Archive for the ‘Bank Regulation’ Category

Perverse foreclosure laws wreck Las Vegas housing market

July 10, 2013

It is a well-known historical fact that most governments – democratic or autocratic – introduce perverse laws. Ignoring the law of unintended consequences, thoughtless, ill-educated politicians produce laws that achieve the exact opposite of their explicit objective.

Few lawmakers, however, can bathe in the infamy of Nevada, a gamblers’ state whose residents gambled excessively on the housing market bubble that burst in 2007. Las Vegas confronted one of the most serious house foreclosure consequences of this gamble. Well, as a signature gambling state, the Nevada legislature gambled one again, recording another spectacular loss in the arena of the American housing dream.

Between 2002 and 2006, house prices doubled in Las Vegas with many buyers making zero or minimal deposits, and confronting the sketchiest of income and asset evaluations. From 2007 through 2012, average house prices collapsed 62 per cent, driving many households into foreclosure and short sale. What is required in such circumstances is a swift and efficient foreclosure system, removing those who cannot pay their mortgages out of home ownership and into the rental market, allowing house prices to fall quickly to their bottom, and thus encouraging a new inflow of more affluent home owners.

The State of Nevada rejected outright this solution. New legislation – in the form of A.B. 284 – threatens criminal penalties for bank officials who do not follow new rules to certify that foreclosures are processed properly. Further, it makes it a felony for any one who makes a false representation concerning real estate title. Worse still, the wording of the new law, rushed through the legislature, is highly ambiguous. Severe penalties apply to vaguely defined crimes.

The Nevada law simply stopped foreclosures cold. In October 2011, the first month after the law took effect, lenders filed just 600 notices of default, an 88 per cent drop from the previous month. By May 2013, foreclosed homes, which accounted for half of all homes sold in Las Vegas since 2007, accounted for only 11 per cent of home sales. Many mortgage holders have gone 60 or more months without making any mortgage payment and still remain in their homes, without any notification of foreclosure proceedings.

As a perverse consequence of the foreclosure seizure, Las Vegas now has only 4.300 previously owned homes listed for sale, down 70 per cent from two years ago. New home sales, in contrast, are up 87 per cent so far this year. The number of new building permits issued this year is up 52 per cent from last year.

Because mortgages for these new homes are extremely difficult to come by – the consequence of A.B. 284 – most of the new homes purchases are by cash buyers, many of whom are aiming to flip their purchases in order to re-sell at higher prices driven by the foreclosure seize-up of the existing housing stock.

So the New Nevada law has effectively destroyed the market in existing houses and driven a rising bubble in new house construction. When this second bubble bursts – as burst it surely will if ever the existing stock of houses comes onto the market – Las Vegas will be right back in 2007, with an even larger stock in houses that should, but will not be, foreclosed.

Well, it is the gamblers’ city. The game is in play and the tables load up until the dealer calls out : ‘Rien ne vas plus“!

Ben Bernanke socialism roils U.S. financial markets

June 18, 2013

U.S. financial markets have been increasingly skittish in advance of the Federal Open Market Committee meeting scheduled for Wednesday June 19. Will the Fed or will it not begin to taper its $85 billion monthly purchase of Treasury and federal-agency bonds? When eight males and four females meet to determine whether an extended exercise in socialism will end or will continue, millions of individuals fidget with their wealth portfolios. Traders around the world, who in better free market times considered a wide range of variables, now focus on a single one, Federal Reserve policy.

In bygone days of free markets, stocks tended to move counter to bonds as investors switched from one to the other in order to maximize yield. But in the new world of Bernanke-rigging, they often head in the same direction. That is not good for investors or for capitalism.

Bondholders surely expect bond prices to fall and yields to rise if the Federal Reserve removes its socialist prop. However, they also worry whether the 15,000 Dow may be a Bernanke bubble that will also deflate as the Fed taper begins. Let us follow the money to see how this may occur.

The Fed makes its Treasury bond purchases from the primary ‘dealer’ banks. The proceeds boost the banks’ deposits at the Fed far in excess of legally required reserves. To encourage the banks to hold this base money sao that it will not entrer the credit markets and destroy the value of the dollar, the Fed pays the banks a quarter of a percentage point interest on their deposits.

