Bank Failure Friday: the 18th of 2014 is in Mankato, MN

Northern Star Bank, Mankato, Minnesota, failed today, costing the FDIC $5.9 million.

As of September 30, 2014, there are 6,589 institutions remaining in the FDIC system.

That means that since the summer another 67 formerly independent participating institutions in the FDIC have left the system, most of which have been absorbed by larger institutions through acquisition and mergers because they were no longer able to survive and compete as stand-alone profitable banks in the new rigorous regulatory environment imposed under the Dodd-Frank legislation and Basel capital rules.

Over 300 formerly FDIC-participating institutions have suffered this same fate since the beginning of this year.

And in February 2007 there were 8,743 FDIC member institutions, 2,154 more than there are now. Only 500+ of these failed. The rest have been gobbled up by big-banking.

Rex "The Nut" Nutting commits drive by shooting of American savers, misunderstands excess reserves

The resident communist at MarketWatch weighs in here:

Sure, people need to keep some money handy to pay their bills and some folks might have a few hundred or a few thousand in a rainy-day fund, but no one needs immediate access to the equivalent of 11 months of income. In essence, there’s $10.8 trillion stuffed into mattresses. That $10.8 trillion hoard represents a failure of Fed policy. Since the Fed began quantitative easing in September 2012, U.S. households have socked away $1.17 trillion in their low-yield accounts. That means that 95% of the Fed’s $1.24 trillion QE3 ended up not in bubbly markets but in a safe and boring bank account.

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The $1.17 trillion since September 2012 is nicely represented in "excess reserves of depository institutions", which are up $1.21 trillion since that time. So sorry, Rex, the banks are holding on to that cash, not households. The reason? They must, to help comply with increased capital requirements under Basel III rules in the wake of the panic of 2008. That's the reason for QE, but no one wants to call it the continued bank bailout that it is while the rest of us continue to suffer without bailouts of our own. People might actually revolt if they did that, so it's best to call QE and its evil twin ZIRP necessary measures to prop up housing, employment and the like. To call it a bank bailout would just give it away, and we can't have that, now can we?

Savings deposits, meanwhile, are up less than $1 trillion since September 2012, to which, by the way, no one has "immediate access". Savings deposits are not "demand deposits" like checking accounts. It can take up to 30 days to get all your money out of savings, which now totals $7.38 trillion. Demand deposits at commercial banks, on the other hand, are up just $220 billion since September 2012, to $1.18 trillion, and total checkable deposits are up just $320 billion to $1.66 trillion. Not exactly a lot of money in a $17 trillion economy.

These savings, such as they are, aren't a failure of Fed policy. They are actually a repudiation of it by a part of the population which still possesses a cultural memory of the basis of capitalism.

Wake up and join the revolution, Rex.

Bank mergers have doubled annually since 2009 as Dodd-Frank and now new capital rules begin to bite

The Wall Street Journal reports here:

More small banks are selling themselves, and executives say Washington regulations are a big reason why. ... In all, there were 204 bank mergers in 2013 in which the target bank had less than $1 billion in assets, according to financial-research firm SNL Financial. That is about the same as the 206 in 2012 and up significantly from 102 in 2009, before Dodd-Frank was passed in 2010. As recently as 2011, the number was 130. ... Many bankers think smaller banks now must have at least $1 billion in assets to cope with the increased regulatory burden. ... One issue some small banks say they are having a big problem with is the Consumer Financial Protection Bureau's new "qualified mortgage" rules, or QM, which require lenders to make sure borrowers can afford the mortgages they take out. Some banks say following the rules, which took effect in January, has been complicated and time-consuming.

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New capital rules being phased in between now and 2018 will require the largest banks to boost capital to 5% of assets from 3% and include risk assets in the calculations according to the New York Times, here:

Under the rule, banks with over $700 billion in assets will have to raise their capital, measured by the leverage ratio, to 5 percent of their overall assets. The ratio will have to be 6 percent at the banks’ federally insured banking subsidiaries, where many of their riskiest activities are. ... Senator Sherrod Brown, Democrat of Ohio, who has introduced a bill with Senator David Vitter, Republican of Louisiana, that envisions higher leverage ratios than those approved on Tuesday, said, “Today’s rule is a major step forward, but we can and must do more.”

