What
in the World is Going on with Banks this Week? Emergency meetings,
banker summits, crashing European banks.......| Zero HedgeSubmitted by Bruno de Landevoisin on 04/12/2016 17:29 -0400B+
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Written by David Haggith - The Great Recession Blog
Just
about every major banker and finance minister in the world is meeting
in Washington, D.C., this week, following two rushed, secretive meetings
of the Federal Reserve and another instantaneous and rare meeting
between the Fed Chair and the president of the United States. These and
other emergency bank meetings around the world cause one to wonder what
is going down. Let’s start with a bullet list of the week’s big-bank
events:
The Federal Reserve Board of Governors just held an “expedited special meeting” on Monday in closed-door session.
The White House made an immediate announcement that the president was
going to meet with Fed Chair Janet Yellen right after Monday’s special
meeting and that Vice President Biden would be joining them.
The
Federal Reserve very shortly posted an announcement of another expedited
closed-door meeting for Tuesday for the specific purpose of “bank
supervision.”
A G-20 meeting of finance ministers and central-bank
heads starts in Washington, D.C., on Tuesday, too, and continues through
Wednesday.
Then on Thursday the World Bank and the International Monetary Fund meet in Washington.
The Federal Reserve Bank of Atlanta just revised US GDP growth for the first quarter to the precipice of recession at 0.1%.
US banks are expected this coming week to report their worst quarter financially since the start of the Great Recession.
The press stated that the German government will sue the European
Central Bank if it launches a more aggressive and populist form of
quantitative easing, often called “helicopter money.”
The European
Union’s new “bail-in” procedures for failing banks were employed for the
first time with Austrian bank Heta Asset Resolution AG.
Italy’s
minister of finance called an emergency meeting of Italian bankers to
engage “last resort” measures for dealing with 360-billion euros of bad
loans in banks that have only 50 billion in capital.
President Obama’s meeting with Fed Chair Yellen
It
is rare for presidents to meet with the chair of the Federal Reserve.
The last time President Obama met with Janet Yellen was in November of
2014, a year and a half ago. It is even more rare for the vice president
of the United States to join them. In fact, I’ve heard but haven’t
verified that it has never happened in a suddenly called meeting with
the Fed before.
For security reasons, the president and vice
president don’t regularly attend the same events. There are, of course,
many planning sessions or emergency meetings where they do get together,
but not with the head of the Federal Reserve. Emergency meetings where
the VP is included in the planning session would include situations
related to dire national security in case the VP winds up having to take
over.
(George Bush and Dick Cheney were exceptional to the point
that everyone commented on how often the VP was included in meetings
with the president, but I always figured that was because George Bush
couldn’t think and speak without Cheney acting as the ventriloquist.)
In
fact the meeting with the prez and vice prez is so rare that the White
House is bending over backwards to assure the entire nation that the
president is not meeting with Yellen to try to influence the Fed, which
is required to act independently of politics (so they say).
According
to the White House, President Obama is meeting with the Fed chair and
Biden to discuss the nation’s “longer-term economic outlook,” even
though Yellen just told the entire nation that the economy was strong
and had arrived nearly back at “full health.” The president says they
will be “comparing notes.” Do their notes about the nation’s outlook
disagree?
White House spokesman Josh Earnest said both Obama and
Yellen are focused on ways to expand economic opportunities for the U.S.
middle class. He called the meeting an opportunity for the two to
“trade notes” while emphasizing that Yellen makes decisions about
monetary policy independently. (SFGate)
Either such meetings are,
indeed, extremely rare, or the White House doth protest to much because
they spent more time emphasize what the president was not going to do
than what he was going to do in assuring us he will not try to influence
Yellen.
“The president has been pleased with the way that she has
fulfilled what is a critically important job,” Earnest said. He added
that Obama has “the utmost respect for the independent nature of her
role.”
Earnest also said that, “even in a confidential setting”
Obama would not “have a conversation that would undermine” the Fed’s
ability to make “critical financial decisions independently.”
If
such meetings with the Fed are so rare they require careful explanation,
why the sudden call of the meeting, oddly timed between two specially
called, emergency meetings of the Fed — or, at least, “expedited”
meetings of the Fed. It can’t just be that the president wants to plan
what he will be saying at this week’s G-20 conference, if he’s to speak
there. That kind of planning would happen in advance because one knows
the conference is coming. One striking peculiarity of the presidents
meeting with the Fed is that it appeared to have been called immediately
after the Fed announced Monday’s “expedited” meeting of the Board of
Governors.
