• Pivotfarm
    04/18/2014 - 12:44
    Peering in from the outside or through the looking glass at what’s going down on the other side is always a distortion of reality. We sit here in the west looking at the development, the changes and...

Regional Banks

Tyler Durden's picture

Is The Fed Fabricating Loan Creation Data?





It wouldn't be the first time the Fed has "stretched" the truth...

 


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How The Government Will Eliminate Fannie & Freddie (In One Simple Chart)





On Sunday, Senate lawmakers unveiled the 442-page plan that will eliminate the mortgage-finance giants; replacing them with a new system in which the government would continue to play a potentially significant role insuring U.S. home loans. The Johnson-Crapo bill would, as WSJ reports, construct an elaborate new platform by which a number of private-sector entities, together with a privately held but federally regulated utility, would replace key roles long played by Fannie and Freddie.

 


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Volcker Is LOLkered As TruPS CDO Provision Eliminated From Rule To Avoid "Unnecessary Losses"





So much for the strict, evil Volcker Rule which was a "victory for regulators" and its requirement that banks dispose of TruPS CDOs. Recall a month, when it was revealed that various regional banks would need to dispose of their TruPS CDO portfolios, we posted "As First Volcker Rule Victim Emerges, Implications Could "Roil The Market"." Well, the market shall remain unroiled because last night by FDIC decree, the TruPS CDO provision was effectively stripped from the rule. This is what came out of the FDIC last night: "Five federal agencies on Tuesday approved an interim final rule to permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities (TruPS CDOs) from the investment prohibitions of section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, known as the Volcker rule." In other words, the first unintended consequences of the Volcker Rule was just neutralized after the ABA and assorted banks screamed against it.

 


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TruPS CDOs Explained - With Charts





Over the past two weeks, Trust Preferred (or TruPS) CDOs have gained prominent attention as a result of being the first, and so far only, security that the recently implemented and largely watered-down, Volcker Rule has frowned upon, and leading various regional banks, such as Zions, to liquidate the offending asset while booking substantial losses. But... what are TruPS CDOs, and just how big (or small) of an issue is a potential wholesale liquidation in the market? Courtesy of the Philly Fed we now have the extended answer.

 


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Here Is What The Fed's Advisors Really Think About The US Economy





Contrary to the all "rose-colored glasses" reports by the Fed released in the past year, which constantly talked up the "economic recovery" only to punk everyone - economists and market participants alike - when it stunned markets with its no taper announcement in September, over fears what this would do to the economy, the Federal Advisory Council's view on things is decidedly less "rosy."

 


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Margin Calls Coming On US Too-Big-To-Fail Banks





This week's biggest news is not the Non-Farm Payrolls, or the European Central Bank or even Portugal's government falling. No - this week's big deal is the openness with which the Federal Reserve is preparing a major margin call on the too-big-to-fail banks in the US. This has been a long time coming since the introduction of the Dodd-Frank law back in 2010 but it is a game changer. Remember all macro paradigm shifts come from policy impulses, often mistakes. Is the Fed about to given the whole banking industry a major margin call?

 


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Some Hard Numbers On The Western Banking System





"If one of you stands up right now and heads for the exit, the rest of the audience probably won’t pay much attention. If ten of you do it, one or two people may notice and follow. But if 400 of you suddenly head for the exit, the rest of the audience would probably follow quickly." It’s a great metaphor for how our financial system works. The entire system is based on confidence. And as long as most people maintain this confidence, everything is fine. But as soon as a critical mass of people loses confidence in the system, then it starts a chain reaction. More people start heading for the exit. Which triggers even more people heading for the exit. This is the model right now across the system. And it’s especially pervasive in the banking system. Modern banking is based on this ridiculous notion that banks don’t actually have to hang on to their customers’ funds. Bottom line, it matters where you hold your savings. Balance sheet fundamentals are critical.