Mortgage Securitization Only Works At The Expense Of Taxpayers And Banks

So says Arnold Kling for The American, here, who provides a useful summary of crony capitalist rent-seeking since World War II:

At this point, all signs point to victory by two of the biggest culprits in the mortgage crisis — the mortgage bankers (firms that originate loans to distribute, not to hold) and the Wall Street investment banks. Both depend on securitization if they are to participate in the mortgage lending process. However, securitization has only been able to compete with traditional bank lending when securities are backed by guarantees from the taxpayers and when bank capital requirements punish banks that hold their own loans.

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Arnold Kling is otherwise famous for his firm grasp of the obvious: "Most home owners are not libertarians."

Central Bankers Buying Stocks: Is This Another Sign Of A Top?

Bloomberg reports here:

Central banks, guardians of the world’s $11 trillion in foreign-exchange reserves, are buying stocks in record amounts as falling bond yields push even risk-averse investors toward equities.

In a survey of 60 central bankers this month by Central Banking Publications and Royal Bank of Scotland Group Plc, 23 percent said they own shares or plan to buy them. The Bank of Japan, holder of the second-biggest reserves, said April 4 it will more than double investments in equity exchange-traded funds to 3.5 trillion yen ($35.2 billion) by 2014. The Bank of Israel bought stocks for the first time last year while the Swiss National Bank and the Czech National Bank have boosted their holdings to at least 10 percent of reserves. ...

Currency reserves among the world’s central banks climbed by $734 billion in 2012 to a record $10.9 trillion, according to data from the Washington-based International Monetary Fund. That’s about 20 percent of the $55 trillion market value of global stocks, data compiled by Bloomberg show. ... 

Even so, 70 percent of the central bankers in the survey indicated that equities are “beyond the pale.”

Notice how the first paragraph calls central banks "risk-averse investors", showing that the line between investing and banking has been completely erased in the popular reporting even as the evidence of the survey shows that for most central bankers the line remains boldly drawn. Banks don't invest, they bank.

Purchases of gold by central banks in recent years is interesting in that context. While buying stocks might mean investing to central bankers, something to be shunned, buying gold is not really investing, otherwise they wouldn't have been doing so much of it.

Gold reserves in the world now total roughly 31,000 tonnes, or about $1.5 trillion if gold is $1,500 the ounce. This amounts to 13.7% of the total forex reserves of $10.9 trillion mentioned in the article. In the context of the Basel III capital rules, that's considerably more hard collateral being set aside by the folks running the show as time goes by than by the downstream bankers who protest against building up to seven, eight or nine percent capital ratios.

I'm glad central banks are buying more gold. They should do even more of it. But investing in stocks by banks, central or otherwise, isn't banking. It's gambling, especially at these levels.

Ben Bernanke Is Trying But Failing Miserably At Money Printing

And it's not exactly his fault.

Historically in the postwar period, the increase in Total Credit Market Debt Outstanding (TCMDO) has closely shadowed the increase in Total Net Worth, seemingly helping to finance it, until the late great recession when for the first time, and very briefly, net worth flagged below the level of the debt owed. (Ignoramuses in the Doomosphere everywhere cried "Insolvency" at the time, not understanding the meaning of the term "net"). Ex post facto, net worth has made a dramatic upswing while the debt owed has increased at a much reduced rate by historical standards. To quote a famous president, "That doesn't make any sense."

Despite all the debt naysayers out there, total credit market debt is not increasing at anything like it should be, and appears to be disconnected to a significant degree from the recent increase in total net worth, which is up 29% since its nadir at the beginning of 2009, or $14.7 trillion. For the whole five year period from July 2007 (the last time TCMDO doubled, going back to 1999) to July 2012, TCMDO increased at a rate of just 12% and real GDP increased just 2.9%, whereas TCMDO increased at a rate of 100% between 1949 and 2007 on average every 8.25 years. The shortest doubling times have included two periods of 6 years each, one of 6.75 years, one of 8 years, one of 9.5 years, one of 10 years, and one of 11.5 years. The very worst real GDP performance of all of those was for a 6 year doubling period when we got 14% real GDP, nearly 5 times better than we're getting now. All the rest posted real GDP of between 23% and 56%.