We are in an election cycle, and I already speculated
in my last article that, with the anti-establishment, Fed-hating
candidates, Sanders and Trump doing so well in their bids for the
presidency we could be sure the Administration would be doing all it can
along with the Fed to put some accelerant on this economy and forestall
the recession that I believe we have already begun.
A recession
would prove Trump and Sander right in their statements about a coming
recession or the failed actions of the Fed and Wall Street to bring true
recovery. So, the Fed and the President have every reason to work
together to make sure such an announcement never happens. That could be
what “comparing notes” on the economy’s future means — how do we assure
the economy doesn’t fall apart in the next few months before the
election since we have that common interest?
That would
explanation why the White House is saying, in advance of any
accusations, that the president isn’t trying to influence the Fed. They
want to get ahead of the story. Of course, it could just be that they
recognize such rare meetings will lead to the kind of speculation I’m
now doing.
Tuesday’s specially called meeting of the Board of Governors under “expedited procedures”
Here is the announcement the Fed posted at the end of last week for Monday’s meeting (italics mine):
Advanced Notice of a Meeting under Expedited Procedures
It
is anticipated that the closed meeting of the Board of Governors of the
Federal Reserve System at 11:30 AM on Monday, April 11, 2016, will be
held under expedited procedures, as set forth in section 26lb.7 of the
Board’s Rules Regarding Public Observation of Meetings, at the Board’s
offices at 20th Street and C Streets, N.W., Washington, D.C. The
following items of official Board business are tentatively scheduled to
be considered at that meeting.
Meeting Date: Monday, April 11, 2016
Matter(s) Considered
1. Review and determination by the Board of Governors of the advance
and discount rates to be charged by the Federal Reserve Banks.
A
final announcement of matters considered under expedited procedures will
be available in the Board’s Freedom of Information and Public Affairs
Offices and on the Board’s Web site following the closed meeting.
…Dated: April 7, 2016
The promised update after the meeting merely added,
Effective
April 11, 2016, the meeting was closed to public observation by Order
of the Board of Governors 1 because the matters fall under exemption(s)
9(A)(i) of the Government in the Sunshine Act (5 U.S.C. Section
552b(c)), and it was determined that the public interest did not require
opening the meeting.
One day later, the Fed put out an
announcement of another special meeting to be held on Tuesday, after the
suddenly scheduled meeting with the president:
Advanced Notice of a Meeting under Expedited Procedures
It
is anticipated that the closed meeting of the Board of Governors of the
Federal Reserve System at 2:00 PM on Tuesday, April 12, 2016, will be
held under expedited procedures, as set forth in section 26lb.7 of the
Board’s Rules Regarding Public Observation of Meetings, at the Board’s
offices at 20th Street and C Streets, N.W., Washington, D.C. The
following items of official Board business are tentatively scheduled to
be considered at that meeting.
Meeting Date: Tuesday, April 12, 2016
Matter(s) Considered
1. Bank Supervisory Matter
A
final announcement of matters considered under expedited procedures
will be available in the Board’s Freedom of Information and Public
Affairs Offices and on the Board’s Web site following the closed
meeting.
…Dated: April 8, 2016
O.K. Two expedited, closed
meetings in a row with a meeting with the president and vice president
in between that is so rare it required special White House defense as to
what would not be happening in the meeting.
The first meeting was
to talk about setting interest rates, which the FOMC will be meeting to
consider again later this month, having just postponed their scheduled
increase in March. The second meeting is more interesting. If you have
served on board or worked with boards that go into closed session, you
know they always use the most generic terminology possible when
announcing the meeting for sharing in minutes what happened in the
meeting.
The fact that it is a bank supervisory matter makes it
sound like a particular concern, not a discussion about supervisory
policy. Something is the matter somewhere that requires an immediate
meeting right after another immediate meeting … behind closed doors.
That something regards bank supervision. Board hold closed meetings when
they have to talk about specific institutions or individuals with
details that they don’t want to go public. This all comes very close to
sounding like some bank somewhere is in trouble, and the trouble is big
enough to call a special meeting of the very august board of governors
right after they just had a special meeting, and if you know these kinds
of guys, they don’t like wasting their time in excessive meetings.
Naturally,
I am as curious as you probably are about why so many last-minute
meetings behind closed doors and with the president and vice president
at a time when all central bank heads will be meeting with finance
ministers in Washington, D.C. So, I cast about for some possible related
stories as to what could be the matter, and I found several very hot
ones going on this same week.
The recession that has already begun — Atlanta Fed revises US GDP down AGAIN!
The
president’s meeting with the Fed and the Fed’s meetings with the Fed
were all called right after the Atlanta Federal Reserve Bank revised the
revisions of its previous revisements to say the US economy now looks
like it will report in for the first quarter at 0.1% growth.
