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Wednesday
Sep112013

The White House, the Fed, the Debt, the Inequality and Larry

It’s going to be an explosive fall, financially speaking, regardless of what transpires in the Middle East. The culmination of faux regulation, debt ceiling debates, derivatives growth and the ever-expanding Federal Reserve books will provide lots of volatility- for which the White House will be caught unprepared.

In the wake of the Great Crash of 1929, FDR and Congress passed an act to isolate people’s deposits from the speculative pursuits of financiers. The Glass-Steagall or Banking Act of 1933, was even promoted by some of the biggest bankers of the time, as I will explain in greater detail in All the Presidents’ Bankers.

Their reasons were self-serving, yet they also helped the population. They wanted a safer banking structure, they wanted citizens to feel more confident in the financial system that they dominated, and they were willing to forego their trading and securities creation operations to achieve this goal. They were willing to become smaller and substantively less risky in accordance with the Act that FDR signed on June 16, 1933.

We got nothing like that legislation this time around, just a lot of talk about ‘sweeping reform.’ President Obama signed the Dodd-Frank Act in July, 2010 to supposedly protect consumers from Wall Street. But it did not make big banks smaller. It did not separate their speculative / securities creation ability from their FDIC backed deposit and lending business. It did not require banks to dramatically reduce their derivatives positions, the leverage imbedded in complicated assets, or the dangerous chains of inter-dependent exposures to other firms.

Despite billion of dollars of fines, which mean little in the scheme of their bottom lines, the biggest banks are bigger and more complex than ever, and thus, their leaders more sheltered by Washington. Unnecessary global risk remains in the system. We need banking reform ala Glass-Steagall. Anything less is an exercise in political posturing and regulatory futility, no matter how many back-pats accompany the procedure.

Derivatives Take over the World

Last quarter, the total notional value of US banks’ derivatives positions increased by $8.5 trillion to $232 trillion, still mostly concentrated in interest rate products. Credit derivatives, 6% of the total, increased 5.4% to $13.9 trillion. The four largest banks account for 93% of that amount, and 81% of industry credit exposure, 36% of it below investment grade.

The total assets of JPM are $1.95 trillion and total derivatives notional $70.3 trillion, or more than 35 times its asset amount. Citigroup has $1.3 trillion in assets and  $58 trillion in derivatives notional. Bank of America has $1.4 trillion in assets and $44 trillion in derivatives, and Goldman has $133 billion in assets and $42 trillion in derivatives. Banks will say they are hedged, notional volume does not equate to the total potential loss, but that just doesn’t matter. In the event that one area of the market or one firm goes belly up, the rest follow. No mega-bank is isolated from the others, though some are more politically connected, have more lobbyists, or are better subsidized than others.

Before the fall of 2008, US banks’ notional derivatives exposure was $180 trillion.  Then, five banks held 97% of that notional, and 85% of the industry’s net credit exposure. The concentration of risk and amount of derivatives has increased, since before the government orchestrated bank bailout and subsidization, and Dodd-Frank.

There are $564 trillion worth of notional over-the-counter derivatives that the Bank of International Settlements (BIS) knows about, as of June 2013. America’s global derivatives presence, has now eclipsed its comparative military expenditures; the US is responsible for 39% of the world total of $1.7 trillion of such expenditures, but US banks account for a whopping 41%, and JPM for 12.4%, of the world’s derivatives.

Debt Ceiling Drama

In the backdrop of ongoing discourse conducted by minions of lobbyists over the minutia of Dodd-Frank that can be still be deliberated to keep them employed, comes the major déjà vu non-debate of the season, resurfacing from two years ago – that of the infamous Debt Ceiling. Tune it out. For, Congress will do a lot of partisan grumbling and then vote to raise the debt ceiling anyway.

In the highly unlikely event that it doesn’t, the US is in no danger of defaulting on its debt. At its current credit rating, it’s many notches away from that, plus, it just won’t happen. S&P pre-empted even the potential of a downgrade in June, when it raised its outlook from ‘negative’ to ‘stable’ and left the rating at AA+, citing the Fed’s “timely and conservative actions” to mitigate the effects of the “great recession” of 2008 and 2009 and noted it expects the US economy to match or top other highly rated countries in the next few years.

And, even in a pinch, the Fed is holding about $2 trillion worth of Treasury securities in excess reserves. Technically, these could be returned or sold– which won’t occur because that would mean the end of Zero-Interest-Rate-Policy, an even tighter credit market and plummeting stock and bond market. Congress and Bernanke won’t let that happen.

