The Bankwatch

I have written here at length about Canadian banks and how the world impression that they are industry leading in strength is at best coloured by superb behind the scenes co-operation between the banks, the government and the Bank of Canada.  The biggest example I could write about was the 2008 freeze on interbank and inter institutions derivatives hastily forced on the banks in 2008.

Purdy Crawford/ Pan Canadian Investments: The Canadian government did presciently freeze $35 billion in derivatives back in 2007.

But if you flip through the Canadian Banks search on this blog there is a general theme that Canada’s banks are not materially better capitalised than other banks in the world.  And now we have the ammunition many of us knew existed but had no evidence.

Todays bombshell from the Canadian Centre for Policy Alternatives, authored by chief Economist David McDonald, provides clear evidence of the extent of Government assistance to the Canadian banks during the crisis.  The amount of that assistance is $114bn.  This is several times total Canadian Bank equity.

The report begins;

The official story of the 2008 financial crisis goes like this: American and international banks got caught placing bad bets on U.S. mortgages and had to be bailed out. But not in Canada. Through the financial crisis, Canadian banks were touted by the federal government and the banks themselves as being much more stable than other countries’ big banks. Canadian banks, we were assured, needed no such bailout.

However, in contrast to the official story Canada’s banks received $114 billion in cash and loan support between September 2008 and August 2010. They were double-dipping in not only two but three separate support programs, one of them American. They continued receiving this support for a protracted period while at the same time reaping considerable profits and providing raises to their cE Os, who were already among Canada’s highest paid. In fact, several banks drew government support whose value exceeded the bank’s actual value. Canadian banks were in hot water during the crisis and the Canadian government has remained resolutely secretive about the details.

Now some details;

CCPA Report (pdf)

The first point of interest in the report is the extent of support as a percentage of the banks’ market capitalisation.  This one should be read in the context of the high leverage that banks enjoy courtesy of government support through deposit insurance and liquidity advances from the Bank of Canada on a day to day basis.

In the reports own words;

Three of Canada’s banks—ciBc, BMO, and Scotiabank—were at some point completely under water, with government support exceeding the value of the company. In March 2009, ciBc stood out for receiving support worth almost one and a half times the value of all outstanding shares. It would

have taken less money to have simply bought all the shares in CIBC instead of providing it with support.

The irony of CEO remuneration during this period is not lost on the report;

To top it off, the CEO of each of Canada’s big banks ranked among the highest paid 100 CEOs of Canada’s public companies and at the height of government support between 2008 and 2009 each CEO of each bank received raises in total compensation. For instance, Edmund Clark of TD Bank saw his overall compensation jump from $11.1 million in 2008 to $15.2 million in 2009.

The total support to Canadian banks and the surprise that CMHC was the primary conduit.

Individual bank support;

RBC

TD

Scotiabank

BMO

CIBC

And the reports conclusion which most would support;

A healthy financial system cannot be based on massive government support for which the details remain secret. It is only through an honest and transparent examination of what occurred and how it can avoided in the future that a stronger financial system can be built, which is in everyone’s best interest.

Relevance to Bankwatch:

This is a stellar piece of work and probably the best report on the Canadian bank system of the 2008 banking crisis.  Recommended reading for anyone interested in banking and how it really works.  There is no magic Canadian bullet.

Square is getting a lot of attention these days.  Banks are sitting by while Square eats their lunch, and this is quite typical.  This happened with eCommerce where banks let PayPal and others take that space.  At the pace mentioned in this Bloomberg piece, Square is looking at up to 8% of the market which seems high but here is the quote.

Square Payment Pace Rises 25% in Niche Coveted by EBay | Bloomberg

Square, founded in 2009, is processing transactions at an annualized rate of $5 billion, up from $4 billion a month ago, as more consumers embrace mobile payments, Chief Operating Officer Keith Rabois said in an interview. The San Francisco company is making cash from sales before 5 p.m. on any day available in merchants’ accounts on the next business day, compared with as many as five days out for other processors.

But that is not what really caught my eye here.  Square credits the merchant next day in most cases, versus up to 5 days for other processors.  If there is one thing banks are able to control it is timing of payments.  I am not sure how Square do that, when they must use banks’ but for sure banks could beat that because they control the payment infrastructure. 

Details on Square:

Square’s technology enables U.S. businesses to handle payments through Apple Inc.’s iPhone or iPad, or through devices running on Google Inc.’s Android software. The card reader plugs into the headphone jack of the mobile device. The reader, introduced in 2010, is available atWal-Mart Stores Inc. (WMT), Target Corp. (TGT) and Apple outlets.