But it is far from easy to contain $2 trillion in inflationary cash. Many analysts believe that excess deposits are a direct factor in the run-up in stocks since March 2009. Banks have constant dealings in the shadow market with non-bank entities, like money-market, hedge funds and other big money pools. It is a short stretch to imagine these institutions accessing excess bank reserves as collateral to raise money for stock market speculation. Margin debt at the New York Stock Exchange reached a record high of $384 billion in April 2013 – and that means that the stock market is receiving heavy support from borrowed money.

If the Committee of Twelve decides to pull the plug tomorrow, watch out for significant declines both in bond prices and in the Dow and the S & P 500. The enormous quandary now confronting the Fed is a direct consequence of the constructive rationalism of Ben Bernanke and his colleagues at the Fed. Like all socialists, as Friedich von Hayek observed half a century ago, their fatal conceit now threatens the green shoots of a fragile economic recovery.

Hat Tip: George Melloan, ‘How the Fed Turned the Market Skittish’, The Wall Street Journal, June 18, 2013

Britain should exit the European Union

May 13, 2013

Fortunately for Britain, the European Union does not prohibit member countries from seceding. No Abraham Lincoln sits in Brussels, willing or able to wage a war of continental aggression, should Britain decide to leave an organization that imposes net economic costs upon it.

The economic case for exit is now dominating debate across the Pelagic Isle. The large single market of the EU has brought benefits to Europe’s many small economies,especially those with a relatively large industrial base. It is bringing transfer benefits to the profligate PIIGS who are exploiting the charity of German savers. The UK, however, is a large economy with a small industrial base. It is fully capable of correcting its own fiscal excesses, especially under Conservative Party governance. For the United Kingdom, the regulatory burden of the single market massively outweighs the benefits.

The key assumption that underpins this judgment is that Britain – in the absence of becoming a member of the European Economic Area – Norway, Iceland and Liechtenstein – would still enjoy access to free trade with the European Union. This assumption is highly probable, since Germany and the Netherlands – the two best functioning EU economies – would welcome open access to the large British market. A negative trade shock imposed on the UK is in the economic interest of no EU economy, however perfidious, Albion may be regarded by some of its former allies and enemies.

Article 50 of the Treaty on European Union, one of the two treaties known together as the Lisbon Treaty, provides the option for an exit. Negotiations would be required between the British government and the various European institutions. Most likely, Britain would secure an exit placing it into a comparable situation with Switzerland i.e. a bilateral free trade deal. This would be a sweet deal for a country that desires to retain the City of London as Europe’s major financial center, and to evade the strangulation of the financial transactions tax and European-style banking regulations that the EU bureaucracy is panting to impose.

So, contrary to the advice given today by President Obama to Prime Minister David Cameron in the Oval Office, my advice is that Britain should exit now, without attempting to reform the EU from within. A country operating outside the euro-zone has precious little leverage to secure a deal that will weaken the social market philosophy that now dominates euro-land. Remember that Britons are still predominantly Anglo-Saxons, Prime Minster Cameron, and that their ties remain closer to North America and other former colonies than to Old Europe.

Hat Tip: Wolfgang Munchau, ‘Lawson is right – Britain does not need Europe’, Financial Times, May 13, 2013

Jon S. Corzine blasted for MF Global collapse

April 5, 2013

Because Jon S. Corzine is a Mister Big in the Democratic Party, he has been treated with kid gloves by the left-leaning Obama administration, by the Democratic Party-controlled financial oversight commissions, and by the mainstream media since the collapse of MF Global in 2011. Any Republican in his situation would have been languishing in jail some 18 months ago.

Fortunately, the person leading the investigation into the failure of MF Global is Louis J. Freeh, former Director of the FBI, and a judge, and surely no sychophant to the Obama administration.

