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The Shadow
Who knows what truth lurks behind the headlines?
February 8, 2022 - Fed balance sheet grew by $107B in December and $116B in Jan
2022. See July 21 post below for commentary. Can you find the "taper" in the
table below?
Rev Fed
Repo Bal Sheet
01-31 1,654.9 8,873.2
12-31 1,904.1 8,757.5
11-30 1,518.0 8,650.4
10-29 1,502.2 8,556.2
09-27 1,297.1 8,448.0
08-30 1,140.7 8,349.2
07-26 891.2 8,221.5
06-30 991.9 8,078.5
05-28 479.5 7,810.5
04-30 183.2 7.935.7
03-31 134.3 7,689.0
02-26 11.2 7,590.1
01-29 7.1 7,404.9
Feb 7, 2022 - Inflation Trivia #3
Paul Volcker is widely credited with raising interest rates in 1980 to break the
back of inflation during the last great inflationary cycle. Less well known is
the story of the first 50 bps rate increase (to 4.50%) fifteen years earlier in
the cycle as inflation crossed the 2% level.
U.S. Federal Reserve Chairman William McChesney Martin infuriated President
Lyndon Johnson in Dec. 1965 with that 50 bps increase. He famously remarked
that:
* Answer Choices
* a) "Guns and butter" are a bad fiscal policy mix.
* b) It was time to take away the "punch bowl".
* c) "Great Society" spending should be postponed.
* d) Nearing 1,000, the Dow Jones average was "irrationally exuberant"
Fed Chair Martin coined the "punch bowl" analogy in 1955 but didn't put it in
practice until this famous clash in 1965. That 50bps rate hike was the first of
many, over a fifteen year period that finally broke the back of inflation.
Dec 29, 2021 - Inflation Trivia #2
Inflation now exceeds central bank targets of 2% YoY and the U.S. Fed is no
longer referring to inflation as "transitory". Some central bankers even
suggest that inflation could extend through late 2022 and into early 2023.
Here's some missing historical context.
How many months did the last great inflation of a few decades ago last?
* Answer Choices:
* a) 29 months
* b) 43 months
* c) 61 months
* d) 198 months
* Let's think in terms of inflation at 3% +.
* Inflation in the U.S. (CPI-U) crept up over 3% YoY in Nov. 1967.
* Except for two outlier months, it remained above that level every month
until May 1983, 198 months later.
* Let's think in terms of 2.5%+.
* Inflation in the U.S. (CPI-U) crept up over 2.5% YoY in Feb. 1966.
* Except for two outlier months, it remained above that level until Feb 1986,
240 months later.
* Let's think in terms of 2.5%+ and ignore the outlier year of 1986.
* Inflation in the U.S. (CPI-U) crept up over 2.5% YoY in Feb. 1966.
* Except for two outlier months, it remained above that level until April
1994, 338 months later.
* It spanned seven U.S. presidents: Johnson, Nixon, Ford, Carter, Reagan, Bush
Sr. and Clinton.
* This is what the Shadow calls "perspective".
Dec 18, 2021 - Inflation Trivia #1
(the first in what history tells us may be a long series of not-so-trivial
vignettes)
On June 15, 1981, a previously unthinkable event occurred. What was it?
* Answer Choices and poll results:
* a) U.S. leaves the gold standard (36%)
* b) President Nixon resigns (5%)
* c) Mass margin calls threatened (34%)
* d) U.K. banks close for one week (24%)
* On June 15, 1981, the Fed Funds rate hit 20.61%.
* I remember that day sitting with Bob Arnold, Merrill Lynch's treasurer. The
Fed Funds rate was about to breach New York's usury ceiling. We were gaming
out several disaster scenarios.
* Would Fedwire shut down, since, effectively, it was a system that
transferred fed funds?
* Would investors max out their margin accounts (capped at the ceiling) and
invest risk free in treasuries at a handsome spread while at the same time
collapsing the entire brokerage industry?