So much has been written about RIM and the previously ubiquitous Blackberry. I see RIM as a solid future potential provided they do one thing.  Refocus.

They must focus on the installed base of government and business customers.  Those customers all have installed Blackberry servers inside their corporate / government networks.  Can you imagine having your server and software working inside the US Government computer infrastructure?  This is an enormous competitive advantage.

I say if I am at Waterloo HQ of RIM, you must throw away all preconceptions about your handsets.  That battle is lost.  Open your eyes, integrate android, make a deal with Apple ios;  you already have the installed base, and the rest is just handsets.  Do not try to re-invent what others have done.

One of the key learning’s and outcomes of the 2008 banking crisis was the need to tighten up control over bank leverage, which in turn promotes de-leveraging and reduces rapid increases in debt.  This is primarily centred in Basel 3 which curtails off-balance sheet lending, and requires debt to to be first risk adjusted and have capital held against that risk.

As with anything financial there are always unintended consequences, and those that seek to bypass the new rules.  Enter JP Morgan.

Banks test ‘CDOs’ for trade finance |ft.com

JPMorgan is among several banks that have begun testing investor appetite for the trade finance equivalent of collateralised debt obligations – the derivative products blamed for compounding the financial crisis – in an attempt to boost lending capacity

Trade Finance or the financing to provide working capital for imports and exports is experiencing reduction in lending capacity as a result of Basel 3.  Trade Finance accounts for trillions of dollars per annum, and will a significant revenue source for JP Morgan.

The interesting shift in this new idea is that Trade Finance would in effect be funded directly by Institutional Investors.  The regulators have acknowledged the problem JP Morgan seek to solve, but are hesitant to make more than minor changes to allow banks any dispensation. 

It seems to me what JP Morgan are doing is rational, and supports the idea that banks are over levered so locating additional sources of smart funding supports the target of de-risking banks.  I keep going back to the idea that banks have become such broad based credit vehicles and deposit taking vehicles that some separation of high volume and high risk from regular peoples finances is a good thing.

There remains plenty of money in the world and if JP can develop new method of wholesale access to it, then that seems in keeping with the spirit of the regulation design.

Someone I know was walking through shopping malls in Washington DC last month and there were many closed stores, including a Banana Republic.  That would be unheard of in Canada.  The effect of the 2008 crash is still with us especially in US and parts of Europe.  The target of re-building a safe banking industry is not easy and will require big adjustments.

In the “just when you thought you had heard everything” department, it turns out the Courtyard Marriott free wifi comes at a cost.  They are taking every web page served and rewriting it, presumably in preparation for injecting their own ads.

I hate ads as much as the next person but the idea that a page is being altered and what I am viewing is not the same as is served on the ‘normal’ internet is quite abhorrent!

Hotel’s Free Wi-Fi Comes With Hidden Extras | NY Times blogs

The lines of code include references to “rxg,” which stands for Revenue eXtraction Gateway, a service aimed at generating money from Internet access points. On its Web site, a company called RG Nets, which makes Revenue eXtraction Gateway, explains that its system rewrites every Web page on the fly so that it can include a banner ad. “As you can see, the pervasive nature of the advertising banner on all Web pages guarantees banner advertising impression,” a narrator says in the video.

I got all excited when I read about the Royal Canadian Mint and their MintChip initiative.  Cash Replacement it proclaimed.  I felt even better when I noted two people I have the privilege of knowing (Dave Birch and David Crow) on the judging committee. 

The Mint refers to this initiative as “the evolution of currency”.   What they actually mean is the evolution of change.  I was at first disappointed when I realised this was all about small payments.  It was no co-incidence the challenge was timed with the Canadian budget and the Mints elimination of the 1 cent coin.  The bigger picgture is that coins cost more to produce than their value.  When you associate that problem with the Canadian preference for electronic solutions, this initiative makes sense.  It is also a bite sized yet national initiative that has the government behind it.  This makes it less likely to become yet another fragmented and localised payment solution like Dexit.

I went to the Developers section which is hard to find, and finally got a much better description about the initiative and the implementation.  This from their site.

Digital Currency

• No personal data is exchanged in the transaction
• There is no intermediary or requirement for a proprietary network and as a result MintChip is a cost effective solution to merchants
• MintChip is designed to facilitate the payment of low value (e.g. less than $10) payments
• Anybody can participate regardless of their age or financial status
• MintChip payments are instant and irrevocable
• MintChips operate like cash in the physical world and virtual world and enables person-to-person payments
• There is no requirement for an external authorisation
• MintChip is backed by the Royal Canadian Mint

So I now have my mind around this solution as one that will eliminate the need to carry change and small bills.