It
seems I cannot write fast enough to keep up with the Federal Reserve’s
downward revisions of anticipated GDP growth for the first quarter of
2016. No sooner did I click “publish” on my last article where I noted
they have just revised their estimates of GDP down to a 0.4% annualized
growth rate than I read an article stating they had revised it again
down to 0.1%!
Isn’t this where I said this quarter was going? That
is within a rounding error of going negative and is less their margin
of error for their data. It was only back in February that the Fed
anticipated a cruising speed of 2% growth for GDP in the first quarter.
They have revised that number down every week.
Of course, the fact
that the Fed and the President called an unscheduled, closed-door
meetings to include the VP does not mean there is any connection between
the events, and I certainly am not concluding even for myself that
there is something dire happening here … but stay with me. There is more
to perk the ears.
US banks expected to report worst quarter financially since start of the Great Recession
That’s
no small potatoes for a coincidence in timing. What if the numbers to
be reported are even worse than has been anticipated, and the Fed is
seeing bank trouble in some of those numbers and the President has
received advanced information about some of those numbers. All
speculation on my part, of course. What isn’t speculation on my part is
that Wall Street is already predicting that this week’s quarterly bank
reports are going to look something like the start of the Great
Recession.
Analysts say it has been the worst start to the year
since the financial crisis in 2007-2008 and expect poor first-quarter
results when reporting begins this week…. Analysts forecast a 20 percent
decline on average in earnings from the six biggest U.S. banks,
according to Thomson Reuters I/B/E/S data. Some banks, including Goldman
Sachs Group Inc (GS.N), are expected to report the worst results in
over ten years. (Reuters)
Whoa! That means, for Goldman, even
worse than any time just prior to or during the Great Recession. When
you consider how bad the last decade has been, being worse than that is
pretty bad. Moreover, the timing is considered unusually nasty:
This
spells trouble for the financial sector more broadly, since banks
typically generate at least a third of their annual revenue during the
first three months of the year…. Bank executives have already warned
investors to expect major declines…. Citigroup Inc (C.N) CFO John
Gerspach said to expect trading revenue more broadly to drop 15 percent
versus the first quarter of last year. JPMorgan Chase & Co’s (JPM.N)
Daniel Pinto said to expect a 25 percent decline in investment banking.
Several bank executives have warned about declining quality of energy
sector loans.
“The first quarter is going to be ugly and we don’t
think that necessarily gets recovered in the back half of the year,”
said Jerry Braakman, chief investment officer of First American Trust,
which owns shares of Citigroup, JPMorgan, Wells Fargo and Goldman.
“There are a lot of challenges ahead.”
Yes, one of the biggest
areas of bank troubles comes from defaults in the energy sector that I
have been saying will play a major role in birthing this banking crisis.
(Translate that primarily oil and gas.)
BofA’s Michael
Contopoulos warned last week, it may be the worst default cycle in
history with “cumulative losses over the length of the entire cycle
could be worse than we’ve ever seen before.”
Over the weekend, the
FT got the memo with a report that … said that “the global bond default
rate by companies is running at its highest since 2009 with the US
accounting for the vast majority, according to rating agency Standard
& Poor’s. A further four defaults this week, with three coming from
the troubled oil and gas sector, pushed the overall tally to 40 with a
little over a quarter of 2016 done.” (Zero Hedge)
According to the
Wall Street Journal, these defaults are from “massive energy loans that
most investors didn’t even know about until recently.” Recovery of
these bad debts is falling extremely fast.
The growth of the
high-yield bond market allowed drillers to take on far more debt than in
past booms, leaving them more vulnerable to default. The emergence of
shale technology allowed companies to expand reserves and the loans
backed by those properties. Some of those loans may now be underwater.
(Bloomberg)
You can thank the Fed’s zero-interest policy for that easy credit bubble.
Is
anyone starting to feel a little financial crisis deja vù? Last time it
was declining housing-sector loans. This time, as I’ve been saying for
the last few months we would soon see, it’s declining energy-sector
loans. Looks like that is ready to materialize.
In code words,
Wells Fargo tells us that their trench-worthy report has not even begun
to fully write down the bad debts or move into foreclosures that would
cause write-downs: (That is, at least, what I read in public
bankerspeak.)
John Shrewsberry, Wells Fargo’s chief financial
officer, said on a January call with analysts. “We were working with
each customer to help them work through this. It doesn’t do us any good
to accelerate an issue, or to end up as the holder of a number of oil
leases as a bank.”