According to the bankruptcy trustee’s report, released on April 4, 2013, Jon S. Corzine, former Governor of New Jersey and U.S. senator, deserves much of the blame for the firm’s demise. Indeed, the report mentions Corzine by name a total of 284 times, more than once per page. and concludes that he and his management team engaged in ‘negligent conduct’

Mr. Corzine, ran MF Global from March 2010 until its failure in October 2011 – ran it into the ground one might say. He embarked on a ‘risky business strategy’ of betting the wrong way on European government debt and ignored ‘glaring deficiencies’ in controls. Unusually for a chief executive, Corzine executed some of the trades personally ‘even placing trades in the middle of meetings’. As a consequence of such negligence – and who knows maybe malfeasance – about $1 billion of customers’ money went missing. Mr Corzine has made no attempt to replenish those monies from his personal assets, though we may expect private negligence suits to place him into bankruptcy unless he makes a run for it to a non-extraditable safe haven.

As the European debt crisis systematically worsened, MF Global started to receive margin calls that threatened its liquidity. At one point, Corzine even debated how aggressively the broker-dealer, on an intraday basis, could borrow customer funds from its futures brokerage arm, totally ignoring the requirement that the two accounts must be kept segregated and secured.

A more disgusting specimen of the human race than Jon Corzine would be difficult to find. He is right down there with the sewer rats. Yet, he is unlikely to serve any time in jail. His Democratic Party friends at the SEC and the Commodities Futures Trading Commission, and his good friend, Barack Obama, will make sure that good ole’ Jon Corzine avoids any criminal charges.

Such is the nature of crony-capitalism in the United States.

The Bitcoin price bubble

April 4, 2013

The Bitcoin is a virtual currency. The currency was created on July 17, 2010 by an unknown computer scientist with the stock of ‘coins’ growing according to a predetermined algorithm. At its launch, one Bitcoin exchanged for $0.05 (a nickel).

Untethered to any real asset, the Bitcoin’s price is determined purely by speculation on exchanges around the world. In the absence of any government intervention, a buying frenzy has sent the value of the total Bitcoin stock past $1.5 billion. The price of a single Bitcoin has doubled in less than two weeks. Having passed $100 on April 1, 2013, it peaked (so far) at $147 a Bitcoin on April 3, 2013, before falling back to $110.

The Bitcoin currency may grow in accordance with a predetermined algorithm, but it is nothing if not volatile with respect to price. A 2011 spike took the price of a Bitcoin from $2 to over $30 – and back again. Now, in the wake of the Greek Cypriot bank bailout fiasco, Bitcoin’s advocates are pitching the currency as an alternative to authorized currencies that can be devalued or confiscated at the will of political hacks.

All bubbles eventually burst and the Bitcoin will prove to be no exception. A major problem is that governments prefer a monopoly of theft. They do not relish competition in that lucrative activity. So if the Bitcoin gets too big for government’s boots, they will stamp down on it.

Gold, coin and bullion, still remains the preferred asset for those who do not place great faith in government.But do take delivery and hide your holdings from inquisitive government eyes.

Jettison Geithner/Draghi national socialist bail-out doctrine now

April 3, 2013

The Geithner/ Draghi doctrine for dealing with financial crises is universal socialization of the losses of financial institutions.In the U.S. the Obama/Geithner doctrine provides a categorical assurance that no systematically important financial institution will ever be allowed to fail. In the wretched euro-zone,the correctly-named Draghi, European Central Bank President, has publicly stated that he will do ‘whatever it takes’ to protect any profligate nation and its financial institutions from market forces anywhere under his jurisdiction. These are national socialist doctrines destined to create financial crisis after financial crisis as moral hazard ravages the financial markets of the United States and the euro-zone.

An effective package of reform has three interlinked components: resolution of failed institutions; restructuring of financial conglomerates; and substantial recapitalization of the whole financial sector. Fortunately, in the wake of the Greek Cypriot debacle, these issues are now becoming part of the public debate.

The principle of resolution is that neither political democracy nor economic efficiency can tolerate institutions that are too big to fail. Adherence to that principle requires realistic plans to break up struggling cross-border institutions and the capacity to impose losses on uninsured creditors as well as shareholders. It requires that within the financial sector, as well as across the real economy, the normal fate of failed institutions is to be wound up.