For the record, I’d retire that $2 trillion in debt, since it’s doing nothing productive anyway, which would alleviate the need to discuss raising the debt ceiling, or put it to some productive job-creating purpose, so we wouldn’t have to hear Bernanke talk about the need for more jobs to be created, while presenting no concrete ideas as to how to do that. Oh gee, I have an extra $2 trillion lying around here, what to do?

But none of that matters. Since Obama came to office, the debt limit has been increased from $10.6 trillion in 2008 to $16.394 trillion now. Under Bush, the debt limit rose from $5.95 trillion to $10.6 trillion.  Republican and Democrat controlled bodies of Congress approved the steps along the way.  They will again.

Epic Inequality and Excess Capital of the Wealthy

While hundred of trillions of dollars of derivatives and trillions of dollars of debt swirl around the bankosphere, the top 10 percent of earners nabbed more than half of the country’s total income in 2012, the highest level recorded since the government began collecting income data in 1917, according to the latest study by noted Economists, Emmanuel Saez and Thomas Piketty.

These are sad, but unfortunately not shocking results. Income and wealth inequality will continue to grow because of the wealth-accumulation effect of excess capital investment in a political system whose restrictions on damaging financial speculation are so lax. In this construct, it still “takes money to make money.” During the pre-Depression years of the 1920s, investors with more ‘cash to burn’, could – and did - take more investment risks like speculating in the stock market or the various trusts, than those living from paycheck to paycheck. Those with less excess capital to begin with, that did chose to invest it more speculatively, or that were otherwise impacted by losses related to the speculation of others and the general economic crisis (losing jobs because their employers had borrowed or invested recklessly and were cut off from bank loans to run payrolls as banks shut or entered hoarding-survival mode), had no financial cushion for necessary expenses, let alone investments later.

Still during and after the Great Depression, for several decades, inequality shrank because even the wealthier investors chose to behave more prudently, and the financial institutions were forced to by legislation.

Today, more complex investing and speculating avenues abound - from stock market options to credit derivatives to commodities indices - through advanced technology and the sheer scope and opaqueness of the practices of major players.

What is particularly scary about the timing of this study, is that it did not take place during the build-up to this financial crisis, which would have been a more even parallel to the 1920s build-up before the 1929 Crash and 1930s Great Depression. Instead, these results were tabulated after the height of this recent crisis - the plummeting of the stock market in 2009, the escalating foreclosures, and the restriction of credit to individuals and small businesses. The resurgence of the stock market - on the back of the Fed’s Zero-Interest-Rate and QE programs and other forms of cheap capital made available to the banks, and the hedge funds, and other wealthy individual clients to which they cater -  has increased capital returns for these participants, but not helped those with less excess capital to begin with that continue struggling for jobs, more livable wages, more affordable health-care and education, and are under mounting other daily expenses.

This time around, there has been a marked divergence in the thing that the White House and Main Stream press calls a “recovery” that renders our overall economy in a more precarious position for more people. The Saez-Piketty study is another indicator that this “recovery” was for the banks and that were disproportionally subsidized by the Fed, Treasury and government policies, and for their wealthy clients and customers that could afford to pick up and churn cheap assets. It was not for the general population.

The Fed and the Fat 

Meanwhile, the US bank subsidization exercise isn’t over. It’s in its fifth year. Despite all the will-he-or-won’t-he speech analysis games, the Fed remains an active buyer of securities from banks and holder of treasuries in excess reserve. Since the Fed instituted its plan to buy $85 billion per month (up from an original $40 billion, why be incremental when you can double-down?) – or more than $1 trillion per year – of mortgage securities from banks, its actions have artificially boosted the prices of those securities and related ones. This provides the illusion of a healthier banking system.

The Fed continues to shatter its own records monthly, now holding a total of $3.6 trillion of debt securities on its books, about ten times the figure of 5 years earlier (in July 2008), including $2 trillion of US Treasuries in excess reserve balances maintained by banks at the Fed, receiving .25% interest. The Fed’s mortgage backed securities component is $1.3 trillion, up from zero 5 years ago.  None of this helps the general economy, all of it helps interest rates remain low, securities prices high, and money cheap for the big banks.