* Would brokerages preserve their profits by preemptively issuing margin
calls, possibly taking the markets down?
* Would someone invoke the questionable phrase "institutional exemption" and
just ignore the usury laws?
* Would the interbank lending market freeze-up and what would be the results?
Sept 20, 2021 - Global markets plunged today as rumors swirled about a liquidity
crisis at China Evergrande Group.
* Evergrande is supporting approximately $300 billion of debt on its balance
sheet.
* Some commentators describe Evergrande as "systematically important".
* Geeze. $300 billion is nothing more than a slow morning on the Fed's reverse
repo desk. RRP hit an all time high of $1.224 trillion today.
* We await Chairman Powell's press conference following the FOMC meeting which
concludes on Wednesday. What will he have to say about Evergrande's $300
billion, the record $1.224 trillion RRP or, most importantly, the Fed's
balance sheet which topped $8.4 trillion for the first time last Wednesday?
July 21, 2021 - Has the Fed already begun to tighten the money supply, even as
its meeting minutes imply accommodation?
* M2 money supply had been growing at a blistering pace since the beginning of
the pandemic, up $5.03 trillion through March 2021.
* In late March 2021 the Fed reactivated its reverse repo program, effectively
draining cash out of the system.
* Since the beginning of April, M2 has actually fallen by $100 billion through
the end of May!
* Yesterday, RRP stood at $848 billion, up from zero earlier this year.
* We await the June M2 numbers next week but will monitor the RRP daily on this
page.
July 12, 2021 - Huge market multiple for a quasi - prime money market fund
* Information is sketchy but here is what The Shadow thinks might be the
situation:
* Circle (https://www.circle.com/en/), a Bermuda registered entity, manages
"USD Coin”, a stable value crypto currency. (See the June 30 blog below
to understand how the stable value cryptos resemble prime money funds.)
* On Jan 1, they had $4B AUM. Now they are up to $26B.
* For a one month lock-up, they pay 4% per annum on those funds, payable in
USDC. For investors willing to extend the lock-up for a year, the rate
rises to $4.15%.
* But here’s the NEWS. They just announced they are going public via a Concord
Acquisition Corp (CND) SPAC with a $4.5 billion valuation! That is an order
of magnitude greater than the valuations (based on AUM) of the most
successful asset managers in the world.
* CEO tweeted last week "As part of our transformation from private to public
company, that also creates an opportunity for Circle to also provide
significantly more transparency about the business we are building around
USDC, and about the reserves that back USDC." Hmmm.
* Please share your insights with The Shadow, Our brain is not absorbing this.
June 30, 2021 - Are crypto Stablecoins the new Prime Money Market Funds?
As the regulatory piling-on of Prime Money Market Funds (PMMFs) continues, The
Shadow asks, "will crypto stablecoins take their place?"
* Twenty years ago, PMMF assets were equivalent to 11.9% of U.S. GDP. Today,
they are down to a miniscule 2.3%. Yet the regulatory onslaught continues.
Not yet satisfied, U.S. Treasury Sec. Yellen led off the June 11, 2021 FSOC
meeting with a call for further "reform".
* This reminds the Shadow of that Vietnam War (when many FSOC commissioners
came of age) sound bite often repeated satirically by a late elder statesman
of the money fund industry, "We need to destroy the village in order to save
it".
* The Carfang Group took the President's Working Group's call for further
regulation to task in comments to the SEC on the topic last month
(https://www.thecarfanggroup.com/advocacy).
* By the way, Commercial Paper, which companies rely upon for short term credit
needs and are a primary holding of PMMFs, has decreased by two thirds over
the same period.
* Enter STABLECOINS. These cryptocurrencies attempt to maintain a stable
$1.0000 market price. Some invest in money market instruments in order to
achieve to achieve the parity. Others use market operations, buying and
selling, to maintain parity.
* The 54 USD stablecoins that we watch at The Carfang Group have a total market
cap of $112B which is already 20% of the PMMF total market cap.
