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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

 

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Thu, 03/14/2013 - 08:22 | 3329115 dow2000
dow2000's picture

First !

Thu, 03/14/2013 - 08:26 | 3329126 DblAjent
DblAjent's picture

this article made zero sense to me

Thu, 03/14/2013 - 08:32 | 3329139 NoWayJose
NoWayJose's picture

I think the scary part is when he says the banks will need separate capitalization for their trading units. Meaning they cannot steal from the banking side and get free money from the Fed. So how many investors will turn over zero percent money to the London Whale?

Thu, 03/14/2013 - 08:38 | 3329151 shovelhead
shovelhead's picture

You need to know your Pooh.

Thu, 03/14/2013 - 08:41 | 3329153 negative rates
negative rates's picture

It's A standard practice from this bunch, it's called blaming the victim.

Thu, 03/14/2013 - 11:43 | 3329622 MayIMommaDogFac...
MayIMommaDogFace2theBananaPatch's picture

You need to know your Pooh

You mean, like a stool sample?!?!?!?

Thu, 03/14/2013 - 09:07 | 3329199 JOYFUL
JOYFUL's picture

Someone call a plumber...

apparently the "Turd's" punchbowl is leaking.

Thu, 03/14/2013 - 10:45 | 3329440 H E D G E H O G
H E D G E H O G's picture

“What’s the point in making a mess when you have to clean it up?”..........well, the fucking BIGGEST MESSES in the world have, and will be made, because the US TAXPAYER will clean them up!

Thu, 03/14/2013 - 08:24 | 3329121 NoWayJose
NoWayJose's picture

We can either shrink the banks now, or shrink them after they cause the next economic and market crash.

Thu, 03/14/2013 - 08:34 | 3329141 BandGap
BandGap's picture

I think that if they are looking at ways to wall off a complete banker meltdown, then one is already starting to occur. Even discussing the POSSIBLE implementation of this will require pulling back the curtain, and that will be both ugly and eye-opening, depending on how you view your three sticks.

Thu, 03/14/2013 - 08:31 | 3329137 Law97
Law97's picture

Or the third option, the banks continue to shrink us.

Thu, 03/14/2013 - 08:40 | 3329152 Sean7k
Sean7k's picture

Mark should know by now the only FED bank you listen to is the NYFRB. 

Thu, 03/14/2013 - 08:43 | 3329154 Schmuck Raker
Schmuck Raker's picture

“the French revolution – without the guillotine”

.......yet.

Thu, 03/14/2013 - 08:46 | 3329159 Joshua_D
Joshua_D's picture

Is Mr. Grant a bankster sympathizer?

Thu, 03/14/2013 - 09:37 | 3329232 JOYFUL
JOYFUL's picture

...Is Mr. Grant a bankster sympathizer?...Either that, or a visitor from a 'parallel universe,'....

where banksters neither bankroll lawyers to write legislation skewed to their favor, nor pay lobbyists to twist the arms of any recalitrant legislators who might balk at the increasingly obvious skewings....

not to mention he must be a denizen of that happy place where regulators are not only NOT alumni of the offending kleptocratic kriminal kartel, but actually refuse to plead ignorance of how to enforce any 'legacy' legislation that might not have already been re-fashioned into simply more tools by which the pillaging may proceed apace!

"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."

Now that single paragraph must rate as one of the most, if not they most, singular pieces of bafflegab ever to be strung together in the English language. It strikes me, after re-reading that jewel, that there may be a third possibility...Mr Grant may just be a 'garden-variety' moron...but I would prefer to discount that, in favor of the visitor explanation!

"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"...

in the 'really real' world, Mark, there's not a chance in hell that this bankster creater and controlled 'administration' is going to lift a finger to impede their sponsors' drive to a total command economy...do people actually pay to subscribe to your raging fantasies?

Thu, 03/14/2013 - 08:47 | 3329160 shovelhead
shovelhead's picture

Open those books and those sticks will be used for making banker fudge-sicles.

Without bailouts, they're washouts and the conveyor system from taxpayer to bank to politician breaks down.

Anyone see the political will to make this happen?

Anyone?

Thu, 03/14/2013 - 09:14 | 3329213 Downtoolong
Downtoolong's picture

“What’s the point in making a mess when you have to clean it up?”

This has never been a problem for Wall Street. They get to profit from making the mess and from having someone else clean it up.

Thu, 03/14/2013 - 09:29 | 3329240 Downtoolong
Downtoolong's picture

we all stare at the same things, the same events and reach wildly different conclusions.

I think this is the heart of the problem with central economic planning. The idea that even a small group of knowledgeable people can reach consensus on a social topic they consider important is ridiculous.

Here’s another example. Have you ever watched one of those panel discussions during a football halftime show? Five guys who spent their entire professional career in football sit there and give wildly different opinions about what they just saw in the first half of the game. They all nod their heads at each other like they are in agreement, but, I wouldn’t bet my retirement savings on the hope that any one of them could or would put that agreement in writing. 

Need another example. Read all the comments to this posted article.

 

Thu, 03/14/2013 - 09:48 | 3329266 q99x2
q99x2's picture

Arrest the banksters. Re-distribute their stolen wealth. Long live the revolution. Enlist Eeyore and Pooh Bear. To the front. To the front. To the front. Stop the banksters before they nuke a city.

Thu, 03/14/2013 - 09:49 | 3329269 Karlus
Karlus's picture

Splitting banks could end up creating more risk, not less. Lets say you decide to cap at $250. Okay, so that means you will need to roll off various business units, (IBK, card, home loan, deposits...etc). Each of those units would have separate reporting and a higher chance of messing it up.

Another model is you smash a bank into several smaller banks that each have the same service offerings. Couple things will happen. First, once they start competing, many will die and some will get bigger. Same issue. Again also same fragmented risk management.

I think pols prob understand this and this is the reason why its not happened. The devil you know vs 5-8 devils you dont...

 

PS

If they fragmented banks, it would be a field day for banking IT, consulting, legal, support...etc. All of these mini would need duplicate functions. It would take years of billing to accomplish this. Bring it, Im down with getting paid

Thu, 03/14/2013 - 09:57 | 3329291 Rusty Trombone
Rusty Trombone's picture

The head of an international cabal of child molesters sits on a throne of gold and wears a bejeweled hat worth more than Liberia's debt while children starve to death and the Vatican is one of the largest shareholders in defence companies like Beretta that make weapons of war for the oligarchs. And he wears red velvet Prada shoes, flowing sparkly robes and carrys a snazzy disco stick while condemning homosexuality.

Seems Legit.

Thu, 03/14/2013 - 12:25 | 3329755 BooMushroom
BooMushroom's picture

Seems a little early to be picking on the new guy, isn't it?

Thu, 03/14/2013 - 13:50 | 3330043 ShorTed
ShorTed's picture

I doesn't seem to have occured to Mr. Grant that selling the assets would provide cash to reduce the liabilites.  Sometimes these concepts are difficult to latch onto.

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