It is all about the banks once again

As so often we find ourselves returning to the topic of the banks as they are at the heart of the financial system. They are the group which most exemplify the dictum if you want to enrich yourself get as close as you can to flows of money. The best description of this was provided by Matt Taibbi some years ago.

The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.

Now we find ourselves in a situation where central banks are hurriedly devising schemes to protect the banking sector which is odd in a way for something they have kept describing as “resilient”. Of course the original medicine of interest-rate cuts has turned into an overdose as the banks remain terrified of the consequences of reducing interest-rates for the ordinary depositor below 0% in case it creates a run on deposits. Such a thing which expose some of the illusions that banking relies on. So now we have other policies such as more Quantitative Easing of which there will be an extra £4.5 billion in the UK today for example. Also we are in an era of “credit easing” with what is called the Term Funding Scheme for Small and Medium-sized Enterprises or TFSME as below.

 In order to mitigate these pressures and maximise the effectiveness of monetary policy, the TFSME will, over the next 12 months, offer four-year funding of at least 5% of participants’ stock of real economy lending at interest rates at, or very close to, Bank Rate……….Experience from the Term Funding Scheme launched in 2016 suggests that the TFSME could provide in excess of £100 billion in term funding.

Last time around the money leaked straight into the mortgage market thus providing a double boost for the banks as they were able to lend out funds they got cheaply as well as boost their balance sheet as the consequent higher house prices improve their mortgage book.

But in spite of that there are plenty of signs of this.

Trouble, trouble, trouble
Oh, oh
Trouble, trouble, trouble ( Taylor Swift).

Lloyds Bank

Let me give you a different perspective on this with some news that flashed a warning sign yesterday.

*LLOYDS BANK STARTS CASH TENDER FOR 12% PERPETUAL CAP SECURITIES Wow, this is stunning. ( @jeuasommenulle)

These securities are part of the capital of a bank and some US $2 billion was issued. As junior subordianated debt it is not at the top of the line but this is hardly the time for a buyback of any sort of capital especially when we note the news below. Switching to the interest-rate well that is what banks had to pay when the credit crunch was raging in last 2009.

This poses a question of why the Bank of England is allowing this? Which leads to the conclusion that one of the holders of the bond may be desperate for cash/liquidity and is being offered a type of out or if you prefer an olive branch. Regular readers are unlikely to be surprised by this being in US Dollars.

Dividends

According to the Financial Times these are something for yesterday and some unspecified date in the future but not now.

The UK’s largest lenders bowed to pressure from Britain’s top financial regulator and halted their dividends after they were warned against paying out billions of pounds to shareholders during the coronavirus pandemic. In a series of co-ordinated statements on Tuesday evening, Lloyds, RBS, Barclays, HSBC, Santander and Standard Chartered said they would cancel their dividends for 2019 and refrain from setting cash aside for investor payouts this year. They also pledged not to carry out any share buybacks.

So the banks will save the amount below and accordingly get a capital boost.

By bowing to the regulator’s wishes on dividends, the banks have avoided being subjected to formal action. But the decision to cancel last year’s payouts — worth £7.5bn — will prove unpopular with some investors, especially retail shareholders who rely on the payout for their income.

Investors though who have been hoping for dividends will lose out. Now whilst owning a share is supposed to be risky there is an awkward optic here in the era of central bank put options for equities as well as the fact that some of these had been announced.

The Asia-focused bank had been due to pay a dividend totalling $4.2bn on April 14. HSBC’s Hong Kong-listed shares fell as much as 9.9 per cent on Wednesday morning…….Barclays had been due to pay a full-year dividend of 6p per share on Friday, worth roughly £1bn.

Bonuses

These too are supposed to be put on hold.

The regulator also said it “expects” the banks and Nationwide, the building society, to refrain from paying any cash bonuses to senior staff and signalled they should stop setting money aside for variable pay during the “coming months”. ( Financial Times )

As someone who is suspicious of such announcements it immediately occurs to me that bonuses in shares are not excluded according to that statement. Furthermore bank shares are very cheap right now, of which more later. So bonuses would probably have been in shares anyway.

If North Man is correct there is also another issue.