* Tether is an example of the first type. It claims to be managing a $63
billion portfolio of government securities and commercial paper to achieve
its peg. Tether claims to hold 49% of its portfolio in commercial paper. At
$63B, it would be the 4th largest PMMFs, ahead of many household names.
* TITAN is an example of the second type. Two weeks ago, its market operations
backfired. The coin lost over 99% of its value.
* In PMMFs, shares are redeemed directly from the fund company when an investor
seeking liquidity sales shares. In coins like Tether, investors are free to
trade their coins with other. This takes a lot of liquidity pressure off the
portfolio. Essentially, their structure leads to a much longer WAM, which
could be a key to stability.
* Stablecoins, at least for now, have escaped the tight regulations to which
PMMFs are subjected.
The Shadow is watching with interest.
April 5, 2021 - GMT, a new global standard? (Global Minimum Tax, that is)
* In 1884, several dozen nations met in Washington, DC and adopted the prime
meridian as the common reference point for measuring time. GMT or Greenwich
Mean Time became the almost global standard. France vehemently objected and
only grudgingly accepted the standard, but not the name, in 1911.
* Now in 2021 in Washington DC, U.S. Treasury Secretary Janet Yellen is
proposing a new GMT, a minimum global corporate tax.
* Space does not permit a full discussion here. The complexities, competing
interests and rivalries are epic.
* However, the Shadow is looking forward to witnessing a lively debate.
March 30, 2021 - Fed seeks comments on Artificial Intelligence activities of
financial institutions.
* Five federal financial regulatory agencies are gathering insights on
financial institutions' use of artificial intelligence (AI). The agencies
seek information from the public on how financial institutions use AI in
their activities, including fraud prevention, personalization of customer
services, credit underwriting, and other operations.
* Download full Request for Comment here.
March 21, 2021 - Is Humphrey-Hawkins now amended? Humphrey-Hawkins-Powell?
* In 1913, the U.S. Congress passed the Federal Reserve Act with the objective
of creating a sound U.S. banking system supported by a stable U.S. dollar.
Price stability was to be the primary objective of monetary policy. With
low inflation, a stable dollar would permit the economic system to
self-optimize.
* In 1977, inflation stood at 6.5%. The Humphrey-Hawkins Full Employment Act
was introduced, requiring the Fed to maximize employment as well as maintain
a stable currency.
* As a non-Keynesian, the Shadow was not at all surprised when inflation
rocketed to 13.55% by 1980.
* We watched in near-despair last Wednesday as Fed Chair Powell unilaterally
overrode the U.S. Congress and declared that the stable currently mandate
would be put on hold until the full employment mandate is achieved. The
disastrous half-step of 1977 has now reached a full stride.
* This movie's ending may not be suitable for children (or adults).
* Footnote: The Shadow certainly desires high employment levels at good wages.
However, we recognize that employment responds to numerous economic,
regulatory, social and technological variables, almost all of which are
beyond the Fed's remit.
March 17, 2021 - Did Jay Powell really say this? Yes he did.
* In his press conference following Wednesday's FOMC meeting in which he
promised to keep the punch blow overflowing, Fed Chair Jerome Powell said
"You can only go out to dinner once per night." When he made that momentous
announcement, was he:
* Announcing another Covid lockdown restriction,
* Reminding me the I need to shed a few pounds, or
* Suggesting that long-term inflation prospects were tame?
* The Shadow picks door number three. However, we disagree and point out that
back in the 1970s, we could only go out to dinner once per night.
* On June 15, 1981, the Fed Funds rate hit 20.61%.
* I remember that day sitting with Bob Arnold, Merrill Lynch's treasurer. The
Fed Funds rate was about to breach New York's usury ceiling. We were gaming
out several disaster scenarios,
* Would Fedwire shut down, since, effectively, it was a system that
transferred fed funds?
