The Bankwatch

There is a shift occurring in world economics in the wake of the credit crisis, and this move at Morgan Stanley sums it up.  There is an assumption that there will be a sovereign debt default, and for now is it assumed it will come from the ‘peripherals’.

Government bonds: A coinage debased | ft.com

It was a small decision but the symbolism was huge. A few months before Ireland’s multibillion-euro bail-out, announced last week, Morgan Stanley quietly switched dealing in the country’s bonds, along with those of Greece, Portugal and Spain – together, the four “peripheral” countries often seen as the eurozone’s weaker members – from its sovereign debt desk to traders specialising in distressed financial assets, some of the riskiest investments out there.

“Peripheral debt is now an asset class in itself,” says a person close to the bank

I have picked up over the last 3 years, Citi interest in employing a new model.  Of course every bank wrestles with the extremes of virtual bank versus optimised branches.  The results has been boring so far.  Maybe Citi has something here.  We shall see.

Citi looks to Europe retail revival | ft.com

But, according to people close to the bank, Citiis determined to rebuild a slim network of flagship outlets – mimicking the store model employed by Apple, the technology group – to underpin an operation in key parts of western Europe.

This resolution of the Irish situation is an unmitigated disaster.  Lets consider what has happened here.  Irish banks got greedy and took on enormous risk through external investments including US subprime mortgages.  The Irish government chose to guarantee 100% of bank liabilities.  That took the Irish debt /GDP from 60% to 176%. 

Ministers sign off on €85bn Ireland deal | ft.com

About €50bn is aimed at bolstering Ireland’s public finances while it implements a €15bn austerity package over the next four years. Of the remaining €35bn, €10bn will be used to recapitalise Ireland’s stricken banks, while another €25bn will be a contingency fund to help support the banking system if necessary.

… …

EU ministers also said that loan maturities in the Greek package, agreed earlier this year, would be extended in line with the Irish terms.

The numbers involved are mind numbing and what gets forgotten here is the role of government and the role of private institutions such as banks.  Government has only one revenue source and that is taxation.  By tripling their debt through the bank guarantee, the Irish Government have tripled the liability their taxpayers must fund.  It is not hard to understand why the Irish population as a little ticked off.

The proponents of the bailout will argue that the alternative is worse and a run on the Euro might ensue.  But do they honestly believe the problem has gone away?  Next Spain and Portugal and lets not forget Greece. 

The dirty little secret is that the majority of Euro Sovereign debt is held by banks.  So the bailout merely allows Ireland to continue to make interest payments to the banks. 

What if the banks had to write of Irish debt?  What the economic consequences be worse than the results of the bailout?

Relevance to Bankwatch:

Banks have made themselves into pawns.  What part of providing your debit card services, your online banking and your money safety has any of the above got to do with it. 

The case for delineation of investment banking and retail banking has never been stronger.  We are no closer to a resolution of the next banking crisis.

Gillian Tett from the FT points out the report from the Fed on the Shadow Banking (unregulated and misunderstood) system that represents value almost double the regular banking system ($20 trillion vs $11 trillion).  Her point is that this is unknown misunderstood and unregulated territory.

Here is a snapshot of one small part of the picture of the shadow banking system as depicted by the NY Fed.  This small (< 10%) part of the larger picture provides a sense of the complexity.  While the immediate conclusion might be that the regulators should focus on the primary offerors of banking services and treat the rest as ‘outside’ this fails to account for the interconnectedness of the primary offerors and the shadow system. 

We can always go back to cash under the mattress of course.

Here is the full report.  (HT Gillian Tett)

Road map that opens up shadow banking | ft.com

But it should be mandatory reading for bankers, regulators, politicians and investors today. Indeed, they might do well to hang similar posters next to their desks, for at least three reasons. For one thing, this circuit board is a reminder of how clueless most investors, regulators and rating agencies were before 2007 about finance. After all, during the credit boom, there was plenty of research being conducted into the financial world; but I never saw anything remotely comparable to this road map.

That was a striking, terrible omission. The Fed now estimates that in early 2008 shadow banking was $20,000bn in size, dwarfing the $11,000bn traditional banking system. And though this shadow system has now shrunk to a “mere” $16,000bn, this remains bigger than traditional banking, at some $13,000bn. Little wonder, then, that so few people immediately appreciated the significance of the seizing up of shadow banking in 2007.

A particularly hard hitting description of what the US sees as the problem in the world economy, i.e. China’s accumulation of US denominated investments thus keeping the US dollar strong and the Yuan weak.  While it is framed as a global recovery issue, it strikes my untrained eye as a US centric problem.  Long read but interesting if you are curious about the intricacies of the current headlines.

Ben Bernanke – Rebalancing the Global Recovery

Chairman Ben S. Bernanke

At the Sixth European Central Bank Central Banking Conference, Frankfurt, Germany

November 19, 2010

Rebalancing the Global Recovery

The global economy is now well into its second year of recovery from the deep recession triggered by the most devastating financial crisis since the Great Depression. In the most intense phase of the crisis, as a financial conflagration threatened to engulf the global economy, policymakers in both advanced and emerging market economies found themselves confronting common challenges. Amid this shared sense of urgency, national policy responses were forceful, timely, and mutually reinforcing. This policy collaboration was essential in averting a much deeper global economic contraction and providing a foundation for renewed stability and growth.