And, not only are banks coddled by the Fed, they are sitting on record amounts of cash. JPM Chase, for instance, is holding a record $345 billion in cash, just to protect itself, while its earnings statements say things are fine. Hoarding is never a sign of stability.

Then, there’s Larry

As the Fed’s books bulge at the seams, chatter about who the next Fed Chairman will be, persists.  Given his proven tendency to populate his inner economic circle with Clintonite-Rubinites, it makes perfect sense for Obama to go with his former economic advisor, and Clinton’s former Treasury Secretary, Larry Summers – if Summers wants the job. Obama has verbally applauded Bernanke many times for saving the country from a Depression (while ignoring the risk, that his policies are infusing into the economy that will manifest after he leaves office). Summers was there through the ‘tough times’ too. 

Wall Street will be as happy with Summers in Bernanke’s chair, as they were when Summer’s replaced Robert Rubin as Treasury Secretary under Clinton, days after Congress passed the Financial Modernization Act that repealed the last remnants of the Glass-Steagall Act, and present for Clinton's signing ceremony. Plus, when Hillary Clinton runs for president, she will need all of Rubin’s circle of campaign contributors. What better way to secure them, than to also have an old friend that understands their need to remain ‘globally competitive’ at the Fed? Summers, fresh from a Citigroup-arranged, Kuwait Investment Authority sponsored May talk in Kuwait, would also keep relations with the Middle East sweet for his banker friends.  

Obama’s argument for Summers, after he retrieves his foot from his mouth regarding Syria, will be continuity, just as it was for Bernanke’s reappointment, and as it was Bush’s argument for Bernanke after Alan Greenspan. Continuity is a big theme with Congress and with bankers, too. Ergo. 

References (8)

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    The White House, the Fed, the Debt, the Inequality and Larry - Thoughts - Nomi Prins
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    The White House, the Fed, the Debt, the Inequality and Larry - Thoughts - Nomi Prins
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    The White House, the Fed, the Debt, the Inequality and Larry - Thoughts - Nomi Prins
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    The White House, the Fed, the Debt, the Inequality and Larry - Thoughts - Nomi Prins
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    The White House, the Fed, the Debt, the Inequality and Larry - Thoughts - Nomi Prins
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    Response: Wrinkle Rewind
    The White House, the Fed, the Debt, the Inequality and Larry - Thoughts - Nomi Prins
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    The White House, the Fed, the Debt, the Inequality and Larry - Thoughts - Nomi Prins
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    The White House, the Fed, the Debt, the Inequality and Larry - Thoughts - Nomi Prins

Reader Comments (16)

Thank you.

September 12, 2013 | Unregistered Commenterdall

Thank you. Always enjoy your writing.

September 12, 2013 | Unregistered Commenterwest

you are gorgeous!

September 12, 2013 | Unregistered Commentergrunta

Obama pretty screws up the middle class but my biggest nightmare would be Hillary be the next president. A woman tolerates the shame in front of the world of her husband misconduct in exchange of a position in the senior politics. If she has the power, she won't be sorry what she does (or even with contempt). Her will will be on par of Iron Lady but in an insane way.

September 13, 2013 | Unregistered CommenterJoe

Yes, HIllary Clinton has demonstrated many times that her will is certainly, and comparatively iron. Under Bill Clinton, the middle class 'appeared' to be doing better, though in actuality, much of the 'boom' aspect of the 1990s turned out to be false, due to an explosion of stock and debt issuance, which propelled the market higher, but then collapsed in the early years of Bush - in other words, Clinton was a recipient of excellent timing. Bush went on to set-up his own economic crises that manifested in 2007-2008, and which, by virtue of his and Obama's policies of backing the coddling of the banking industry since, still linger. There's no reason to assume that Hillary Clinton would be any different on these accords.

September 13, 2013 | Registered CommenterNomi Prins

Well written, interesting read.

September 13, 2013 | Unregistered CommenterRadek

The irony of the" Clinton timing benefit", receiving high fives because of the dotcom bubble, is that it was during this excess that more excess was created via Gramm Leachy....and people still think he was great....when in fact, repealing Glass Steagall should be viewed as the dumbest bill he ever signed, creating epic disaster. It kills me to see Rubin still parading around, $130 million richer from Citibank, while Citi shareholders TODAY are 95% poorer, and he more than anyone had the influence to change policy and repealed Glass Steagal. Should be called Rubin's Folly. Or Clintons, Or Gramms, or you get the idea. Blame needs to be cast so meaningful solutions can be embraced.

