#banks

Banker Buster?

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Before the GFC in 2008, bank shares across the globe were flying. Financial engineering promised a new paradigm of wealth creation and abundant profitability. They were unstoppable.

However 12 years later, many banks look mere shadows of their former selves. We are told by our political class to believe that our economies are robust and that a low-interest rate environment will keep things tickety-boo indefinitely. After all the wheels of the economy have always been greased by the financial sector.

If that were true, why does Europe’s largest economy have two of its major banks more than 90% off the peak? Commerz has shrunk so far that it has been thrown out of the DAX. Surely, Japan’s banks should be prospering under Abenomics so why are the shares between 65% and 80% below 2007 levels?

Ahh, but take a look at those Aussie beauties! How is it they have bucked the global trend? How can Commonwealth Bank be worth 6x Deutsche Bank?

Although we shouldn’t look at the Aussie banks with rose-tinted glasses they have mortgage debt up to the eyeballs. Mortgages to total loans exceed 62% in Australia. The next is daylight, followed by Norway at 40%. Japanese banks, before the bubble collapsed, were in the 40% range. CM wrote a comparo here. There is a real risk that these Aussie banks will require bailouts if the housing market craps out. It carries so many similarities to Japan and when anyone ever mentions stress tests – start running for the hills.

If you own Aussie banks in your superannuation portfolio, it is high time you dumped them. Franked dividends might be an ample reason to hold them, but things in finance turn on a dime and this time Australia doesn’t have a China to rescue us like it did in 2008-09. More details contained in the link in the paragraph above.

In closing, Milton Friedman said it best with respect to the ability of central banks to control outcomes,

“… we are in danger of assigning to monetary policy a larger role than it can perform, in danger of asking it to accomplish tasks that it cannot achieve, and as a result, in danger of preventing it from making the contribution that it is capable of making.

 

Before we rush to bash the bankers!

Bankers have worked hard to stay one rung above lawyers. Yet is anyone surprised? Before we embark on a “bash the banker” tirade, at what point do we cast aspersions on the regulators? If you leave a child unattended with a box of matches don’t be surprised if the house burns down.

None of this is new. Before the housing crisis engulfed America, a group of certified home appraisers raised the alarm in 2003 by signing a petition to present to Congress. They claimed many unqualified assessors were in cahoots with mortgage brokers to jack up property appraisals because of the higher fees that were attracted. What was done by the authorities? The square root of jack. So the $750,000 mortgage taken out was actually against a $500,000 property. $250,000 in negative equity before the new home owner moved in. Regulators could have clamped down but didn’t.

Charging dead people fees is of course a bit much and gouging advisory fees without actually offering service is poor form. However at what point does the customer bear some responsibility to accepting the status quo? Getting access to lower cost providers is/was always there but the opportunity costs were such that many just sucked it up. It wasn’t enough to devote time to when the half yearly check up came around.

CM was one of the ones that questioned the big bank superannuation advisor’s usury fees. So poor was the explanation that after minimal effort, a new advisor was found with fees cut in half and investment flexibility rising exponentially. We shouldn’t have been hanging out for a Royal Commission to whump the banks.

Indeed, should any laws have been broken then the perpetrators deserve to have the book thrown at them. If boards willingly accepted that certain divisions were deliberately acting in unethical ways then they deserve to be accountable.

Corporate governance is not helped by hiring a majority of independent directors. The US experience has shown that to be a failure. It is all about corporate culture. If boards have not been setting the highest standards why should we be surprised if the underlings follow suit. We only need look at the debacle that was Cricket Australia or the recent shenanigans at the ABC to see examples of a poorly run board leading to a culture beneath that ends up seeing staff “cheat” or making decisions that flagrantly contravene the charter.

Do we jail bankers for 25 years? Depending on the extent of actually “breaking the law” that maybe a deterrent. WorldCom CEO Bernie Ebbers was sentenced to 25 years based on nine counts of conspiracy, securities fraud and false regulatory filings to the tune of $11bn. Enron’s former CEO Jeffrey Skilling was convicted on 35 counts of fraud, insider trading and other crimes related to Enron and sentenced to 24 years prison and fined $45 million. Madoff 150 years, Stanford 110 years jail. This has not necessarily stopped corporate crime but it should throw a flag in the minds of those considering it. If the consequences are too soft then clearly the risks profile diminishes for the perpetrator.

Look at the advent of whistleblower laws in America. The SEC now encourages whistle-blowing by offering sizable monetary awards (10 to 30% of the monetary sanctions collected). Successful enforcement actions as a result of whistle- blowing has led to awards as high as US$30,000,000. As a result the SEC has seen a 10 fold increase in claims over the last few years. Would boards be more inclined to act ethically if whistleblowers were granted protections?

Plenty of ways to improve what has transpired but what the Royal Commission should make painfully clear is that consumers need to wise up and become more savvy about how they make choices. We can’t forever complain and wait for governments to rescue us when it is them in the first place not acting responsibly to ensure good behaviour.

The free market should be the first to benefit from filling this clear void. Tying up banks in more red tape and onerous regulation isn’t the way forward. All it will do is drive costs for compliance higher which will ultimately hit the consumer. The larger the institution, the easier such regulations will benefit their ability to squeeze the little guy!

Making the punishments for bad behaviour enforceable and putting the onus on boards to act ethically will make all winners.

Too big to fail?

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When looking at the state of the economy, a healthy banking system is generally a pretty good indicator. Look at the parlous state of global banks. This but a small selection but it is no wonder Frau Merkel is concerned about her beloved Germany. Its two venerable financial giants, Deutsche Bank and Commerz Bank are 2 notches above being declared non investment grade. Personally I don’t put much if any value in the ratings agencies. They are generally rearward looking. Markets are a far better judge and jury.

We often look to the biggest country in the Eurozone as the power house. However the share price performance since Jan 2010 show that the German banks are amongst the worst performers. So despite Lloyd shaving the same BBB+ rating to Deutsche Bank it has outperformed its German neighbour even including the belting on the Brexit vote.

Interestingly the Italians have just fired a E40bn bailout fund for its banks. We made the case that these bailouts contravened the ECBs own rules. Public recapitalisation of insolvent  banks by member states is not allowed at this juncture but I doubt that will get in the way. Zero Hedge sensibly argues that the E40bn is the collective write down needed on E200bn of sour loans. Once again taxpayers will be forced to pay for another bailout. The Italians are already in denial wiuthe the head of their banking association saying the Italian banks can manage on their own.