This week and next is the big-bank reporting
season. So, we should know right away if this is the next leg down in
the Epocalypse, but you will probably have some coded language to look
through. Something as big as this would certainly merit a flash meeting
with the president and vice president, multiple meetings of the board of
directors, and a G-20 financial summit in Washington along with
meetings with the IMF and World Bank.
Not saying that’s what it
is. Just sniffing out the kinds of stories that could be related to all
these meetings, some planned earlier, others suddenly and somewhat
secretively called.
Austrian bank failure echoes Great Depression
Five
and a half years ago, I wrote an article here that mentioned how the
Great Depression took its second and deepest plunge in 1931 because of
the failure of a private Austrian bank named Credit Anstalt.
In
May 1931, a Viennese bank named Credit-Anstalt failed. Founded by the
famous Rothschild banking family in 1855, Credit-Anstalt was one of the
most important financial institutions of the Austro-Hungarian Empire,
and its failure came as a shock because it was considered impregnable….
The fall of Credit-Anstalt—and the dominoes it helped topple across
Continental Europe and the confidence it shredded as far away as the
U.S.—wasn’t just the failure of a bank: It was a failure of
civilization.
Now, as I’ve been writing about the start of what I
believe will be the the second and worst dip of the Great Recession,
another Austrian bank is crumbling.
Austria created Heta Asset
Resolution AG when it nationalized all the bad loans of Hypo
Alpe-Adria-Bank International five years ago to rescue the bank and
depositors by creating a “bad bank” to contain the problems. It went
down something like this:
Hypo Alpe-Adria bank, when it was still
owned by the small Austrian state of Carinthia, was a cesspool of
corruption. It involved bankers, politicians, and powerbrokers in
Austria and the Balkans. It was the perfect union of money and power.
Investigators found 160 instances of suspected fraud….
Six of the bank’s former executives have been convicted of crimes.
“I’m
not aware of a criminal case bigger than this one,” explained Christian
Böhler, whose forensics team started investigating the bank in 2011.
“It was a mix of greed, criminal energy, and utter chaos.” (Wolf Street)
Hypo’s
troubles began, much as Credit Anstalt’s had before it, when it was
required to adjust its books to reflect the true value of its collateral
assets after the value of real estate in southeastern Europe collapsed.
Everything fell apart upon the realization of how little it was
actually worth.
Austria’s central bank governor Ewald Nowotny and
his task force recommended that Hypo’s toxic assets of €17.8 billion
should be put into a “bad bank.” But to stop the drag on public
finances, the federal government should not guarantee Hypo’s bonds. At
the time, Austrian taxpayers had already plowed €4.8 billion into Hypo
to bail out these bondholders.
He then explained on TV to
incredulous Austrians that this deal would nudge the budget deficit over
the 3% limit set by the Maastricht Treaty and push the government’s
debt from 74.4% of GDP to 80% of GDP. This one rotten, state-owned bank
in Carinthia was causing this much damage to the country’s finances!
The government, at that point, set a one-year moratorium on all payments to the “bad bank’s” bondholders.
After
burning through 5.5 billion euros of taxpayer money to no avail and
discovering a 7.6-billion-euro hole in its balance sheet still remained
to be filled, Finance Minister Hans Joerg Schelling ended support in
March 2015.
Surprise, surprise, the bad bank created by the government
to put a fence around all the bad debts of the original bad bank became
nothing but a black hole of debt, swallowing all money poured into it
with nothing to show for the effort. That didn’t stop Schelling from
claiming the nationalized bank was in good health in order to put a good
face on things as leaders are inclined to do when dealing with really
bad stuff in order to protect the public from a scare.
Yesterday,
under the first application of Europe’s new forced “bail in” procedures,
Austria ordered a haircut to the banks bondholders. Sighs. This is
apparently what happens if your money is still locked up in a bank with
“good health.”
It does, indeed, sound a tad bit like Credit
Anstalt. Now the moratorium is up, and it’s time to start dishing out
the bad news to the bondholders under Europe’s new rules:
Austria
officially became the first European country to use a new law under the
framework imposed by Bank the European Recovery and Resolution Directive
to share losses of a failed bank with senior creditors as it slashed
the value of debt owed by Heta Asset Resolution AG.
The highlights from the announcement…
a 100% bail-in for all subordinated liabilities,
a 53.98% bail-in, resulting in a 46.02% quota, for all eligible preferential liabilities,
the cancellation of all interest payments from 01.03.2015, when HETA was placed into resolution pursuant to BaSAG,
as well as a harmonisation of the maturities of all eligible liabilities to 31.12.2023. ((SuperStation95)
This is some much-needed relief from how things used to work:
Throughout
the Financial Crisis, and since, there has been one rule: bank
bondholders will always be bailed out at the expense of everyone else.
