The Bankwatch

This survey released today asked bank executives in institutions of banks, with 62% of the respondents being from small banks (those with less than $500 million in estimated assets).

The picture is a disturbing turn for the worse as the realities of a new structural unemployment and the impact of government borrowing weighs heavily.

Grant Thornton – Bank Survey – Sept 2010

CHICAGO, Sept. 29, 2010 – Bankers are again becoming pessimistic about the economy, according to Grant Thornton LLP’s 17^th Bank Executive Survey, conducted in conjunction with Bank Director magazine. Only 15% of bank executives believe the U.S. economy will improve in the next six months, while a quarter believe that it will actually get worse. This is a statistically significant drop in how bankers felt about the U.S. economy six months ago when nearly half (45%) said that they expected the economy to improve.

This has to be one of those ‘say what?’ posts.  A couple of weeks ago we had that deadly explosion in San Bruno near San Francisco caused by a gas pipe explosion of some variety.  So now in the interests of transparency PG&E have been required to release details of any pipes that are considered potentially dangerous or requiring attention. Maps included.

Well if you focus in on the #44 on the map, there is an 18’ foot segment near Menlo Park that is being ‘reviewed’.

Just another consideration in crisis and black swan planning I guess  :-/

PG&E Planning

Segment(s): DREG4197, segment 801, Mile Points 0.00 – 0.00

Footage: 18′

Factor: Overall

Description: PG&E is conducting an engineering review of 18 feet of pipe near Dunbarton St. and Donahoe St. in Menlo Park. Based on this review, PG&E will determine whether any repair or replacement is warranted.

Its too bad this innovation panel brought out the usual bank thinking by focussing on what they thought they were doing that was innovative rather than greater focus on lessons learned.

ING, HSBC and Nordea outline barriers to banking innovation | finextra

Beurden goes on to say that banks need to recognise how many so-called "painful moments" they face off to their customers and reconcile these with what he describes as a "pleasure curve." (Such as a store offering a child’s play area, while parents wait in line at the register.) He adds that ING will be making a technology announcement around this "pleasure curve" for customers in the next nine months.

More here.

In fact this quote sums up for me the banking view of innovation.

“We don’t have an innovation strategy just for the sake of innovation….All of our innovation is aligned with our core strategies. There are things we do, that while it doesn’t have a huge financial impact, from a people investment and a customer investment is huge." – Stewart Bromley, HSBC (First Direct)”

I get the connection to core strategy but do not use strategy as an excuse for developing supporting tactics rather than innovating. 

For the record here is the detail on Basel 3 (Basel III).  It is a positive step but it still means banks have a debt to equity level of 8.5 :1

BIS Press release and pdf.

High level taken from the pdf.

Detailed schedule taken from the pdf.

Ron did up a great post here reflecting on the reason for Wesabe’s failure and the arrogance of someone at Mint as to why they ‘won’ (quotes mine).

First off this from Techcrunch in Sept 2009.

Very early in Mint’s life they signed a sweet deal with Yodlee to provide all that back end technology. Mint focused on the front end user experience, and did a great job with marketing. People who have knowledge of the deal say total payments from Mint to Yodlee over the last couple of years are around $2 million/year. So Yodlee made $4ish million off of Mint.

Which is why the Mint post amuses me with “Disclosure: I designed Mint, and I never actually used Wesabe. I have a strong belief in keeping my mind clear to come up with original solutions to problems. I’ll take my best shot based upon what I know about both companies, and some intuition / guessing”

That aside lets stick to the facts.  Wesabe built a platform from the ground up.  I get the whole thing about buy or build but Wesabe had a clear vision.  I do know the folks there and I was thoroughly impressed by their drive and vision in building out the platform.

I get the rationale whereby Ron picked apart Jason’s points, and frankly am not sure why Jason felt he had to make any point unless he is selling himself.  The way I saw the Intuit deal is a relatively cheap way to pick up 3 million customers at a very reasonable $62 per customer.  Presumably those customers are relatively motivated with a propensity towards PFM software and tax software.  That $62 price compares very favourably with targetted adwords and all in customer acquisition costs – and that is the name of the game these days.