 


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Goldman Slams Abenomics: "Positive Impact Is Gone, Only High Yields And Volatility Remain; BOJ Credibility At Stake"





While many impartial observers have been lamenting the death of Abenomics now that the Nikkei - essentially the only favorable indicator resulting from the coordinated and unprecedented action by the Japanese government and its less than independent central bank - has peaked and dropped 20% from the highs, Wall Street was largely mum on its Abenomics scorecard. This changed overnight following a scathing report by Goldman which slams Abenomics, it sorry current condition, and where it is headed, warning that unless the BOJ promptly implements a set of changes to how it manipulates markets as per Goldman's recommendations, the situation will get out of control fast. To wit: "Our conclusion is that the positive market reaction initially created by the policy has been almost completely undone. At the same time, a lack of credible forward guidance for policy duration means that five-year JGB yields have risen in comparison with before the easing started, and volatility has also increased. It will not be an easy task to completely rebuild confidence in the BOJ among overseas investors after it has been undermined, and the BOJ will not be able to easily pull out of its 2% price target after committing to it."

 


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Japan Central Bank Admits Sending Schizophrenic Signals To Market As JGB Liquidity "Evaporates"





It doesn't take an Econ Ph.D to realize that what Japan is trying to do: which is to recreate the US monetary experiment of the past four years, which has had rising stocks and bonds at the same time, the first due to the Fed's endless monetary injections (and pent up inflation expectations) and the second due to quality collateral mismatch and scarcity and shadow bank system funding via reserve currency "deposit-like" instruments such as TSYs, is a problem. After all, those who understand that the BOJ is merely taking hints from the Fed all along the way, have been warning about just that, and also warning that once the dam breaks, and if (or when) there is a massive rotation out of bonds into stocks, it is the Japanese banks - levered to the gills with trillions of JGBs - that will crack first. Apparently, this elementary finance 101 logic has finally trickled down to the BOJ, whose minutes over the weekend revealed that members are pointing out "contradictions" in the Kuroda-stated intent of doubling the monetary base in two years, unleashing inflation, sending the stock market soaring, all the while pressuring bondholders to not sell their bonds. As the FT reports, "According to the minutes of the April 26 policy meeting, released on Monday, a “few” board members said the BoJ’s original stance “might initially have been perceived by market participants as contradictory”, causing “fluctuations in financial markets”.

 


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BNP Warns On Japanese Repression: Echoes Of The 1940s Fed





In the 1940s, the Fed adopted pegging operations to protect the financial system against rising interest rates and to ensure the smooth financing of the war effort. In effect, the Fed became part of the Treasury’s debt management team; as the budget deficit hit 25% of GDP in WW2, it capped 1Y notes at 87.5bps and 30Y bonds at 2.5%. From the massive bond holdings of its domestic banks to its exploding public debt, Japan today faces a situation very similar to the US in the 1940s. When the long-term rate climbs above 2%, the BoJ will probably adopt outright measures to underpin JGB prices to prevent turmoil in the financial system and a fiscal crisis - and just as Kyle Bass noted yesterday, they are going to need a bigger boat as direct financial repression in Japan is unavoidable.

 


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Toyota Pulls Bond Deal Due To Soaring Yields: The Japanese "VaR Shock" Feedback Loop Is Back





Despite the eagerness of Abenomics and the new BOJ head Kuroda to have their cake and eat it too, in this case manifesting in soaring stock prices, plunging Yen, rising GDP and exports, and most importantly, flat or declining bond yields, so far they have succeeded in carrying out three of the four, as it is physically impossible for any central planner to completely overrule the laws of math, economics and physics indefinitely. Volatility aside the recent surge in yields higher is finally starting to take its tool on domestic bond issuers. As Bloomberg reports, already two names have pulled deals from the jittery bond market due to "soaring" borrowing costs. The first is Toyota Industries which as NHK reported, canceled the sale of JPY20 billion debt. Toyota is among Japanese firms that put off selling debt as long-term yields on government debt have risen, increasing borrowing costs, public broadcaster NHK says without citing anyone. Last week JFE Holdings announced it would delay plans to sell bonds due to market volatility. So two names down... and the 10 Year is not even north of 1%... But perhaps, more importantly, what happens to JGB holdings as the benchmark Japanese government bond continues trading with the volatility of a 1999 pennystock, and as more and more VaR stops are hit, forcing even more holders to dump the paper out of purely technical considerations: a topic we touched upon most recently last week, and which courtesy of JPM, which looks back at exactly the same event just 10 years delayed, now has a name: VaR shocks.  For those who wish to skip the punchline here it is:  A 100bp interest rate shock in the JGB yield curve, would cause a loss of ¥10tr for Japan's banks.

 


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