Just Three Sticks

Tyler Durden's picture

Submitted by Mark J. Grant, author of Out of the Box,

"To the uneducated, the 'A' is just three sticks."
 
                  -Eeyore
 
Three sticks and three chances for a poke in the eye. On the other hand they could be kindling for the fire or perhaps the first ingredients of alphabet soup. You see, this is what makes things so tough; we all stare at the same things, the same events and reach wildly different conclusions. The media hands out each stick as presented by the government, a corporation or someone else in a supposed leadership position. The somewhat wise can grasp that there are three sticks and not just one and the good minds recognize not only the three sticks but see that it can be made into the first letter of the alphabet. The great minds go further and see that the same three sticks can also be made into an “H,” an “N” or an “F.” Then, finally, there is the time factor; get there first and the odds of you winning go up dramatically. Just a little wisdom from Pooh and his friends.
 
In this light then let us consider the recent proposal from the Federal Reserve Bank of Dallas. Under the banner of limiting the government’s support for the large U.S. banks in case one were to fail the Dallas Fed has proposed capping assets at $250 billion and of walling off investment banking from the bank. This would represent a massive reversal from Glass-Steagall and would have a severe impact upon the financial condition of all of the major American banks. This plan is suggested so that the FDIC could shut a failed bank without using taxpayer funds.
 
I would not count this plan out as some far-fetched scheme because the support for it, by both Republicans and Democrats,  is increasing rapidly. Banks, as you may have noted in any number of comments from our President, are not exactly beloved institutions these days and they are the favorite whipping posts most weeks for politicians trying to raise the level of anger in the American people and turning it to their advantage. It could be increasing pressure from the various regulators or we may have some AT&T moment where the powers that be actually bang the gavel on the desk.
 
However it occurs, it will not be good for our large banking institutions. The amount of debt for these banks is massive as they leverage their positions and if the assets shrink or are mandated to shrink then the underlying ability of the banks to service their debt becomes problematic as the assets contract while their debt does not. To put this into prospective, J.P. Morgan had U.S. assets of $646 billion at the end of December while Bank of America had $686 billion of like assets. Consequently the plan of the Dallas Fed would mandate at 60% cut at these two banks, a 30% slash at Citigroup and a 70% whack at Wells Fargo. I note that when assets are no longer there and money making operations have vanished while the debt remains constant that ratings downgrades happen, that debt to free cash flow, debt to assets and debt to equity ratios worsen significantly. Proverbially the squeeze would be on.
 
There is also another significant part to this proposal that would require separate capitalization and funding for any investment banking and trading units. This would mean that the capitalization of the parent, the bank, could no longer be used to support these operations and they would shrink dramatically I suspect while counter-party risk increased substantially as well as all sorts of funding activities that are currently utilized. Keep your eyes on this. This is not some off-the-world idea by some fame seeking academician but a real world proposal by the Federal Reserve Bank of Dallas and it has legs.
 
"If you feel awkward visiting friends without a special reason, tell them you've come by to wish them a Very Happy Thursday.”
 
                  -Pooh
 
Italy
 
There was a sigh of relief yesterday as neither Mr. Berlusconi nor Mr. Grillo was elected Pope. Various journalists were also relieved as they no longer have to consult the internet to add some Roman Numerals to the Pope’s new name. There was also celebration in Argentina of course. The first South American Pope and it is reported that the government has already contacted the Holy See to plead that some of the money on the Sunday plate might be used for the Argentinian debt.
 
All of this overshadowed Mr. Grillo’s comments yesterday, of course, as he declared to the German newspaper Handelsblatt that his 5 Star Movement was “the French revolution – without the guillotine.” He went on to state that, “The northern European countries are only holding onto us until their banks have recouped their investments in Italian sovereign bonds. Then they’ll drop us like a hot potato.”
 
Clearly this is not the drink of choice in Brussels or Berlin. Overnight it was reported that there was a massive increase in demand for Pepto-Bismol in both cities. This was also true in Athens, where no agreement with the Troika has been reached, but the one available bottle of Pepto-Bismol was apparently auctioned off overnight which was funded by the National Bank of Greece, collateralized by the pink label, guaranteed by the country of Greece, pledged at the ECB and declared “risk free” by everyone. You may expect a speech from Mr. Barroso or Mr. Rehn on this topic later today.   
 
“What’s the point in making a mess when you have to clean it up?”
 
"Quel est le point de faire un gâchis quand vous devez la nettoyer?"
 
"Was ist der Sinn in ein Chaos, wenn Sie es aufzuräumen haben?"
 
(For the benefit of Brussels and Berlin)
 
                     -Tigger