In terms of acquiring locations they can use web addresses but more importantly QR codes.  This could finally put QR on the map.  Memo to marketers – putting a QR code on a poster in the subway where there is no internet service is not smart.  But I digress.

This whole initiative is well under the radar in Canada.  I learned about it on Techcrunch.  I say good luck to them and I want this one to work.  Tell your friends if you are in Canada,

Bruce Summers of the Kansas City Fed (retired) produces a highly articulate and relevant account (pdf) of the US Payments system that equally matches the Canadian.

I especially liked this paragraph that epitomises banks today.

US payments system failing to meet the needs of the digital economy | finextra

"The idea that money in transit is digital information which can be processed immediately has not been readily accepted by the banking industry," he says. "Most bank-sponsored payment schemes depend on clearing and settlement systems that are designed around batch processing and delayed settlement, and these clearing and settlement arrangements are being nurtured as opposed to being re-designed around continuous, real-time processing."

The IMF warms up to the US.

Cooperation and Connectedness—an Address to the Associated Press | IMF

By Christine Lagarde
Managing Director, International Monetary Fund
Washington, April 3, 2012

As prepared for delivery

Good morning. I am delighted to be here. I would like to acknowledge Tom Curley, who is just stepping down as Associated Press president and CEO after a lifetime of distinguished service in journalism. A warm thanks to Kathleen Carroll too.

It is important for the IMF to maintain a good, open, dialogue with all members, especially the United States—our largest shareholder. You, the media, play an indispensible role in this engagement.

I come this morning with a simple message: the global economy needs a strong U.S. economy and strong U.S. economic leadership.

Time and again over the last century, we have seen that U.S. leadership has been indispensible—bringing people together around shared values and an abiding vision of human potential, and economic potential too.

We saw this with the Marshall Plan after the Second World War. We saw it during and after the Cold War. And we saw it with the U.S. driving the global economy over the past half century.

The result has been a more prosperous world. A more peaceful world. A better world.

Today, we stand at yet another moment in history, where the United States, working closely with its partner nations, can help lead the world to a better future.

These are trying times. The global economy is trying to emerge from the deepest and most painful economic crisis since the Great Depression. At the same time, the world is growing smaller and more interconnected by the day, meaning that economic disruption in one country can touch people all across the globe.

With this in mind, let me talk about three things this morning:

First, where we stand in terms of the global economy.
Second, why the United States, in particular, needs to be engaged.
Third, why cooperation is so vital, and why I believe the IMF is especially valuable.

Global economy

Let me begin with the global economy. It’s fair to say that things are looking a bit better than they did even a few months ago. We can see some signs of thaw—welcome signs after the longest, hardest, winter in a generation. We see this in Europe, with some encouraging signs of financial stabilization. We see this here in the United States, with some encouraging signs of stronger growth and employment.

But we should not delude ourselves into a false sense of security.

The recovery is still very fragile. The financial system in Europe is still under heavy strain. Debt is still too high, public and private. Stubbornly high unemployment is straining the seams of society. Rising oil prices have the potential to do a lot of damage.

What is crucial at this point is that policymakers use the breathing space to finish the job, and not lapse into complacency or insularity.

Remember, we are here because of courageous policy actions, not blind luck. I’m thinking about the coordinated actions taken through the G20, in which the United States played a leading role. I’m thinking of the bold actions taken by major central banks to restore calm, including the Fed in this country and the ECB in Europe.

So what should be done to keep things on course? I see three broad dimensions.

First, it’s about stability. We must ensure financial calm. And here, I welcome the decision by the Europeans to strengthen their firewall, which should help stop contagion. And this should support a stronger global firewall, achieved in part by increasing the IMF’s resources.

More generally, we also need a stronger and safer financial sector that puts societal interest ahead of its own financial gain. This means better, and more coordinated, regulation. We’ve already come some distance here. The nations of the world, including the United States, have joined forces to strengthen global regulatory standards for banks through the Basel III process. We now need effective implementation, in a coordinated manner, of what has been agreed and more agreement on the outstanding areas—including regulation of derivatives and the shadow banking system, and effective resolution of banks with cross border operations.

Second, it’s about growth. In the short run, what matters most for growth is demand. But we should not ignore the supply side either, especially to keep growth strong and steady.

Boosting growth means using monetary policy to support activity, especially with no real signs of inflation among the advanced economies.