It is evident that Ben Bernanke's quantitative easing program (right scale) anticipated the leveling off of TCMDO (left scale). Clearly he expected the troubled banks to need a push to keep the credit money creation process going, but didn't understand how fruitless it would be. One notes that he has added about $2 trillion to the monetary base from the middle of the late great recession. By contrast, TCMDO is up (only!) $9 trillion from the beginning of 2007. By historical standards TCMDO should be up $25 trillion by now if TCMDO is to double again in ten years from 2007. And it should be up a lot more than even $25 trillion by now if it's to double sooner than ten years. At the average doubling time of 8.25 years, the $49.8 trillion of TCMDO in July 2007 should hit $99.684 trillion by October of 2015 if the postwar pattern is to continue. Instead, at the current rate of growth in TCMDO, it's going to take an unprecedented 27 years to double it, unless of course there are limits to borrowing to fuel growth, as many are beginning to tell us. In either event one can only assume there will be only pathetic real GDP growth going forward, if there is any at all.

Clearly something is horribly amiss in the transmission process of credit money creation for the first time in the postwar. Seemingly gargantuan quantities of money from the Fed through the process of quantitative easing should be seeding the banks who in turn should be creating massive amounts of credit way beyond the $9 trillion so far created. Instead, the banks are doing something else with it, by-passing the normal distribution channel. Some of the seed money is being held back to comply with increased capital requirements, to be sure, but more appears to be going directly into household net worth creation through investment gains from the stock market, enriching a very few bondholders, shareholders and banking industry players through the private trading desks of the banks, a unique development by historical standards made possible only since 1999 with the abolition of Glass-Steagall through the Gramm-Leach-Bliley Act. As an act of Congress, Ben Bernanke can't do much about that even if he is the most powerful man in the country.

In the absence of a creative policy change from the Fed whereby Congressional intent would be thwarted and money would actually reach the marketplace through a different avenue than the uncooperative banks, one must conclude that the Fed thinks it necessary to continue the various easing schemes because it judges the banks to be still too fragile to risk stopping them. That would be putting the best construction on the matter, to borrow a phrase from Luther's catechism. Either that, or the Fed itself has been completely captured by the bankers.

Cyprus Bailout Deal Amounts To Robbery Of Ordinary Citizens' Accounts

The Chair of the European Parliament's Economic and Monetary Affairs Committee, Britain's Liberal Democrat Member of the European Parliament, Sharon Bowles, comments here on today's news that Cyprus residents, regardless of nationality, must agree to confiscation of personal savings (at either 9.9% or 6.75% of the total) in exchange for an EU bailout, or face a messy national bankruptcy:

"This grabbing of ordinary depositors' money is billed as a tax, so as to try and circumvent the EU's deposit guarantee laws. It robs smaller investors of the protection they were promised. If this were a bank, they would be in court for mis-selling.

"The lesson here is that the EU's Single Market rules will be flouted when the Eurozone, ECB and IMF says so. At a time when many are greatly concerned that the creation of the 'Banking Union', giving the ECB unprecedented power, will demote the priorities of the Single Market, we see it here in action.

"Deposit guarantees were brought in at a maximum harmonising level so that citizens across the EU would not have incentive to move funds from country to country. That has been blown apart.

"What else will be blown apart when convenient? All the capital requirements we have slaved over, what about the new recovery and resolution rules? What does this mean for confidence in cross-border banking and resolution and preventing the fragmentation of the banking sector?

"When the dust has settled on this deal, which I hope it never does, we will see that the Single Market has been sold down the river for a shoddy price. All the worse as the consequences for Cyprus of the Greek bond haircuts were obvious."

The UK Guardian has a full report here, Reuters here. The cost of the 10 billion Euro bailout is to be offset by the confiscations, totaling as much as 6 billion Euros, perhaps half of which will come from rich Russians living on Cyprus. ATMs on the Mediterranean island nation ran dry before noon yesterday.