The principle of structural reform requires that too complex to fail is no more acceptable than too big to fail. Separation of retail and investment banking will reduce the cross-subsidy arising from the mingling of taxpayer-guaranteed deposits with speculative exposures. It will limit the contamination of the everyday business of financial inter-mediation by the culture of trading.

The principle of recapitalization requires that banks must acquire lots more capital – not some minimal provision based on a pseudo-scientific calculation of risk-weighted assets. The only safe bank is one with more capital than it could possibly require – like banks of old.

If Geithner/Draghi are thrown on the trash heap of history and these three principles are re-invoked, no one will need to worry about financial institutions anymore, just as no one should have to worry about real economy institutions. Market forces will take out the failures at minimum social cost.

Hat Tip: John Kay, ‘The bungled bailout that heralds an overdue shift in attitudes’, Financial Times, April 3, 2013

Cypriot banks launder dirty Russian money

March 19, 2013

Cyprus is the third largest island in the Mediterranian, after Sicily and Sardinia. The Republic of Cyprus is a small nation composed of 800,000 people with an economy of less than $18 billion, representing less than 0.2 per cent of the euro zone’s gross domestic product.

An opaque banking system has evolved, under government influence, with some $70 billion in deposits, much of which emanate from Russia. Indeed, Cyprus has become in essence a client state not just of Russia and a number of the former Soviet satellites, but more specifically of the Russian Mafia. The corrupt financial sector, promoted by a blind-eyed government in the pockets of Russian oligarchs who use Cyprus as a mechanism to cleanse dirty money and evade Russian taxes, accounts for 45 per cent of the entire national economy of Cyprus.

Understandably, in such circumstances, the Cypriot governmentnow finds itself between a rock and a hard place. Its agreement with the euro-zone to impose a 6.7 per cent haircut on small depositors and a 9.9 per cent haircut on large depositors has provoked fury from both groups. The government may fall come election time if the small depositors are hit; and cries about the breaching of the rule of law are justifiably rife across that group. But heads literally may roll if the Russian oligarchs are robbed. So the government wavers between loss of position and loss of life as it gropes around a number of equally unappetising alternatives.

If small depositors are spared completely, then the Russians are out by 15 per cent and all their tax evasion gains go to the euro-zone. If small depositors remain on the hook, then street riots may be expected once the banks reopen, as reopen presumably they eventually must.

Anxious eyes no doubt will be glancing northwards,across the Cyprus partition, where the Turks may decide to enter the south as liberators of their oppressed brothers. A lot of chickens are coming home to roost on this beleaguered island.

Entire euro-zone is now a dead man walking

March 18, 2013

When murderes in the United States are sentenced to death, they are placed on Death Row, awaiting execution. They are isolated from other prisoners throughout the usually lengthy process from sentence to the needle.They are known as Dead Men Walking.

When the Eurozone leaders last week forced the Cypriot government to impose 6.7 per cent hair cuts on all bank deposits in Cyprus below the level of E100,000, they sentenced themselves to such death row conditions. It may take a while for the euro-zone to make its way to the Death Chamber. But it surely, from this moment on, is a Dead Man Walking.

Readers should be aware that all euro-zone bank deposits, irrespective of nation, are guaranteed by deposit insurance for holdings below E100,000. This guarantee constitutes an inportant component of the rule of law. It has now been violated at the specific request of Germany and Finland as a condition for a $17 billion bailout, without which the entire Cypriot banking system is at risk of collapse.

The circumstances are as follows. The Germans and the Finns demand that $7 billion of the $17 billion bailout must be extracted from the Cypriot banks. This extraction is designed as a warning to other euro-zone countries about the negative bail-out consequences of seriously bad behavior. No one need have qualms about such a policy.The Cypriots deserve to be placed in the naughty corner of the euro-zone, where they will not find themselves to be alone.

However, the Cypriot government proved to be unwilling to allow that hair cut to fall where it should have fallen, namely first on the shareholders and second on the bondholders of the failing banks, followed by the large depositors, whose holdings are not protected by deposit insurance. Such a policy would have upheld the rule of law.