It also means using fiscal policy to support activity wherever possible. Yes, most countries need to bring down debt over time, and yes, some countries under pressure have no choice but to cut deficits today. But a global undifferentiated rush to austerity will prove self defeating. Countries like the United States with low costs of borrowing should not move too quickly.

But let’s not be too complacent either—total U.S public debt already exceeds 100 percent of GDP. The country needs a stronger push to fix its public finances in the years ahead, including by curbing the growth of entitlement spending and raising more revenue.

In the United States also, the recovery is being held back by the burden of household debt. Some of the statistics here are staggering—for example, about 1.5 million mortgages are seriously delinquent. More must be done to ease that burden. I’m thinking of actions to encourage mortgage writedowns and ease refinancing—and the U.S. administration has recently proposed new measures with those objectives. Aggressively implementing these measures can help avoid costly foreclosures, improve household finances, and boost consumption.

Remember, banks were helped so they could lend more; homeowners should be helped so they can spend more.

Third, it’s about jobs. Nothing enriches like gainful employment, so jobs must be a priority. This is a daunting challenge. Over 200 million people across the world today can’t find work. That includes nearly 13 million people right here in the United States. The plight of young jobseekers throughout the world is especially painful.

Growth must also become more inclusive, so that everybody benefits from rising tides. This is important all over the world, not least in the hopeful yearnings associated with the Arab Spring.

A world of interconnections

Americans might ask themselves: why should what happens in the rest of the world concern us? Don’t we have our own problems?

The answer is simple: in today’s world, we cannot afford the luxury of staying in our own mental backyards.

Think about it. When I was growing up, the world was a simpler place. Your livelihood depended pretty much on what was happening around you, in your own community, in your own country.

No longer. Today, a densely-woven web of interconnections zigzags across the globe. Since 1980, the volume of world trade has increased fivefold. By the time of the crisis, global capital flows were more than triple the level of 1995.

These connections are everywhere. As just one small example, think about how cars are made. A modern car needs up to 40,000 different parts, and the loss of a single part can bring the global supply chain to a standstill. So when a deadly earthquake in Japan knocked some parts out of commission, suburban American auto dealers started running out of cars.

On a larger scale, it’s fair to say that the story of the global financial crisis is really the story of global interconnections.

Perhaps more than any other country, the United States is intertwined in this global nexus, affecting—and being affected by—developments all across the world.

This is mainly due to its dominant financial sector. Our analysis shows that foreign banks hold about $5½ trillion of U.S. assets, while American banks have $2½ trillion of foreign assets. These are big numbers, showing that banking illnesses can be easily transmitted across borders. As we have so painfully seen, illnesses that come from the financial sector can be especially virulent—with large, widespread, and immediate effects.

The United States is also heavily integrated into the global trade network. It accounts for 11 percent of global trade.

These connections are particularly strong with Europe. About a fifth of U.S. exports go to Europe. And while two-thirds of EU trade is internal to the union, exports to the United States account for almost a fifth of the remainder.

Before the crisis, U.S. S&P500 companies were earning 20 percent of their profits in Europe. Five of the top ten overseas markets for U.S. investment are in Europe. European-owned companies in the United States employ about 3.5 million people.

So if the European economy falters, the American recovery and American jobs would be in jeopardy. So America has a large stake in how Europe fares—and how the world fares.

Cooperation and the IMF

This brings me to a larger point—integration poses great risks, but it also promises great rewards. Heightened global cooperation is the key.

History has shown us that when nations face common challenges in a spirit of solidarity, everybody wins. When nations pull apart in acrimony, going their own way and seeking their own advantage, everybody loses.

As Ralph Waldo Emerson said, “The reason why the world lacks unity, and lies broken and in heaps, is because man is disunited with himself”.

In the middle of the last century, two visionaries saw this clearly—an American named Harry Dexter White and Englishman called John Maynard Keynes. Having lived through the hardship and devastation of the first half of the century—when countries pulled apart and sometimes tore each other apart—they were determined to build a better world. I’m talking about the founders of the IMF.

The idea behind the IMF was simple: if countries worked together in the common interest and helped each other in times of need, then everyone would prosper together.

If this idea was important in 1944, it is equally important today.

So what is the IMF?

It is an economic club and a giant credit union, where the 187 member countries cooperate with one single mandate—global financial stability. We act as a conduit for countries to pool resources and provide a lifeline to members in need.

The IMF has been in the trenches from the start, helping our members overcome all kinds of challenges, great and small.