As far as Hillary goes, I'm not real excited to see her do anything after watching her amateur performance as Sec of State -"we came, we saw, he died...hahahahahaha" http://www.youtube.com/watch?v=Fgcd1ghag5Y

The problem with today's banker is that they don't care about capital or equity..Congress has allowed this....just as long as they get bailed out with new capital to generate new fees, interest, and oh, yeah, pay those fines for such pesky things like fraud and drug money laundering....all true. Society needs, must begin viewing bankers as guilty until they prove themselves innocent. Banking should have the social stigma just a notch or two below used car sales....(apologies to used car sales)

September 16, 2013 | Unregistered Commenterdg

Totally agree. And - that repeal of Glass-Steagall (i.e. Gramm-Leach-Bliley) didn't even bring about long-term shareholder wealth for the investors in the new mega-supermarket-banks, it just satisfied the 'competitive' itch of the bank titans to be 'bigger'. The debt and leverage in the system created in the aftermath of repeal remains an obvious danger today. Clinton's team ushered the repeal through with great political skill, but Phil Gramm - Republican Senate Banking Committee leader helped, and the idea of repeal was first pushed under Reagan / Bush. It was a bi-partisdemolition job, harnessed politically by the Clinton team for the bank execs. Yet, Obama hailed Larry as helping to architect w/Geithner / Bush's pick Bernanke, etc. the 'recovery' that isn't. And yes, today, bankers care about leveraged short-term gains, nothing else. They don't have to, because of the regulatory framework that allows this.
.

September 17, 2013 | Registered CommenterNomi Prins

So if I have about 4K in assets and 15K in debt....I have managed my economy better than
Corporate America Governments?
All this while being gainfully unemployed too!
Perhaps I should be nominated for next Fed Reserve President?

September 17, 2013 | Unregistered Commenteramerican small fry

William R. Simonson & The Reality Gap

Published on Sep 17, 2013
At present Americans have given their consent to a system that is clearly and firmly working against the best interests of the nation.

I spent a few days looking at "Obama-care" and from what I can tell it will it will harm many or most of the people that are under the false impression this initiative will be good for them. Ironically, A few major lobby groups representing labor are just seeing this fact now! This kind of policy is simply illustrative of many of the deleterious public policy initiatives that have come before it.

William R. Simonson & The Reality Gap


US policy is working against the self-interest of all but few Americans... Listen to congress and you will see how out of tune they are with the concerns of the everyman. Listen to the every man too and you will be confronted by even more delusion. When you don't have an overview and most of the information that comes your way is a blatant lie what do you expect? Reason cannot emerge from a foundation based on lies. Lies allow people the comfort that our society and our economy will sustain itself indefinitely.

So here we have it;

Not only do Americans fail to realize their future prospects but the idea of finding truth is horrific an abhorrent prospect.

The question we have to ask is where we are going, not where we are...
We have seen some transitions

A nation that once Encouraged consumerism
Found that consumerism is not sustainable
So now consumers are fully shifted to digital entertainment
When the American Dream cannot be funded
Have your society as borrow as much as possible

When the stress cracks start to show
Change the laws to selective interest

Control the information flow
Eventually
Collect all Information about your citizenry

These symptoms mask Layers of delusion...

Yet, There are good reasons why there are many layers of delusion in place.

http://youtu.be/Le_3UjUVNoU

September 18, 2013 | Unregistered CommenterDante

Brilliantly articulated, brilliantly written, brilliantly rendered!

(And to think I was just about to skip reading this in order to be the first in line to purchase the latest model of Apple's iPhone, the iPhone NSA model.)

https://www.youtube.com/watch?feature=player_embedded&v=oSJqBJ1TF-E

September 18, 2013 | Unregistered Commentersgt_doom

@dg, pertaining to Hillary Clinton:

As secretary of state, Madame Clinton appointed a bunch of necons, including Bush inner circle member, Marc Grossman (who, if what I've heard and read is correct, is a second cousin to the Bush-Walker family). Also, Victoria Nuland, wife of a founding member of the PNAC bunch (Project for a New American Century, neocon of short-lived neocon groups --- the other being the Federalist Society).

