A few years ago (2005) we warned that anyone continuing to hold Italian government bonds yielding a measly 15 basis points more then German Bunds would be reckless. Now it is time to put out the warning again. While conditions may not yet be as extreme as in those days it is only prudent to consider an exit and take what is effectively a free option. Unless you believe in full political and fiscal union in the Eurozone this prepares you for the next (inevitable?) economic and financial storm.
Last week's announcement by the head of the ECB, Don Draghi, that the Eurocrats will pump up to € 400 billion into a 'targetted' long-term refinancing operation immediately makes me curious about how exactly this new bureaucratic monster is supposed to operate.
Leaving aside the question whether or not this new confetti money will do much good to the real economy in the Eurozone area there is a number of problems even a cursory look at the scheme brings to mind. So when one member of the Commentariat calls the TLTRO the "Star of the Show" (Gilles Moec, Deutsche Bank) we would warn him to be less star-struck and more dispassionate. But maybe his employer really does need this shot in the arm (or gift from heaven, maybe that is the star Moec refers to)?
So I cannot wait for the full details to be published. A few critical points that need answers: Who shall be the beneficiaries of the additional lending? Giant Buy-out funds speculating on ever-rising share prices certainly will not be among them though there is a displacement effect as banks may well use the TLTRO money to fund one group of clients and therefore have more money available to property, buy-out groups and companies seeking to finance M+A deals.
And what exactly counts as a small (and possibly mid-sized) borrower? And who is going to monitor that the TLTRO money really goes into ADDITIONAL lending to this privileged group of clients. And what if most or all of the lending is done in 'stable' economies such as Germany or Austria?
One thing is certain - programs such as these will inevitably lead to additional jobs for the boys and increase the ever-expanding number of bureaucrats working for the ECB, the local Central Banks and favored 'Consultants' charging exorbitant fees that are ultimately paid by savers and taxpayers who as usual have no say in these dirigist extravaganzas.
My prognosis for interest rates, esp bond rates, for the next few years gives a high probability that rates will meander around a relatively low base level. So the view that the bond trading business will be less profitable from now on is quite justified. But one has to remember that volumes during the previous 5-10 years were abnormally high. Declining and/or volatile interest rates are manna for bond traders. In addition, many innovations - some useful, some less so - in the bond market created new business opportunities. But there are no new products on the horizon, and some 'innovations' turned out to be duds. But taking all this into consideration, given the enormous volume of outstanding bonds and the large number of investors and issuers in a globalised bond market one can expect a good but down-sized bond market business from now on.
Prevention, detection and prosecution of money laundering has become big business during the past 20-30 years. And it will keep on growing and feed an ever-expanding army of regulators, compliance officers and assorted consultants. By definition the term money-laundering can be applied to nearly all business transactions and it taints everyone - even innocent parties - that is involved in commerce. For who can with 100 percent certainty say that someone he transacts with is not in some way associated with a proscribed activity? As re-iterated on this site for a few times money-laundering legislation is only a get-out for poor legislation and poor government. If the crime (and quite a few of the proscribed activities do not rank as crime in everyone's eyes) would have been prevented, detected or prosecuted, or even better, bad laws would not have been enacted, the need for anti-money laundering would vanish. It is also noteworthy that money-laundering accusations are regularly added to accusations that are not really involving any money laundering. One example would be where the someone is accused of tax fraud. Naturally there will be some financial transactions involved but to claim that money laundering was involved is not grounded in any rational sense of justice. But it suits today's political class to create a climate of all-pervasive supervision and fear among the citizens they are supposed to serve.
