall has been since the peak of 505 in May 2014 to give an idea of scale. In the headlines we see this as reports of new lows in prices for basic commodities like Iron Ore and Copper.

Producer Prices

This morning’s data release has confirmed the trends described above.

Factory gate prices (output prices) for goods produced by UK manufacturers fell 1.5% in the year to November 2015, compared with a fall of 1.4% in the year to October 2015.

So we see that the immediate prospect is for more good price disinflation and what do we see further up the chain coming our way?

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 13.1% in the year to November 2015, from a fall of 12.3% in the year to October 2015.

As you can see the heat remains on and returning to the trends for oil and commodity prices seems set to remain with us into early 2016.

Those who look at the data will note that we now have core PPI numbers. This is you think about it are perhaps the silliest effort on this front we have seen. Let us try to measure trends for manufacturers costs whilst excluding the main costs…. what could go wrong?

Official Consumer Inflation

This nudged its way out of outright disinflation in November.

The all items CPI annual rate is 0.1%, up from -0.1% in October.

The main factors in this were that petrol and diesel prices fell more slowly than last year, prices of spirits and wines rose and the Insurance Premium Tax rose from 6% to 9.5%.

We also see that we have a dichotomy in our inflation position or for football fans a story of two halves. The first half is in line with the updates above.

The CPI all goods index annual rate is -1.9%, up from -2.1% last month.

Whereas the second half begins to return us to my theme that the UK is basically an inflation nation, or if you prefer has a strong tendency towards institutionalised inflation.

The CPI all services index annual rate is 2.4%, up from 2.2% last month.

Clothing and Footwear

This has been a problematic area for the UK Office for National Statistics for some time and the issues were used as an excuse for the establishment attack on the RPI. However just like with the rentals series the pack of cards tends to behave like well a pack of cards.

This is the first fall in prices between October and November since official records began in 1996 and follows the largest September to October price increase on record. It continues the trend seen since the summer of atypical monthly price movements……..

The average person is not convinced

Only last Friday we were told this by the Bank of England’s own inflation expectations survey.

Asked to give the current rate of inflation, respondents gave a median answer of 2.0%, compared to 2.1% in August.

So lower but hardly overall disinflation and if we look ahead?

Asked about expectations of inflation in the longer term, say in five years’ time, respondents gave a median answer of 2.9%, compared with 2.8% in August.

So we see that they are not convinced by the official consumer inflation numbers and we see a reason why the Retail Price Index continues to retain support.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 1.1%, up from 0.8% last month

The modernised version remains above CPI too.

The all items RPIJ annual rate is 0.3%, up from 0.0% last month.

The RPI is now 1% above the CPI (0.91% to 2 decimal places) which poses its own questions not only for the inflation target which was only moved by 0.5% when the latter replaced the former. That as I have pointed out often in the past was a type of loosening of monetary policy.

House Prices

These are the two words which must not be mentioned along the lines of the rules of Fight Club in UK inflation measurement. We get to see why just by observing the numbers they provide.

On a seasonally adjusted basis, average house prices increased by 0.8% between September and October 2015……UK house prices increased by 7.0% in the year to October 2015, up from 6.1% in the year to September 2015.

Plenty of inflation here if we bothered to officially look! If we look at the change in the credit crunch era then the official line that it is pure wealth is simply laughable.

In October 2015, the UK mix-adjusted house price index increased by 0.1% from the previous record level witnessed in September 2015 to reach a new record of 220.1 (Figure 2). The UK index is 18.7% higher than the pre-economic downturn peak of 185.5 in January 2008.

Comment

The UK inflation experience has been extremely favourable over the past couple of years or so. First we had the ongoing appreciation of the UK Pound £ -often hidden by the rise of the US Dollar- which began in March 2013 and more latterly we have had the fall in oil and commodity prices. However if we bother to look there are signs of inflation in the services sector and the housing market which are very familiar from UK economic history. Thus if the Bank of England applies the 18 month lag rule for monetary policy it has some thinking to do.

Yesterday Deputy Governor Minouche Shafik gave a speech which was not a lot of help.

So when the time does come to raise Bank Rate, it will be important to retain the flexibility to change course if needs be, either by tightening policy more quickly than originally envisaged or by being prepared to loosen again.

That more or less covers everything! Oh and did she mean the credit crunch here?

The flexibility the MPC has had to pursue its target independently since 1997 has brought great benefits.

As we wait to see if Janet Yellen and the US Federal Reserve back up their hints and promises I note that for the Bank of England there is a choice to be made too. Are they targeting inflation two years ahead or not?

Update

Regular Readers will recall that earlier this year Paul Johnson of the IFS recommended that the UK use CPIH (where H= a watered down version of housing costs using rents) as its main inflation measure. How is that going? On Twitter not too well as the only non-official mention is pointing out it is a bad measure.

Hold that knighthood…….