Absolute scandal – the banks have just paid their 2019 bonus pools in the LAST 2 WEEKS (e.g. c http://1.bn Barc and c. 3bn HSBC paid out). If a capital cushion is required, why didn’t the PRA ensure these were stopped as well?…….Why doesn’t the FT article mention this – any serious financial article would question why 19 bonuses can be paid, but the 19 dividend can’t and challenge this glaring inconsistency. Surely has to be same treatment for both whether it is pay, cut or suspend.

He has a point I think.

The US Dollar Shortage

I have been writing for a couple of years or so now about the apparent shortage of US Dollars. It would appear that the US Federal Reserve is coming around to my point of view. It was only on the 16th of last month I noted the expansion of its liquidity or FX Swaps. As of last week’s update some US $206 billion was drawn on them. But it seems that was not enough. The emphasis is mine.

The FIMA Repo Facility will allow FIMA account holders, which consist of central banks and other international monetary authorities with accounts at the Federal Reserve Bank of New York, to enter into repurchase agreements with the Federal Reserve. In these transactions, FIMA account holders temporarily exchange their U.S. Treasury securities held with the Federal Reserve for U.S. dollars, which can then be made available to institutions in their jurisdictions.

 

Comment

The financial system is plainly creaking and clearly so are some of the banks. I have looked above at the issue of US Dollar liquidity and it is not necessarily a shortage of them outright but that now some are considered too risky to be lent them. As banks rely in such flows there is a danger of a financial form of contagion. I doubt it is a coincidence that the bond Lloyds Bank are planning to redeem is US Dollar denominated.

On the other side of the coin the banks are under pressure to support the economy. There must be extraordinary demands on them to support smaller businesses for example. I see the big read in the Financial Times is this.

Will the coronavirus crisis rehabilitate the banks?

I would not be any sort of son if I did not point out that my father’s ashes will be spinning at maximum speed. For newer readers I looked at his experiences with the banks during economic slow downs last Thursday. This from the FT piece is really rather extraordinary.

We are the doctors of the economy now.

If that is a parody then please forgive me for missing it.

Returning to the UK banks we see in an irony of the times the Bank of England remaining a follower of the ECB as it was it who started the dividend suspension theme. However there is a catch which is the effect on already weak bank share prices as we learn there are a lack of free gifts in this area. For example Barclays Bank is at 88 pence as I type this down another 6 pence today. Meanwhile Royal Bank of Scotland in which the UK government invested UK taxpayers money at a bit over £5 is at £1.07 as I type this also down 7 pence today.

Yet Lloyds Bank can apparently buy a bond back? With a share price of 30 pence?

Meanwhile the owner of Brewdog when asked by CNBC if the banks were doing all they can replied.

No I don’t

A critique of the Keynesian fiscal expansion plans of Lord Skidelsky

Last night I attended a lecture by Lord Skidelsky at the Progressive Economic Forum. On a personal note it was amusing not only to be so near to my alma mater the LSE but also to have a chat with one of my past tutors from there Willem Buiter. Returning to the economics the lecture was based on the faith that Lord Skidelsky has in fiscal policy and his argument that we should have expanded it in the face of the credit crunch. Putting it another way he is an out and out Keynesian although the claim in the introduction that he was the greatest expert on the subject seemed a little harsh to me on John Maynard Keynes himself.

If we start with a strength of his approach it was the point that we have seen an extraordinary monetary response to the credit crunch. He also mentioned his discussions with central bankers and how they debated what the response had been in terms of growth and inflation. It was clear that he was unconvinced that it had done much good, but whilst  he did not seem to address the point of who should be held responsible for this, he did have a proposed solution which was for the government to take back control of monetary policy. In some ways I support that as it would return at least some democracy to an important process but it also creates another type of what I call the British Rail problem. This is a situation where we do not like the current scenario and sometimes forget that the proposed alternative is something that we did not like much either when we had it. In other words there is a clear danger of jumping from the frying pan into the fire. Indeed I found it troubling that when asked a question about QE and its consequences our noble Lord simply resorted to waffle.

Fiscal expansionism

The case here is that we would have been on a better path if in the dog days of 2008/09 and following we had expanded fiscal policy. The detail sounded like an argument for something of a control and command economy when the case was made for public investment “of course there will be mistakes but the private-sector makes mistakes too”. The latter point is true but glosses over the point that it is with their own money or with money given to them by shareholders. We know that it is far from perfect in a world where managers act as owners and even owners can appear on TV smoking weed and acting oddly.  But then again of course if we look at Tilray we see that taking advantage of people smoking weed is apparently the great new profit opportunity or something like that! The Steve Miller Band were of course on point many years ago.

