The underperformance across emerging markets stocks is becoming more severe. In spite of Friday’s beating to the S&P500, emerging markets indices are faring worse. Brazil’s Bovespa for example is down 14.5% year-to-date (vs. S&P500 up 15% YTD)….
The debate around “too big to fail” of the US banking system is often infused with political rhetoric and media hype. Let’s go through some Q&A on the subject and discuss the facts.
Q: Did large banks take disproportionate amounts of real-estate related risk vs. smaller banks prior to the crisis?
A: No. That’s a myth. Smaller banks were much more exposed to real estate (see discussion).
Q: Which “too big to fail” banks were directly bailed out by the US federal authorities during the 2008 crisis?
A: While hundreds of banks were forced to take TARP funds, only Citigroup (among US banks) received an explicit bailout to keep it afloat. Note that Bear Stearns (and Lehman), AIG, GM/GMAC, Chrysler, Fannie and Freddie were not banks. Neither was GE Capital and other corporations who relied on commercial paper funding and needed the Fed’s help to keep them afloat. Wachovia may have become the second such large bank if it wasn’t purchased by Wells.
Q: Why did Citi fail in 2008?
A: Citi ran into trouble because of a massive off-balance-sheet portfolio the firm funded with commercial paper. In late 2007, when the commercial paper market dried up, Citi was forced to take these assets onto its balance sheet. The bank was not sufficiently capitalized to absorb the losses resulting from these assets being written down.
Q: What were the assets Citi was “warehousing” off-balance-sheet?
A: A great deal of that portfolio was the “AAA” and other senior tranches of CDOs that Citi often helped originate (including mortgage related assets). Rating agencies were instrumental in helping banks like Citi structure these assets and keep them off balance sheet in CP conduits.
Q: Why did Citi (as well as many other banks) hold so much off-balance sheet?
A: Because they received a significantly more favorable capital treatment by doing so (the so-called “regulatory capital arbitrage” – see discussion from 2009).
Q: Did Citi break any state or federal laws by doing what it did?
A: No. All of this was perfectly legal and federal authorities were aware of these structures.
Q: Did derivatives positions play a major role in Citi’s failure? Were other large US banks at risk of failure due to derivatives positions?
A: No. That’s a myth. The bulk of structured credit positions (tranches) that brought down Citi were not derivatives (just to be clear, CDOs are not derivatives).
Q: What has been done since 2008 to make sure the Citi situation doesn’t happen again?
- The US regulators now have the ability to take over and manage an orderly unwind of any large US chartered bank. Banks are required to create a “living will” to guide the regulators in the unwind process. The goal is to force losses on creditors in an orderly fashion without significant disruptions to the financial system and without utilizing taxpayer money.
- Large banking institutions are now required to have more punitive capital ratios than smaller banks.
- Capital loopholes related to off-balance-sheet positions have been closed.
- Stress testing conducted by the Fed takes into account on- and off-balance sheet assets, forcing banks to maintain sufficient capital to be able to take a hit. US banks more than doubled the weighted average tier one common equity ratio since the crisis (see attached).
Q: Do large US banks have a funding advantage relative to small banks?
A: Not any longer. According to notes from the meeting of the Federal Advisory Council
and the Board of Governors (attached – h/t Colin Wiles @forteology), “Studies point to a significant decrease in any funding advantage that large U.S. financial institutions may have had in the past relative to smaller financial institutions and also relative to nonfinancial institutions at comparable ratings levels. Increased capital and liquidity, in addition to meeting the demands of many regulatory bodies, has largely, if not entirely, eroded any cost-of-funding advantage that large banks may have had.”
Q: What is the downside of breaking up banks like JPMorgan?
A: Large US corporations need large banks to provide credit and capital markets access/services (Boeing is not going to use Queens County Savings Bank). Without large US banks, US companies will turn to foreign banks and will be at the mercy of those institutions’ capital availability and regulatory frameworks. Foreign banks will also begin dominating US capital markets primary activities (bond issuance, IPOs, debt syndications, etc.) And in an event of a credit crisis foreign banks (who are to some extent controlled by foreign governments) will give priority to their domestic corporations, putting US firms at risk.
Q: How large are US largest banks relative to the US total economic output? How does it compare to other countries?
A: See chart below:
So before jumping on the “too big to fail” bandwagon, get the facts.
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The “March Against Monsanto” in 52 countries, an unapproved strain of its genetically modified wheat growing profusely in Oregon, cancelled wheat export orders…. A rough week for Monsanto. Now it threw in the towel in Europe where its deep pockets and mastery of lobbying had failed: “It’s counterproductive to fight against windmills,” it explained.
US inflation measures continue to decline. Government data showed that both the headline and the “core” PCE (excluding food and energy) indicators fell last month. Moreover, the core index hit the lowest level since this data has been collected, starti…
Setting aside the $2.13 trillion under management, there is a certain mystique attached to hedge funds and the people, like George Soros, Carl Icahn, and John Paulson, who manage them.
At one time, hedge fund managers were counted among the “Masters of the Universe.” Most of the “rich lists” include no small portion of these types.
But all of these big money managers ultimately live or die on performance.
If their fund takes a dive, the manager might not even draw a paycheck. Meanwhile, the wildly successful managers are compensated far and above what the average Wall Street or London über-banker receives.
But this year, the hedge funds have collectively lagged behind the S&P 500 by about 10% according to Goldman Sachs. Analysts there credit this underwhelming performance to overly bear-ish fund managers who like to short stocks like Johnson & Johnson (NYSE:JNJ), only to see the stocks head the other way.
Part of the allure of the hedge fund world is that they are usually open only to “accredited investors,” certain high net worth individuals who meet the criteria, laid out in SEC Regulation D, rules 505 and 506, for investing in hedge funds [emphasis added].
Here are just a few of the criteria:
- a bank, insurance company, registered investment company, business development company, or small business investment company;
- a director, executive officer, or general partner of the company selling the securities;
- a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person;
- a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
- a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.
A Poor Man’s Hedge Fund
As for the rest of us, who may not be “accredited investors?” We’re on our own-but not completely.
There are certain ways to taste the rarified air of the hedge fund crowd.
There is an ETF, the Global X Guru Holdings Index ETF (NYSEArca:GURU). Global X’s methodology involves scouring the numerous 13F forms that fund managers are required to file. The fund searches for the best performing holdings among the hedge funds – the managers’ top picks – with the least turnover, and takes you along for the ride. It’s been called the “poor man’s hedge fund.”
GURU has been around a little less than a year, and has beaten the S&P 500 by a respectable 18 percent.
It’s not bad, but their track record is thin on time and the truth is there are ways to do even better…
If you have a 401(k) chances are you’re getting ripped off and you don’t even know it.
“You are lucky, if I may say so, that I’m the one who’s standing here and not the ghost of Sen. Carter Glass. One hesitates to speak for the dead, but I am reasonably sure that the Virginia Democrat, who regarded himself as father of the Fed, would skewer you.”
When looking for the best undervalued stocks to buy now, you can’t just consider those that have lagged the broader market.
The boom in shale oil production in the United States isn’t expected to have much impact on global markets.
The existing social and financial order is crumbling because it is unsustainable on multiple levels. The central state is not the Millennials’ friend, it is their oppressor.