The sanctity of bank bonds reigned supreme, no matter what government
and central banks had to do to keep it that way. Bank bonds weren’t
allowed to be judged by the capital markets. They were simply
untouchable. Underpaid and overtaxed workers would have to bail out bank
bondholders when these recklessly managed banks collapsed.
That
was the rule in the US when the Fed, and to a lesser extent the federal
government, bailed out the banks. And that was the rule during the debt
crisis in Europe. (Wolf Street cont.)
Europe’s new rules were
intended to make sure that depositors did not take all the loss and that
tax payers don’t absorb all the loss. Heta, because it was a government
created “bad bank,” apparently does not have depositors, as it was the
creditors who were pooled into the “bad bank” who take the hit. The
preferred creditors at the Austrian bank have been told they will have
to take a 54% haircut, meaning the bonds they have purchased will
recover forty-six cents on the euro.
The big-money (preferred)
creditors of the bank, however, don’t like the new rules. They
complained and are still holding out for ninety-two cents on the euro.
That doesn’t bode well for anything being left for the smaller guys,
whose money will, in the very least, be kept in a lockbox for seven
years because payouts to the non-Majors don’t wind up until 2023. Major
bond-holders demanding a smaller hit include Pimco, Commerzbank and the
already deeply troubled Deutsche Bank. (Anybody see how things can
quickly move down the line like dominoes when you consider the size of
some of the worried creditors who are complaining that the hit will be
too hard for them?)
The “subordinated liabilities,” as I
understand the complex breakdown (for which I have been unable to find
any clear definitions) appears to include bondholders who took a second
position to the “preferred liabilities” in getting their money back and
third-party investors in the bank. It also appears to include the
partners in the bank. If so, then this is exactly how bank failures
should happen. The investors are slated to lose 100% of their money
first, allowing for the smaller loss by the bond holders.
It is
the investors who elect the board that governs the bank and who fill the
board positions and who make the decisions of who will be CEO; so, of
course, they should lose all of their money before anyone else does.
Creditors (bond holders) should be next, as they are often large
institutions like PIMCO that have more than enough capacity to
investigate risk before investing. Depositors should always be last, as
most of them have no capacity whatsoever to investigate the real risk of
banks and nowhere near enough money to put into a bank to make it worth
a real investigation of risk. They are acting in trust … and
particularly in trust that government regulators are doing their job.
Too bad the United States doesn’t operate this way!
What
kind of spinoff can the settlement of Heta have to other institutions?
Well, last month, the Association of German Banks had to bail out a
small bank called Duesseldorfer Hypothekenbank AG because its hit as a
creditor of Heta would have killed it. Though Duesseldorfer is a small
bank, it was apparently deemed too big to fail because, once again,
government bailouts went to the rescue.
Given that such an
agreement happened on Sunday afternoon, and that central banks and
regulatory bodies usually talk with other national bodies that may be
affected, I have to wonder if the thought of how Europe might react on
Monday had anything to do with Monday’s sudden meetings of the Fed.
Italian banks on final crash-landing approach
As
if all that were not bad enough for the start of a week in banking
news, Italy’s minister of finance called an emergency meeting over the
past weekend of Italian bankers to engage “last resort” measures for
dealing with 360-billion euros of bad loans in banks that have only 50
billion in capital.
Finance minister Pier Carlo Padoan has called a
meeting in Rome on Monday with executives from Italy’s largest
financial institutions to agree final details of a “last resort” bailout
plan.
Yet on the eve of that gathering, concerns remain as to
whether the plan will be sufficient to ringfence the weakest of Italy’s
large banks….
Italian bank shares have lost almost half their
value so far this year amid investor worries over a €360bn pile of
non-performing loans — equivalent to about a fifth of GDP. (Contra
Corner)
Could that have had anything to do with the flurry of bank
meetings in the US. I have no idea, but I do have to wonder, with so
much smoke everywhere in the banking industry, is there a fire we need
to know about? You can be sure, we’ll be the last to know, and any
announcement of what’s really going down will hit like Bear Sterns or
Lehman Brothers. One day, all the central bankers are talking like
things are fine. The next day a major vertebrae is knocked out of the
nation’s financial spine.
Or maybe presidents and central bankers
are just making sure things generally hold together through the election
cycle. Such a bad-news week for banks around the world certainly
doesn’t sound like all is well as our smiling central bankers, president
and V.P, say it is. I don’t know any top secrets to reveal, but the
smoke is killing me.
http://www.zerohedge.com/news/2016-04-12/what-world-going-banks-week-emergency-meetings-banker-summits-crashing-european-bank