The Cypriot president refused to allow double-digit hair-cuts to be imposed on all wealthy depositors. Perhaps 15 per cent haircuts would be required to meet the $7 billion target. Many of the large depositors are Russian – and the response of the Russian Mafia targeted onto leading Cypriot government officials is too obvious to spell-out. Moreover, Cyprus is currently renegotiating a $2.5 billion loan with Moscow!

Furthermore, Nicosia has attracted considerable volumes of laundered money, seeking tax evasion under the lax enforcement mechanisms deliberately applied by a euro-hungry government. The long-term foreclosing of such an opportunity surely was not in the interest of Cyprus’s political elite, many of whom receive kick-backs from such investors.

So now, noone with small deposits in euro-zone banks has any deposit insurance. That is the implication of the Cyprus capitulation.For what has been applied to one, predictably can be applied to all. As small savers across euro-land move their investments out of euros and into dollar accounts and pound sterling accounts, so the prison gates of death row will clang shut and the slow retreat to the ultimate death chamber needle jab will commence.

Cyprus government follows FDR bank raid initiative

March 17, 2013

In 1932, FDR stole money from US savers. He declared a Bank Holiday during wich he removed the right of individuals to exchange dollars for gold at the existing fixed rate of exchange. When the banks reopened the dollars available to US savers were devalued in terms of gold. Individuals were not allowed to hold gold bullion even at the reset rate.

Yesterday, using the weekend and a new Monday Bank Holiday to effect its theft, the Government of Cyprus essentially followed the example of FDR. In order to secure an EU bailout, the Cypriot government agreed to steal significant sums of money from everyone – Cypriot or not, who is sufficiently foolish as to deposit savings in a Cypriot bank. For deposits below E100,000 accounts will be reduced by 6.7 per cent. For deposits at E100,000 and above, accounts will be reduced by 9.9 per cent.

FDR’s bank raid did not provoke open rebellion, as well it might have, even in New York and Washington, D.C.. The question hanging over Cyprus, when the Banks reopen on Tuesday next, is whether deposit holders will gun down members of the government in an attempted coup d’etat, or whether they will simply generate a bank run as they attempt to withdraw all deposits from a den of thieves.

How much new investment in Cyprus do you think that this theft will generate?

Impose rule of law on ‘too-big-to-fail’ U.S. banks

March 11, 2013

A dozen U.S. mega-banks – 0.2 per cent in terms of numbers of all banks – currently control 70 per cent of all assets in the U.S. banking industry. These mega-banks – deemed to be too-big-to-fail, are treated entirely differently from the rest of the industry. They are exempt from the normal processes of bankruptcy and fear of failure. This dirty dozen and all its counter-parties are free to take excessive risks rightly denied to their competitors.

In the absence of the rule of law, the playing field is uneven within the banking industry, and Main Street remains fundamentally vulnerable to the whims of Wall Street. Dodds-Frank, funded by big bank campaign contributions, corruptly locked in the privileges of the few and deliberately exposed the U.S. economy to a repeat of the 2008 fiasco.

Three reforms would restore the rule of law to the banking industry, and would go far to restoring Main Street confidence in the financial system. They are not easy to introduce because the mega-banks will lobby vigorously against them. But a political opportunity exists because many voters remain outraged by the recent excesses of the dirty dozen. Sometimes, even in U.S. politics, informed votes remain immune to campaign finance.

First, roll back the federal safety net- deposit insurance and the Federal Reserve’s discount window – to apply only to traditional commercial banks. Exclude all non-bank affiliates of bank holding companies, and the parent companies themselves from the safety net.

Second, require all customers, creditors and counter-parties of all non bank affiliates to sign a legally-binding document accepting that there will be no government guarantee, ever, protecting their investments. A similar disclosure would also apply to bank deposits outside the FDIC insurance limit.

Third, restructure the largest financial holding companies so that every one of their corporate entities is subject to a speedy bankruptcy process and, in the case of banking entities themselves, that they must always be of a size that is too small to save. The aim must be, for every bank across the United States, that should it fail, it will be liquidated with finality – closed on Friday and reopened the following Monday under new ownership and new management.

Hat Tip: Richard W. Fisher and Harvey Rosemblum, ‘Hot to Shrink the ‘Too-Big-to-Fail’ Banks’, The Wall Street Journal, March 11, 2013