Conclusion
As currently constituted, the international monetary system has a structural flaw: It lacks a mechanism, market based or otherwise, to induce needed adjustments by surplus countries, which can result in persistent imbalances. This problem is not new. For example, in the somewhat different context of the gold standard in the period prior to the Great Depression, the United States and France ran large current account surpluses, accompanied by large inflows of gold. However, in defiance of the so-called rules of the game of the international gold standard, neither country allowed the higher gold reserves to feed through to their domestic money supplies and price levels, with the result that the real exchange rate in each country remained persistently undervalued. These policies created deflationary pressures in deficit countries that were losing gold, which helped bring on the Great Depression.³ The gold standard was meant to ensure economic and financial stability, but failures of international coordination undermined these very goals. Although the parallels are certainly far from perfect, and I am certainly not predicting a new Depression, some of the lessons from that grim period are applicable today.⁴ In particular, for large, systemically important countries with persistent current account surpluses, the pursuit of export-led growth cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account.

An interesting case and example of the fall out from the sub prime crisis.  BankAtlantic is the main topic, but also noted are Countrywide, Bank of America, and Merrill Lynch.  The Countrywide  proposed settlement is the second-largest securities settlement of 2010 at $624 million.

Barroway Topaz and Labaton Sucharow

“The trial opened a most revealing window into fundamentally dishonest reports BankAtlantic made to its stockholders about the riskiness of its land portfolio,” said Barroway Topaz partner Andrew Zivitz, who along with partner Matthew Mustokoff shared trial duties with the Labaton Sucharow firm. “The jury’s award represents a clear rebuke for the bank’s deceitful  disclosure practices. But it’s also an historic success for investors who were victimized by the bank’s behavior.”

Labaton Sucharow also represented investors in litigation alleging securities law violations by Countrywide Financial Corporation, one of the largest providers of consumer housing loans prior to the bursting of the housing bubble.  The $624 million proposed settlement in that litigation is the second-largest securities settlement of 2010. 

Full text of press release:

Jury Finds BankAtlantic Lied To Stockholders Over Risky Loans
Jury verdict in rare securities fraud case; law firms Labaton Sucharow and Barroway Topaz represent institutional investor plaintiffs; award cites bank’s failure to disclose extent of troubled real estate loans and false statements

MIAMI/NEW YORK (November 18, 2010) –  In a rare courtroom trial of a securities fraud class action, a federal jury in Miami has awarded a group of institutional investors a verdict finding securities fraud against BankAtlantic Bancorp, Inc. and two senior officers for lying about and failing to disclose the extent of risk in its troubled loan portfolio in 2007.  This is the first securities class action case arising out of the financial crisis to go to jury verdict. The jury found that investors overpaid by $2.41 per share between April 26, 2007 and October 26, 2007 which resulted in millions of dollars in damages for the class.

Investors were represented jointly at trial by leading plaintiffs’ law firms Labaton Sucharow LLP and Barroway Topaz Kessler Meltzer & Check LLP.   Labaton Sucharow represented State-Boston Retirement System, lead plaintiff in the federal class action lawsuit.  Barroway Topaz represented Erie County Employees’ Retirement System as co-class counsel.

This was only the 12th securities fraud class action to go to trial since passage of the historic Private Securities Litigation Reform Act in 1995 – the vast majority of such cases settle before reaching a courtroom. The PSLRA allowed institutional investors to serve as lead plaintiffs in federal securities actions. It is believed that this is the second successful plaintiffs verdict in a securities class action case led by a public pension fund.

During the four-week trial, investors accused Ft. Lauderdale-based BankAtlantic of serial misrepresentations and omissions regarding the extent of the high risk loans in its so-called “land loan” portfolio – those made for acquisition and development of residential buildings in Florida – between October 2006 and October 2007.  Prior to trial, Southern District of Florida Judge Ursula Ungaro ruled that four statements made by BankAtlantic Chairman and CEO Alan Levan about the health of the bank’s land loan portfolio were false.  Levan made those statements on a July 2007 conference call with investors, four months after writing an internal email admitting, “I believe we are in for a long sustained problem in this sector.”

“We’re gratified the jury held BankAtlantic and its senior management accountable for misleading investors and causing millions of dollars of losses,” said Labaton Sucharow partner Mark Arisohn, plaintiffs’ lead trial attorney.  “BankAtlantic knew of the high risk that was growing in its loan portfolio but for a year lied to its stockholders about the extent of that risk.  Florida citizens on the jury sent a message by finding the defendants committed securities fraud. Banks and their management cannot intentionally mislead their stockholders about the extent of lending risk,” added Arisohn.