* Would investors max out their margin accounts (capped at the ceiling) and
invest risk free in treasuries at a handsome spread while at the save time
collapsing the entire brokerage industry?
* Would brokerages preserve their profits by preemptively issuing margin
calls, possibly taking the markets?
* Would someone invoke the questionable phrase "institutional exemption" and
just ignore the usury laws?
* Would the interbank lending market freeze-up and what would be the results?
January 17, 2021 - Introducing the Gamma Squeeze.
* Short sellers of GameStop, AMC, BlackBerry, Express and others just met Gamma
the hard way
* Before this week, only financial quants had ever heard of "Gamma". For those
of us who model options strategies around volatility, the series of Greek
letters describing financial pricing attributes are a thing of beauty
* To be technically precise, "Gamma" describes the rate of change of "Delta".
In options land, "Delta" is the rate of change in an option price for a
given price change in the underlying security.
* In a practical sense, a broker dealer may have a client that wants to buy a
cheap out of the money call option. A short-term option with a 150 strike on
a 100 stock would be fairly cheap, hence attractive to retail investors who
read on a chat board that the price is about to double. The investor would
profit handsomely if the stock rose to say $200.
* On the flip side, the BD would facilitate by taking the other side of the
trade and short the option. But the BD would hedge its short position by
buying a small amount of the underlying stock. Gamma, in conjunction with
Delta, is the measure we use to determine the hedge ratio. Since the stock
is well out of the money, the Gamma and Delta would be fairly low, and the BD
may only need to buy 10 or 15 shares to "perfectly hedge" 100 short options.
* However, sometimes the stock actually does go up. That happened this week as
the shorts were squeezed in GME, AMC, BB and others. As the stock price
approaches the strike price of the option, its Gamma and Delta rises. The BD
needs to buy more shares to maintain the proper hedge ratio. (Think of
gearing) Of course, that buying further increases the stock price.
* Now looks at what happens when Gamma squeeze meets Short squeeze. Round and
round they go.
* Just look at this action for the two weeks between Jan 13 and Jan 27, 2021 as
I write this:
* GameStop rose from $20 to $347
* AMC Entertainment rose from $2.20 to $19.88
* BlackBerry rose from $7.50 to $25.00
* Express (the Limited spinoff) rose from $1.02 to $9.55
* We'll return to this topic later to see how the movie ends.
January 15, 2021 - Today is an historic anniversary in Money Market Fund
history with eerie parallels to the present.
* Twelve years ago today, in 2009, total assets in U.S. MMFs reached a then
all-time high of $3.92 trillion. That record stood for nearly 11 years.
* The Dow Jones Industrial Average fell 20% in the subsequent two months.
* Now for the parallels to today:
* It immediately followed the release of two high profile reports calling for
radical changes in MMF regulation. The Volcker Group of Thirty report in
Jan. 2009 and the President's Working Group report in Dec. 2020.
* MMF assets had increased by more than 20% in the preceding years (2008 and
2020)
* It was the week before a presidential inauguration which saw the White
House move from Republican to Democrat control.
* In terms of the overall economy:
* It followed a year of major market turmoil.
* It was during a period of nearly zero interest rates.
January 8, 2021 - Froth in digital currency land? Maybe. Maybe not.
* Crypto currency moved to all time highs this week with Bitcoin trading above
$40,000 or nearly 4X its level in three months.
* But the real market action is in the "miners", some of which are up 9X since
October, 2020. RIOT, MARA and BTBT are on quite a run.
* Update Jan. 14: I acquired RIOT puts today.
October 19, 2020 - It must be official since it has an acronym: CBDC
* Bitcoin, Ethereum, Libra, Ripple. Move aside and make room for CBDC -
Central Bank Digital Currency.
* Not satisfied with a seven fold expansion of central bank balance sheets over
the past twelve years, there are new worlds for the Federal Reserve, Bank of
England, the European Central Bank and the Bank of China to dominate ( or
some might say "interfere with").