Of such small sparks are conflagrations made.

Basel III Capital Requirements May Cause 30% Of Banks To Merge

So says Victor Nava, here:

Community banks are generally defined as banks with less than $1 billion in assets. There are approximately 6,800 community banks which represent about 8% of total assets in the banking sector, but they account for almost 40% of all small business loans. The proposed Basel III regulatory capital requirements are an immense and unnecessary burden that will actually threaten their existence. Community banks were already having a hard time re-establishing themselves in a period of weak loan demand, low interest rates, and thinning profit margins. In 2011, only 3 new community banks were chartered, down from 181 new charters in 2007.

But these new regulations will further drive consolidation between them into bigger banks. Community banks that can't find affordable ways of raising capital will be left without many options other than to find a merging partner. Some on Wall Street, like mergers and acquisitions expert John Slater, predict that Basel III's compliance costs will lead to a merger boom, and that in the next 3-5 years 20-30 percent of all banks will merge.

Massive Central Bank Purchases Of Gold Boosted Price Over 30 Percent In Last Year

This baby weighs one metric ton

That's the upshot from this report in The Wall Street Journal, here, in early June:

Central banks increased their gold hoards by 400 metric tons — each equal to almost 2,205 pounds — in the 12 months through March 31, up from 156 tons during the prior year, according to recent World Gold Council data. ...

Central banks “will probably be continuous buyers of small volumes of gold for the foreseeable future,” says Jeff Christian, founder of New York–based commodities consulting firm CPM Group. By small volumes, he means 311 to 374 metric tons a year, or about 10% of the global supply. ...

He says that central bankers will avoid buying any quantity that dramatically affects the price. They know that the market is tiny, compared with the $4 trillion-a-day foreign-exchange market. Still, consistent buying of 10% of annual supply can’t but help keep the price elevated.

Up from 156 tons? That's a 156 percent increase in purchases by banks in the last year, March over March.

That's a remarkable development in the face of the enormous growth in central bank balance sheets to support weak economies at the same time that stiffer Basel III capital rules are imposed on the world's largest fiat money banks. Central banks are the banks of last resort and have been demonstrating rather vividly what they think counts as the capital of last resort.

Is it any wonder then that gold soared from $1,400 the ounce in March 2011 to $1,900 by September 2011? Gold has been above $1,750 as recently as March 2012. Clearly central bank demand has boosted price. 

Purchases of 400 metric tons at today's pull-back-price of $1,600 the ounce would imply $22.58 billion allocated to gold purchases by central banks during the one year period. Purchases of 156 tons at $1,400 the ounce at the top previously comes to at best only $7.7 billion allocated to gold purchases just prior to the period. That's a nearly three-fold increase, and a sign that central banks' confidence in sovereign support of fiat currencies has eroded to say the least. 

The implications for gold price going forward, however, are tricky.

The Wikipedia gold investing article, which also depends on figures from the World Gold Council, puts annual demand in 2005 at 3,754 tonnes and states annual production figures, for example, of as few as 2,500 tonnes as of 2010 to as many as 3,859 tonnes in 2005. Complicating matters is its assertion that 2,000 tons routinely gets allocated to jewellry and industrial production annually, making central bank acquisitions of 375 metric tons annually far more than 10 percent of the remaining supply on either accounting of the total.

It would seem that the very wide spread for annual production reported between 2,500 tons and nearly 3,900 tons (over 50 percent!) is part of a delicate balancing act by the industry, which attempts to pay its respects to all sides concerned in the gold business, both those who profit from production and those who profit from consumption.

Jeff Christian, cited in The Wall Street Journal article above, hints perhaps at how to split the difference. If his low end estimate for bank purchases of 311 metric tons is really 10 percent of annual supply, that means annual supply is probably closer to 3,100 metric tons. Sans jewelry of 2,000 metric tons, bank consumption of 350 metric tons or so going forward would be nearly a third of remaining production if sustained at that level.

In response to this surging demand by banks in the last year, however, production has probably run up against a new and unsustainable level, which is why the price of gold has softened roughly 15 percent off the high in recent months. Add to this that significant fresh inputs from consumers are unlikely in view of declining wages and the increased demand for return on investment which gold cannot give. Few have significant resources left to mop up increased supply of gold.