When the European nations clutched onto the Marshall Plan to climb back to economic health and vitality after a devastating war, we were there.

When the newly independent countries in Africa and Asia sought to find their footing in the postwar years, full of hope and optimism, we were there.

When Latin American countries struggled to break free from a morass of debt in the 1980s, we were there.

When the Berlin Wall came crashing down, and new nations stepped over the rubble into a bright new world, trying to build institutions from the bottom up, we were there.

And when the global economy almost collapsed three short years ago, we were there too.

Today, the world needs the IMF more than ever. Why? We can provide a circle of protection against global turbulence, and help members adjust to changing circumstances with minimal disruption.

But to do this effectively in today’s world, we need more resources. As I said earlier, now that the Europeans have moved first with their firewall, the time has come to increase our firepower. The ratio of Fund quotas to world GDP is significantly lower today than in the past. Sixty years ago, it was as much as 3-4 times higher. We’ve a lot of ground to make up.

As you know better than me, there is a great tradition in rural America—a tradition of “barn raising”, whereby neighbors all band together to build barns. Barns were large, costly, and hard to build, but absolutely essential for farming. The lesson is simple: together, the community can accomplish what the individual cannot, and everybody benefits. We should think of pooling our global resources in precisely these terms.

I must also point out that the IMF is a good investment for all our members, including the United States. Your money is not drawn upon until needed. Your money earns interest. Your money is used prudently—our programs always carry rigorous conditions to ensure their effectiveness.

No member country has ever lost money by contributing to IMF resources—and I assure you that will not change on my watch.

One last point: as the tectonic plates shift in the global economy—with dynamic emerging markets like Brazil, Russia, India, and China assuming an ever-greater role—these changes are also being reflected at the IMF. Our members have approved reforms to increase the quota share of these countries. Now countries must implement these reforms, and we are urging all to make progress by the time of our Annual Meetings later this year.

Even with these reforms, the United States will retain its leadership role as our largest shareholder.

Conclusion

Let me leave you with three thoughts.

First, cooperation can deliver. Over the course of the 20thcentury, we saw what can be accomplished when the global community pulls together, especially when the United States takes a leading role. Now is another moment for U.S. economic leadership.

Second, in a world riven by an infinity of interconnections, the ideal of cooperation is as urgent as when John F. Kennedy said, “Geography has made us neighbors, history has made us friends, economics has made us partners, and necessity has made us allies”. The time has come for the nations of the world to stand together again in the face of a major economic challenge, and with the U.S. as a lead partner.

Third, the IMF was founded more than half a century ago for precisely this purpose. We are here to serve our members—including the United States of America.

Support us. Use us. Work with us.

Thank you.

Its been a while since I wrote about Groupon.  Back then my main issue was their misuse of accounting rules to ignore marketing costs when calculating profits and basically falsify profitability.  They were called out on that by the SEC.  However that might be chicken feed compared to what they are up to now.

Groupon is essentially a sub-prime lender that does zero risk assessment | reDesign

Well, for starters, it’s not a coupon company nor a marketing company. At its core, Groupon’s U.S. business is a receivables factoring business, as I wrote last year. They give loans to small businesses at a very steep rate (the price of the discount plus Groupon’s commission). They get the money to fund these loans from credit card companies such as Chase Paymentech. Groupon is essentially a sub-prime lender that does zero risk assessment. And as word continues to spread about what a terrible deal running a Groupon is for many categories of businesses, the ones that will choose to run Groupons are the ones that are the most desperate. For U.S. based businesses, the only time I can definitely recommend running a Groupon is if it is otherwise going to go out of business.

The nature of Groupon business model is to bring out the worst in business practise and the worst businesses that practise those practices.  This company is the opposite of “do no evil".

Peer-to-Peer lending in the UK has suddenly become fashionable.  First Andy Haldane mentioned P2P as a valid and needed catalyst for innovation in financial services on Mar 14th.  Now we have demand for P2P returns from City investors, and finally the government are getting into the P2P business.

City moves in on peer-to-peer lending | ft.com

As this type of “direct lending” has expanded into business loans – through websites such as Funding Circle and ThinCats – it has started to attract the attention of more sophisticated clients who are keen to lend larger sums. Funding Circle lifted the maximum loan limit from £100,000 to £250,000 at the start of this year.

The increased interest comes as the government is also gearing up to invest up to £100m in peer-to-peer groups that facilitate loans for small and medium-sized enterprises. The chancellor earmarked these funds in the Budget and the Department for Business, Innovation and Skills is expected to provide details of how they will be allocated next month.