September 18, 2013 | Unregistered Commentersgt_doom

Robert Prasch: The “Lessons” that Wall Street, Treasury, and the White House Need You to Believe About the Lehman Collapse

By Robert E. Prasch, Department of Economics, Middlebury College. Cross posted from New Economic Perspectives

Five long years have passed since the demise of the once venerable firm of Lehman Brothers. To mark the occasion, Wall Street, the United States Treasury Department, the White House, and their several political proxies and spokespersons have taken to the mass media to instruct the public in the “lessons” to be drawn from the financial crisis of 2007-09. Regrettably, we are witnessing the propagation of several self-serving falsehoods in the hope that the public can be induced to embrace them now that the immediacy of the events in question is in the past. Some of the lessons are so flagrantly false that they demand immediate correction.

No One Saw It Coming

Of all the falsehoods being circulated, this one is in many ways the most egregious and damaging. It systemically denies the attribution of credit and thereby voice (and political power) to those who in fact did see “it” coming even as it provides blanket exoneration to those whose ignorance–or more likely–cowardice combined with self-interest prevented them from perceiving what was happening in the financial sector. Those making this latter claim can, more correctly, observe that, “no one in our close-knit circle of elites saw it coming.” Stated in this form, the statement is suggestive. Why, we might ask, was their circle exclusively made up of individuals who did not, would not, or could not, see the crisis coming? Why is it, in a nation with the diversity and talent of the United States, that all of the senior managers of our largest financial firms, and those charged with regulating them, were exclusively made up of individuals sharing the same perspective – a perspective that, I might add, was and remains so singularly and disastrously dysfunctional for the economy upon which the rest of us depend?
These are compelling questions because, as a matter of fact, many highly-informed people “did see it coming.”
http://www.nakedcapitalism.com/2013/09/robert-prasch-the-lessons-that-wall-street-treasury-and-the-white-house-need-you-to-believe-about-the-lehman-collapse.html

September 21, 2013 | Unregistered CommenterTom

A Risk Manager’s Impossibility?

A reconsideration of the London Whale, JPMorgan’s risk management, Jamie Dimon’s oversight – and their implications for other financial institutions

If you are a risk manager at a U.S. bank, you will be faced with difficult decisions. You’ve probably already run into one or more of what I think of as the three major problems for risk managers. The first is the lip service paid to risk management by people in leadership positions who are unfit to lead; the second is ignoring or covering up oversized risky positions; and the third is not effectively managing short positions.

Lip Service

Jamie Dimon, Chairman and CEO of JPMorgan Chase, is still lauded as the best bank manager in America. That’s a leading indicator of how difficult your job will be if you actually try to perform your role in the way it should be done. Yet, if you go-along-to-get-along, you will probably be safe only temporarily.
“JPMorgan failed to keep watch over its traders as they overvalued a very complex portfolio to hide massive losses,” George S. Canellos, co-Director of the SEC’s Division of Enforcement, said in the statement. “While grappling with how to fix its internal control breakdowns, JPMorgan’s senior management broke a cardinal rule of corporate governance and deprived its board of critical information it needed to fully assess the company’s problems and determine whether accurate and reliable information was being disclosed to investors and regulators.”

Though the SEC did not name individuals in its release, it did state that “senior management” applies to the people who held the titles of CEO, CFO, CRO, Controller and General Auditor at JPMorgan as of May 10, 2012.

Dimon has created his own Catch-22: he wants to be in charge, without doing the work that it takes to actually be in charge. If he’d like to now claim that he did do the work required of him, then he has to admit that he lied to the public.

Given the choice between admitting negligence and lying, Dimon chose negligence. He now suggests that it shouldn’t matter, anyway, because JPMorgan has made up for the $6.2 billion in losses through revenues generated elsewhere—in units that, unlike the CIO, don’t report directly to him.

http://tinyurl.com/kuk6vve

September 24, 2013 | Unregistered Commenterrich

Nomi,
It's always much too long between your articles/thoughts, the only upside being that they are always worth the wait!

DavidC

October 26, 2013 | Unregistered CommenterDavidC

As Ceasar scribbed in the field while he was slaughtering thousands(to bring peace of course): "Avoid the unecessary word like the sailor avoids the rock"..
Thanks Nomi. You're writing is quite simply the greatest b-line'ish I've seen. And while the content is always depressing, the light it brings is always eye-opening.

And when we do return a Glass-Steagall law, or if, I nominate the first half be Nomi-..take your pick. Of course, if want your name last we can negotiate.
Cheers.

November 3, 2013 | Unregistered CommenterBri

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