Oversupply of gold has been noted as recently as mid-July, here, by Dominic Schnider, an analyst at UBS Wealth Management in Singapore:


"The market is in oversupply -- production growth is solid and we simply don't see incremental gold purchases," he said.


That suggests banks continue to buy at levels consistent with the recent past, but are restraining themselves a little bit. This coheres with an observed supply glut and softened prices.

An attempt at a non-partisan evaluation of supply here suggests that already mined gold "above ground" historically totals 170,000 metric tons, with another 100,000 metric tons in the ground, less than half of which is profitable to mine under current conditions. In other words, you could devalue the above ground supply with the below ground supply over time, but only by another 28 percent at the extremes, not counting such factors as the small amounts of above ground gold lost to industrial production, the long time required for mines to become profitable, the changing costs of extraction, and the like.

My take is that bank purchases of gold at higher levels in recent times signals that the pendulum has started to swing against endlessly devaluing fiat currencies and against the elite consensus which created them. Official gold reserves around the world already approach 31,000 metric tons, and I expect they will only increase from here, if but gradually. The effect, however, may be to shore up existing currencies rather than to replace them, which would augur for a stabilization of gold prices near present levels and improved conditions for the world's economies.

Basel Capital Rules Reinforce Fascist Financialization Of The Global Economy

Robert Barone for Minyanville summarizes better than anyone else I have read the process whereby banking in partnership with government has grown out of all proportion to the real economy and throttled it, here:

Under all of the Basel regimes, "sovereign" debt is considered riskless.  Everything else has a varying degree of risk to it which requires a capital reserve.  Loans to the private sector have the highest capital requirements. ... The bias imparted with this sort of capital regime makes loans to the private sector unattractive, especially in times of economic stress where bank capital is under pressure.  But, it is in times of such stress that loans to the private sector are needed to create investment, capital spending, and jobs. ... Simply put, the banking model in the west now promotes moral hazard (banks making bets that are implicitly backed by taxpayers) and Too Big To Fail (TBTF) policies while it stifles private sector lending. ... Isn't it clear that the relationship between the US federal government and the banking system is unhealthy, perhaps even incestuous, to the detriment of the private sector?  That very same banking model is emerging in Europe with the emergency funding by the European Financial Stability Fund (EFSF) to recapitalize the Spanish banks and talk of a pan-European regulatory authority and deposit insurance.

What's missing from this otherwise penetrating analysis, however, is an appreciation of the extent to which banking has been redefined, particularly in the US as a result of the Gramm-Leach-Bliley Act of 1999, which finally overturned the Glass-Steagall Act of 1933.

Now companies as diverse as automobile manufacturers, investment banks, insurance companies and highly diversified multinationals like GE are deemed banking institutions which qualify for government TARP bailouts, FDIC protection, or preferred treatment at the Federal Reserve's discount window. Almost any big business that gets in trouble can now get "help" from the taxpayer by becoming a "banking" concern under the new definition of the rules, to the detriment of those trying to compete in our so-called free market.

Moral hazard doesn't extend now just throughout the traditional banking system, stiffing the disciplined, prudent smaller banks with high FDIC premiums to bailout the failures, it now effectively short-circuits the process by which an innovative small firm might grow one day to challenge GE's gargantuan share of the household appliance market, or in aircraft engines, nuclear reactors and the like.

As financialization of the economy deepens and grows, companies as they are with their relative advantages have those advantages locked into place, while those without market heft are frozen-out. Some people call this crony capitalism, others state capitalism. Almost any euphemism will do, it seems, the latest being venture socialism, which gets us closer to the truth.

In the end it's just good old-fashioned fascism from the 1920s. Obama absolutely loves it. George Bush practiced it. Bill Clinton signed it into law, with the help of Newt Gingrich.

But please don't call this stagnating, ossified, economy failed, free-market capitalism. Just like Christianity before it, you can't say something is a failure which isn't at all being practiced.