I’m a joker
I’m a smoker
I’m a mid-night toker

The problem is that whilst Lord Skidelsky can assert his claims as so often in economics we lack evidence. The nearest example to a country I could think of to his preferred scenario is Japan. It’s fiscal deficit stayed quite high for a while in response to the credit crunch as in relation to GDP it went 9.5%, 8.3% twice, 8.1% and then 7.8%. Yet in terms of economic growth or wage growth it has seen its own struggles. Also one of the ways this has been financed has been by the QE bond purchases of the Bank of Japan which has bought 42% of the market now and its total balance sheet is just passing annual GDP. So via the depressive effect of  QE effect on bond yields, we see that a further stimulus was applied by QE, as otherwise a higher deficit would have been required for the same outcome. This brings me to another issue which I will expand upon more later but these thoughts seem unworldly with regard to financial markets, and a harsher critic might say from another world.

Another issue is a common one with advocates of expansionary monetary policy which is the “More, more,more” one. At whatever point we find ourselves we are told that the next step will lead us to the economic version of the land of milk and honey. It is of course not the fault of advocates of fiscal policy that the monetary policy advocates have pretty comprehensively queered this patch. But we are where we are and as Kelis points out.

Might trick me once
I won’t let you trick me twice
No I won’t let you trick me twice

Financial Markets

Here we got the strongest example of an unworldly line of thought which was the suggestion that UK banks should be restricted to domestic activities only. I could see two clear flaws in that. The first is that RBS and Barclays may well immediately collapse and HSBC would either shift to the places in its name and/or collapse. Next if we move to the international arena there is the case of Turkey where UK banks have lent around US $15 billion which presumably they would need to get rid of under the planned scenario. In its current state Turkish firms could hardly repay it and other banks would only take over the loans for quite a discount.

Regular readers will know that I am very critical of banking behaviour and am certainly no fanboy. But the problems with banking run deep as for example are we really expected to believe that Danske Bank somehow took on some US $234 billion of dodgy money in Estonia without anybody being aware of it? We cannot wish away this reality and retreat behind our own borders as we are likely to find the problem simply pops up somewhere else.

Next comes the issue highlighted by the mention of a requirement for capital controls to accompany the new policy. These were not specified and were rather vague leading to the fear that they might spread to more areas than intended. We also know that they have a patchy success record because if we look at China where some of the implementation has been ruthless we also see that a lot of money escaped via Bitcoin if nowhere else.

This was accompanied by the implication that financial markets are bad people and speaking from personal experience some of them certainly are. But in general they mostly represent investors and pensioners and if you are implementing policies they are worried about they have a right to ask for a higher rate of interest. This can be a dangerous downwards spiral which has become anaethetised to some extent in the credit crunch era because central banks have replaced investors as buyers of government debt. But as that option would not exist in Lord Skidelsky’s scenario as the government will be in charge of monetary policy we could see what would be regarded as outright monetisation of government debt. We have seen few examples of this but the one in Ghana we looked at a couple of years or so back was like an express lift going down.

Comment

An unspoken theme here was the issue if how much control any government actually has these days? In the scenario suggested in the lecture we saw a firm grip being taken in some areas but in my opinion a lack of understanding of not only second order effects but also some first order ones. That could go wrong very quickly. On an initially more minor point the idea that Labour should have devalued the Pound £ in 1964 rather than 1967 provoked two lines of thought. Firstly my understanding of the 67 devaluation was that due to later revisions of the balance of payments it was not necessary so why do it earlier? Next comes a much less minor point that an outspoken sub-plot might be that a much lower £ is also part of the plan. That might be arrived at on day one if the reference to doing things without telling voters was carried out – interestingly the source of this line of thought was a political opponent Nigel Lawson- as it would be somewhat like financial dynamite I think.

Moving to strengths of the proposal there are indeed some. Firstly we do have some control over events and some freedom of manoever and there are times fiscal policy can help.There are certainly areas which could do with more public money. I agree that monetary policy has spiraled out of control with the list of its advocates shrinking.  Also the point that what we have has at best a patchy record and at worst has not worked is a fair one. But to my mind that is quite some distance from assuring us that it is a type of Holy Grail for our economic problems.

 

 

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?

 

 

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