The US 'authorities' (if you can name them as such as the country becomes more and more ruled by out-of-control lobbies and zealots) prepare another drive-by shooting aimed at a foreign bank. This time it is the turn of French BNP-Paribas. The 'crime' was that the bank supposedly conducted business with a peaceful country as that is the only way one can describe Iran. Or can anyone point to an occasion where the country has been the aggressor and not the victim (do I need to mention BP, or Mossadegh?). So it is with growing anger that one watches the spectacle of a useless Eurocracy that drowns Europe in more and more intrusive and expensive regulation but is afraid (incapable? lazy?) to put a serious warning shot in the direction of the United States demanding that the extra-territorial reach of its 'laws' be stopped immediately. Europe - or at least its citizens - have no quarrel with Iran and do no longer want to support unaccountable lobbies and the policies they have imposed on the US government.
PS: Cleptocrats in the US have just upped the ante - $10 billion, and rising? Basically it is the behavior of the typical criminal, grab what you can get away with, only this time it is the government (or the shady lobbies that push idiotic and counterproductive foreign policies on a hapless majority).
Announcing that the number of jobs in the investment banking unit will be cut by 25 per cent over the next three years is as bad a decision as can be. Firstly it sends a clear signal to anyone who can get a job elsewhere to do so as soon as feasible. The remaining staff will be spending most of their time second-guessing where and when the next cuts will be made. Even worse, the instinct for survival will make it essential that each and every one tries to protect his employment by trying to put the knife into his or her colleagues' back. Above all it is not even clear why a down-sized and provincial version of Barclays - not dissimilar to a building society or - shock horror! - the Co-op bank, will be more successful in the long run. Is there something JP Morgan or Bankamerica know that Jenkins and the regulatory/political cabal here in the UK don't know? But never mind, Shipping, Car Manufacturing, Textiles, Steel Making etc were successfully destroyed by the Powers-that-be, so it matters little if British Banking is blow-torched as well. Makes it so much easier for other financial centres - in the EU and further away - to eat the City's lunch.
When senior banking figures warn that London's position as preeminent financial centre would be at risk from any British exit from the EU must be taken seriously. But at the same time one should not overlook the other side of the argument. Language and legal traditions aside the first question that comes to mind is the following: where would all the banks that are supposed to leave move to? A battle royal would ensue between the obvious candidates, Frankfurt and Paris. But some banks might also consider Amsterdam or Brussels, and the main European banks might find it unnecessary to maintain a major location outside their home country. If it ever comes to the question of 'Brexit' the main deciding factor might well be what the regulatory and tax regimes look like in the UK and the various possible alternatives inside the EU.
Every bank is bust if all depositors want their money back at the same time - unless a thorough reform (which we support) has mandated a strict maturity match (Disregarded by the Solons in Brussels, Frankfurt etc). It is also always possible to find a scenario that results in a bank failing a stress test - how about a Mega Earthquake in Yellowstone? an escalation of the Ukraine conflict or a nuclear exchange somewhere else? So to employ 25 Deloitte staffers to check more than half (which half?) of all loans at Austria's Raiffeisen Landesbank Oberoesterreich (12/13 Balance Sheet € 40 Bio) seems to be an expensive waste of money. The depositors/borrowers/equity owners have to pay the hefty fee of € 4.5 Mio for this extravaganza. It remains to be seen how 'expert' the Deloitte people are. Can we assume that they are banking experts? or just box tickers? Will these commissars really be able to properly assess each and every borrower? Are they just recent school leavers and Deloitte charges full whack for their (questionable) services? Was there a proper tender process when the contract was given to Deloitte? As the team will stay at RLB for a full five (!) months each of the 25 will be charged to the bank at a fee of approx. € 40,000 per month (!!). Talking of overpaid bankers! Now multiply all these shenanigans by a massive number - the same game is being played all over Europe, without a single citizen having had a chance to have a say - and you can see what massive amount of wealth destruction is being conducted at the behest of unelected politicians and their minions in the regulatory and central banking institutions. And the taxpayer is still not off the hook when the next disaster hits the financial industry!
Every bank can be shown to fail under certain assumptions. For example a 50 percent drop in property and/or share prices, a steep increase in interest rates etc. So you can always design stress tests that result in a positive or negative result, depending on the scenario you choose.