In terms of long term strategic value, I agree with the first comment on this post.  The only issue Wesabe had was to be early and ahead of its time.  Aside from simplified tagging and how you get the data, I have written extensively about the value in data centred on the customer, not on the institution.  That is what has been lost with Wesabe.  When you think of that kind of data in the context of the limited and out of date information held by Equifax, Experion and TransUnion, the Wesabe model had the potential to reshape how customers see themselves, benchmark themselves, and how others (institutions) see customers.  In short the Wesabe model had the potential to level the consumer/ institution playing field.  If I am right, the model is right, and it will re-occur.

This is a remarkable paper from Andrew Haldane at the Bank of England.  There are lessons and direction here for everyone and it is not as dry as one might expect.  It is the more remarkable because it addresses human behavior and relates to economic context.  Not your typical Central Bank speech.  Lessons from Asia are being learned.

The most amazing for me is the HFT (high frequency trading) stat about Accenture in bold.

A few quotes to whet your appetite.

• Take happiness. Studies have shown that happy people save more and spend less. Happy people also take longer to make decisions and expect a longer life. In short, they are patient.
• Just as patience can self-generate, so too can impatience. And while patience generates self-improving cycles, its alter ego can create self-destructive cycles. Addiction is the classic self-destructive cycle. Drugs and alcohol chemically alter the balance of the double-self, increasing the value of instant gratification. This shortens time horizons, increasing further the value of instant gratification in a downward spiral. Unless arrested, this unfulfilling equilibrium becomes self-fulfilling.
• John Maynard Keynes. He quipped: “markets can remain irrational for longer than you or I can remain solvent”.
• By the time of the stock market crash in 1987, the average duration of US equity holdings had fallen to under 2 years. By the turn of the century, it had fallen below one year. By 2007, it was around 7 months. Impatience is mounting.
• A decade ago, the execution interval for HFTs (high-frequency traders) was seconds. Advances in technology mean today’s HFTs operate in milli- or micro-seconds. Tomorrow’s may operate in nano-seconds.
• HFT firms are believed to account for more than 70% of all trading volume in US equities
• HFT is believed to account for between 5 and 10% of Asian equity volumes. This evolution of trading appears already to have had an effect on financial market dynamics. On 6 May 2010, the price of more than 200 securities fell by over 50% between 2.00pm and 2.45pm.32 At 2.47pm, Accenture shares traded for around 7 seconds at a price of 1 cent, a loss of market value close to 100%. No significant economic or political news was released during this period.
• So disliking goods price inflation and liking asset price inflation suggests a potential time-inconsistency in preferences. It is leaving as a bequest for your children the mortgage but not the house.

There is a statement today …

Statement of John Corston, Acting Deputy Director, Complex Financial Institution Branch, Division of Supervision and Consumer Protection, Federal Deposit Insurance Corporation on Systemically Important Institutions and the Issue of "Too Big To Fail"

that contains some very interesting facts, and side from he bureaucratic commentary there is a real sense of incredulity that this is how big banks are managed.

The overall message is excruciating detail is one of rationalising insufficient regulatory oversight existed to permit the FDIC to adequately monitor the situation.  It describes the nature of onsite examiners at FI’s with greater that $10 Bn in assets (news to me) and how they were able to determine in 2008 with limited information that Wachovia was deteriorating do to increased bad debts but also doubts about derivatives which were being traded not as a hedge but for house benefit.

No surprises so far, and sounds like a regulator.  Then despite the bureaucracy no sooner than 11 + days before the demise of Wachovia, FDIC got excited that there was a problem despite earlier warnings.

In early September 2008, the FDIC became increasingly concerned with the liquidity condition of Wachovia. During the week of September 15^th, following the Lehman bankruptcy, Wachovia experienced significant deposit outflows totaling approximately $8.3 billion, representing a mix of deposit types, but primarily large commercial accounts. On September 23^rd, senior executives and staff of the FDIC met to discuss our elevated concerns with the institution, specifically noting liquidity concerns including considerable contingent funding risk and increasingly negative market views on the firm. The institution’s marginal and weakening financial condition made it vulnerable to this negative market perception.