* To be fair, the fragmented, opaque and volatile world of digital currencies
ought to keep central bankers up at night.
* However, we are beginning to see the broad outlines of the benefits digital
currencies could usher in:
* More efficient and lower lost payments
* Faster and cheaper international payments with less FX friction
* Solutions for the underbanked / unbanked
* Security
* Privacy
* Left to a free market, digital currencies such as Bitcoin, Ethereum, Libra or
Ripple could disrupt some highly profitable corners of the banking business
such as payments, foreign exchange and trade.
* No wonder central banks want a piece of that action.
October 1, 2020 - Still trying to get it right. Volcker Rule 2020 takes effect
today.
* Volcker Rule 2020 takes effect Oct. 1 and banks should be very happy. Ten
years after the Dodd-Frank Act/Volcker Rule took effect (see our July 2020
insights below), this new rule relaxes several provisions which had limited
bank investment activity and proprietary trading.
* It appears that banks may invest their own capital in VC funds and certain
credit funds.
* Banks may now invest alongside some of the funds they sponsor.
* It liberalizes 23A trading.
* We have long advocated that Dodd-Frank went way too far in its post crisis
regulation. This is a partial recognition of that reality.
* But there is so much more that still needs to be addressed. Read here.
September 22, 2020 - What ever happened to the charge that companies were
"hoarding" cash?
* U.S. Corporate Cash soared to $3.9 trillion or 20% of GDP. That was
comprised mainly of bank deposits and money market funds. Read here
* That is more than $2.0 trillion higher than just a few years ago.
* Obviously, this is a prudent liquidity buffer in the face of the global Covid
pandemic.
* We strongly argued back then, cash levels are a function of hundreds of
individual decisions and not some dark market cabal. However U.S.
regulators, notably the Securities and Exchange Commission, and legislators
continued their stubborn pursuit of market villains.
* What a difference a lit bit of context makes! We wonder if they'll now go
back an redo their ill conceived market regulations.
* September 20, 2020 - The run into BlackRock ETFs
* On March 23, 2020, the U.S. Federal Reserve announced an unprecedented policy
shift to calm the Covid-crushed markets. For the first time ever, it would
purchase up to $750 billion of corporate debt and debt-related exchanged
traded funds (ETFs). Further, it would hire BlackRock, the $7.3 trillion
asset manager, to advise and execute the program. Debt and ETF purchases
began in May, 2020.
* The results were immediate. The announcement alone helped calm markets and
the ultimate purchases were estimated at only $13 billion, barely 2% of the
maximum.
* The results for BlackRock were also remarkable. The Wall Street Journal
reports immediate and substantial inflows into BlackRock ETFs. Essentially
there was a stampede to front-run the Fed purchases. In fact, WSJ cites
Morningstar in noting that BlackRock's market share in Fed eligible ETFs grew
from 51% to 56% between late March and June.
* BlackRock is estimated to earn 14 bps in management fees (WSJ) from
front-running investors. LQD alone saw $8.2 billion in inflows in the days
following the announcement. That works out to $11 million in fees, just on
the LQD front-runner hopefuls.
September 18, 2020 - Do banks need more capital? How about 24%?
* The not quite fully implemented Basel III accords, following the 2008
financial crisis, imposed higher capital and liquidity standards on
commercial banks. Neel Kashkari, president of the Minneapolis Federal
Reserve Bank has long argued that the bank capital requirements should be
even higher.
* Kashkari is concerned that more capital in the financial system is necessary,
given possible Covid economic impact scenarios.
* According to Seeking Alpha, he said at a Council of Institutional Investors
virtual event "If the largest pension plans in America got together and said
we aren't going to trade with banks that do not have at least 24% equity,
they would increase their capital levels".
* Is the regional Fed president fomenting a boycott?
September 4, 2020 - Basel III final implementation delayed again.