New Federal Reserve Capital Requirements May Doom Savings and Loans

And putting savings and loans out of business will dramatically reduce competition in the mortgage business, which is negative for housing, and borrowers, going forward.

Moral hazard. Picking winners and losers. Fascism, American-style.

Story here.

James Pethokoukis Trots Out His August 2010 Surprise as a January 2012 Surprise

Involving a supposed mass refinancing of GSE-backed mortgages.

Rush Limbaugh fell for it on his show today, but it's a recycled attempt at a story to which there was nothing when it first appeared a year and a half ago, and there's nothing to it now unless . . . Obama makes another very quick recess appointment, and a bunch of lenders agree to take huge hits.

Fat chance, I say.

Aside from the political toxicity of the former (even The New Republic thinks Obama's recent appointment was unconstitutional), I can't imagine how lenders are just going to agree to eat half of the losses associated with rewriting mortgages at today's lower interest rates, especially with the stiffer Basel III bank capital rules now taking effect: "[T]he plan would have an immediate fixed cost to the government of . . . $242 billion with half that cost split equally between the government and lenders." 

Linda Lowell at housingwire.com, among others, knew the story was malarkey way back when here.

For Pethokoukis' August 2010 version, see here. For the January 2012 version, now see here.

The Farce of Letting Banks Simply Refigure Themselves to be Far Less Risky

From Jeffrey Snider's latest in a series of penetrating meditations on contemporary banking:

Basel II gives banks latitude in "modeling" the potential riskiness of each specific asset since banks long ago successfully argued that it was inappropriate to assign broad weightings and definitions to idiosyncratic assets.

So instead of selling stock into a bad market or engaging in asset fire-sales (concrete expressions of a "bad" bank), banks will simply refigure themselves to be far less risky, thereby increasing their capital ratios, "fixing" the problem without much fuss. Reality no longer has a seat at the banking table since it is a demonstrable fact that banks are holding far riskier assets than they estimated only a few months ago (just ask MF Global), especially since default risk is not the only concern.

To what purpose do capital ratios serve if they are to be so easily discarded by the farce of one-way "risk-weighted asset optimization"?

Record Corporate Cash? Doodleysquat

Says the master of the S and P:

Mr. Silverblatt complains that he has repeatedly seen analysis showing US companies with a big cash hoard, which fails to note that much of it is being held by financial institutions as deposits or in expectations of higher capital requirements. In short, the companies can't spend it.

Read more about the man behind the numbers in The Wall Street Journal here.

Epic Warning Signals Echo 1931

The "Keynesian" prescription aside, the depth of appreciation for the problem posed by mounting debt stands in stark contrast to much American reporting on the subject. The whole country is starting to resemble Illinois. What a shock.

The article, "Don't Go Wobbly On Us Now, Ben Bernanke" by Ambrose Evans-Pritchard, originally appeared here, appended by vigorous and juicy comments, many of which recognize the need for governments to slash, not cut, spending, meaning, for starters, fat public sector union employees must take a haircut just like the rest of us.

Some excerpts follow:

Barack Obama's home state of Illinois is near the point of fiscal disintegration. "The state is in utter crisis," said Representative Suzie Bassi. "We are next to bankruptcy. We have a $13bn hole in a $28bn budget." ...

The Economic Policy Institute says states face a shortfall of $156bn in fiscal 2010. Most are banned by law from running deficits, so they must retrench. Washington has provided $68bn in federal aid, but that depletes the Obama stimulus package. ...

Bank loans in the US have fallen at a 14pc rate this year, caused in part by Basel III rules pushing banks to raise capital ratios.

The M3 money supply has fallen at a 5.6pc rate since September. The Fed's Monetary Multiplier dropped to an all-time low of 0.809 last week.

The contraction of eurozone bank credit to firms accelerated to 2.7pc in January, while M3 fell by a further €55bn. Japan's GDP deflator has dropped to a record low of -3pc.

These are epic warning signals, with echoes of 1931. ...

Don't go wobbly on us now, Ben. If the governments of America, Europe, and Japan are to retrench – as they must – their central banks must stay super-loose to cushion the blow.

Otherwise we will all sink into deflationary quicksand.

Follow the link for more.