The jury also was shown extensive e-mails from a BankAtlantic lending manager, who described the bank’s major loan committee as “asleep at the wheel.”  In one communication about a loan, the executive wrote, “I hate these deals and think the MLC is blinded by GREED and focused only on [interest] rates…We never analyze the risks up front, only on the downside, when the learning curve is steep and most expensive.”
In an email dated November 30, 2007, the lending manager wrote:  “We all have problems when we make loans … but being this dishonest and hiding the problems so long until you can’t any longer, is cause for termination and borderline criminal.”

“The trial opened a most revealing window into fundamentally dishonest reports BankAtlantic made to its stockholders about the riskiness of its land portfolio,” said Barroway Topaz partner Andrew Zivitz, who along with partner Matthew Mustokoff shared trial duties with the Labaton Sucharow firm. “The jury’s award represents a clear rebuke for the bank’s deceitful  disclosure practices. But it’s also an historic success for investors who were victimized by the bank’s behavior.”

Labaton Sucharow also represented investors in litigation alleging securities law violations by Countrywide Financial Corporation, one of the largest providers of consumer housing loans prior to the bursting of the housing bubble.  The $624 million proposed settlement in that litigation is the second-largest securities settlement of 2010. 

Barroway Topaz is currently representing a group of U.S. and European pension funds in a shareholder class action in federal court in New York against Bank of America related to its purchase of Merrill Lynch, one of the most significant shareholder cases currently before the Court.

The full case caption for the BankAtlantic case is, In re BankAtlantic Bancorp, Inc. Securities Litigation (No. 07-61542 S.D. Fla.).

Best definition of Quantitative Easing.  Clearly written by some smart people and worth the 6 minutes of your time.  Great use of smart humour to explain complexity.

As soon as I saw these stats I immediately thought of Ron Shevlin. The observations about teens immediately suggest that we should transfer all future communication to text messaging and eliminate all email communication. Why you ask? Teen usage of texting has leapt 100% over the last 3 years, whereas email has dropped 25%. Social networking is relatively flat so forget about Facebook. Face to face shows some growth so people will still talk to each other so pubs remain fine.

The fact of texting being simple in class while avoiding detection from the teacher and a hundred other irrelevancies do not come out of these graphs. It could suggest a better medium is needed and hence the context of Facebook messages which we have yet to see. Google Wave failed on that.

I still think back to Bill Gates and the advantages of email because of the asynchronous communication, that fits with busy people doing business – a characteristic not evident necessarily with teens. Have fun with this.

PEWInternet

President Obama is beginning to take on the mantle of an embattled and potentially protectionist leader with this comment in Yokohama today.

My interest is less politics and more Banks. Such inward looking approaches will inevitably result in inward looking institutions within the US, especially those with government ownership, or essentially government protection.

BBC http://www.bbc.co.uk/news/world-asia-pacific-11748433i

Addressing business executives in Yokohama, President Obama said the economic crisis had shown the limits of depending on US consumers and Asian exporters to drive growth.

When I read this the first time I thought the idea of a 2 tier system was wrong but on reflection and considering the banks they use as examples outside the TBTF (Too Big to Fail) group, the more it makes sense.

G20 draws up 2 tier bank plan | ft.com

Nonetheless, the G20 will press ahead with the creation of two separate systemic bank lists, the first with an estimated 20 global banks whose failure would pose a risk to the international financial system. The ­second would be a country-by-country list of banks that are systemically important within their home economies, but pose little danger to the world.

…

The Financial Stability Board, the global body that implements the G20’s communiqués and which comprises senior international regulators, has been working on a list for more than a year. The banks on the original list were Goldman Sachs, JPMorgan Chase, Morgan Stanley, Bank of America Merrill Lynch and Citigroup of the US; Royal Bank of Canada; UK groups HSBC, Barclays, Royal Bank of Scotland and Standard Chartered; UBS andCredit Suisse of Switzerland; France’s Société Générale and BNP Paribas;Santander and BBVA from Spain; Japan’s Mizuho, Sumitomo Mitsui, Nomuraand Mitsubishi UFJ; Italy’s UniCredit and Banca Intesa; Germany’s Deutsche Bank; and Dutch group ING. Legal experts said the likes of Mizuho, Sumitomo Mitsui and MUFJ could be removed from that list, leaving their oversight to local regulators.

The examples of banks outside the TBTF group are all Japanese.  The Japanese banks are huge but quite insular and maybe this is ok.  

Anyhow, I remember quite clearly the comments from financiers around the world at the World Economic Forum in January 2009 speaking about how the world must prepare (and regulate) for the next crisis, not the last.  From this we can assume they are focussed on the banks that have the greatest impact on the banking system, at least by size.

Somehow this approach the G20 is leaning toward still feels like a “fingers in the dyke’ solution rather than a comprehensive approach.  Picking a list of banks suggests a lean towards things such as separation of investment and retail banking within TBTF institutions or limitations on international derivative participation.  This hardly sounds like a systemic approach to a better banking system. 

Its tough to be a big bank and will be hard to remain focussed on customers.  Directionally this still points to a future of banking utilities.  Lets watch over the next 3 days.  G20 are not known for big changes overnight.