This is the point where the detective work goes from years to minutes in detail.  Early September 2008, FDIC met with Wachovia executive regarding ‘elevated concerns’.

Liquidity pressures on Wachovia increased the evening of September 25^th when two regular Wachovia counterparties declined to lend to the firm.² Since the institution was a net seller of Federal Funds this signal was not viewed by the OCC as a catastrophic development. As discussed in the next section, the failure of WaMu was announced late in the evening on September 25th. As of the morning of Friday, September 26, the OCC indicated to the FDIC that Wachovia’s liquidity position remained manageable. During the day, however, market acceptance of Wachovia’s liabilities ceased as the company’s stock plunged, credit default swap spreads widened sharply, and many counterparties advised that they would require collateralization on any transactions with the bank.

So now over a 2 day period from Sept 23rd to Sept 25th Wachovia encounters counterparties to their commercial paper that will no longer lend to Wachovia, yet the OCC (Treasury) signaled all remains well.

Wachovia’s situation worsened as deposit outflows on Friday (26th) accelerated to approximately $5.7 billion, $1.1 billion in asset-back commercial paper and tri-party repurchase agreements could not be rolled over, and $3.2 billion in contingent funding was required on Variable Rate Demand Notes.

Then the final kicker.

On the morning of September 26^th, before U.S. financial markets opened for the day, the FDIC Board approved both the systemic risk exception and the acquisition of Wachovia by Citigroup. This proposed acquisition included government assistance in the form of an asset guaranty on a portion of Wachovia’s assets in exchange for $12 billion in Citigroup preferred stock and warrants. The terms of the asset guaranty called for Citigroup to absorb the first $42 billion in losses on a $312 billion segment of Wachovia’s assets with the FDIC covering any additional losses above that amount.

… …

In the end, the Citigroup transaction was superseded by an unassisted bid by Wells Fargo to acquire Wachovia that was announced on Friday, October 3^rd.

Relevance to Bankwatch:

The moral of this saga is the speed that a bank can disappear.  On September 23rd FDIC determined Wachovia was in serious trouble and September 26th Wachovia’s fate was sealed.  The speed of this is astounding and certainly speaks to the inability of the system to determine earlier that a problem was brewing.  But the FDIC already ranked Wachovia as being in trouble earlier in September (“FDIC became increasingly concerned with the liquidity condition”).  Surely some earlier activity could have occurred, especially since even this blog knew there was a systemic mortgage problem 18 months before Sept 2008!

For me this really speaks to the fragility of the banking system and the banks.  It also speaks to the lack of teeth that the regulators have, or are willing to exercise.  Its an obvious fact that banks operate at the convenience of government.  No legitimate enterprise could otherwise operate with debt to equity of 20 :1 +/- and survive. This occurs by virtue of the money markets and direct connection with the central bank who effectively manage the liquidity positions of banks. 

So long as that is the system there must be better co-ordination of information with the regulator so that banks are kept honest and do not get into the kind of house trading that made Wachovia a high risk market maker rather than a market participant.  This participation is high risk market activity not associated with basic banking is why Wachovia deserved to disappear.  The flip side is that banks create sufficient capital depth that they can operate independently.

The state of Canadian finances is still the envy of the world, yet there continue to be areas of concern that pop up.  This statistic caught my eye.  The trillion dollar figure works out to be $100,000 on average for every bankable household in Canada.  The average is deceiving though because there are many homes with no mortgages.

The other statistic there is that about 38% (although the numbers in the article do not add up) of mortgages are securitised and held by others as investments.  This could be hedge funds, pension funds and other investment funds.  Obviously any impact on the housing market as referred to in the article could have impacts on the value of those securities.

House is Banks’ next sore spot (in Canada)

Canadian households have about $1-trillion of home loans outstanding, the latest statistics from the Bank of Canada show. Of that amount, about $495-billion is held by the chartered banks on their balance sheets. A further $300-billion of mortgages mostly issued by the banks has been made into mortgage-backed securities.