* According to its press release, "the Basel Committee's oversight body, the
Group of Central Bank Governors and Heads of Supervision (GHOS), has endorsed
a set of measures to provide additional operational capacity for banks and
supervisors to respond to the immediate financial stability priorities
resulting from the impact of the coronavirus disease (Covid-19) on the global
banking system."
* The implementation date of the Basel III standards finalised in December
2017 has been deferred by one year to 1 January 2023. The accompanying
transitional arrangements for the output floor has also been extended by
one year to 1 January 2028.
* The implementation date of the revised market risk framework finalised in
January 2019 has been deferred by one year to 1 January 2023.
* The implementation date of the revised Pillar 3 disclosure requirements
finalised in December 2018 has been deferred by one year to 1 January 2023.
* Sounds like the Bank for International Settlements doesn't want to let a good
crisis go to waste.
* Final, final implementation push out to 2028. If our match is correct,
that's nearly twenty years after the crisis.
August 14, 2020 - Does the left hand know what the right is doing?
* Fannie Mae and Freddie Mac just slammed the brakes on the consumer mortgage
refinance market. It is instituting a 50 basis point (0.50%) fee on new
refinancing. That's roughly $1,500 on a $300,000 refi. In a sidebar that
seems unserious, it suggests that consumers will not be adversely impacted if
lenders and mortgage originators do not pass the fee on. Let's discuss Econ
101.
* They call it an "Adverse Market Refinance Fee" to recoup the additional risk
in the new Covid world. That seems to ignore that fact that a nascent
recovery has begun and the Federal government is using trillions of liquidity
and fiscal stimulus to immunize lenders from such "risk".
* It seems to be directly contrary to the objectives of the Federal Reserve's
$1.25 trillion-dollar mortgage-back securities purchase program which was to
"intended to provide support to mortgage lending and housing markets and to
foster improved conditions in financial markets more generally".
* Why would Fannie and Freddie, under the guise of "risk management", institute
a measure so directly counter to the Covid-19 stimulus efforts of both
political parties? Perhaps bolstering capital ahead of their exit from their
Dodd-Frank mandated conservatorship?
* We're going to keep our eye on this and following the money wherever it
flows.
August 3, 2020 - Former Fed Chair Janet Yellen says the we need a
new Dodd–Frank
* She also praises Dodd-Frank.
* So which is it????
July 2020 - Dodd–Frank Wall Street Reform and Consumer Protection Act - Ten
Years Later
* See our analyses and commentary in the posts below.
* View our Congressional testimony here.
* Assessing the Impact of the Dodd-Frank Act Four Years Later (Tony Carfang
and Barney Frank - U.S. House).
* House Hearing on Banking Industry Regulations and Consumer Protection
(Carfang - U.S. House).
* The Impact of Regulation on Short-Term Financing (Carfang - U.S. House)
* Federal Support for Financial Institutions (Carfang - U.S. Senate)
* Read our anlyses here
* The Impact of the Dodd-Frank Act and Basel III on the Fixed Income Markets
and Securitizations
* Is Simpler Better? Limiting Federal Support for Financial Institutions
* Examining the Impact of the Volcker Rule on Markets, Businesses, Investors
and Job Creation
* Put Dodd-Frank into Context
* Read "Retracing the Financial Crisis 2007 - 2008", a collection of 75
vignettes which chronicle the unfolding saga which played out in broad
daylight.
* Recall that the actual market capitulation was triggered with the federal
bailout of AIG. While some historians still claim that Lehman Brothers or
the Reserve Primary Fund was the proximate cause, our forensic examination
of capital flows that week point instead to the $85 billion rescue of AIG.
Investors presumed the Fed felt that markets were strong enough to absorb
a Lehman collapse. But when the NY Fed stepped in two days later to rescue
AIG, markets figured the Fed was in full panic mode and acted accordingly.
* Remember these names? Washington Mutual, Indy Mac, Countrywide Financial,
Wachovia, Golden West, Northern Rock, Dexia, Bear Stearns, Cheyne
Financial, King County WA.
* Remember these terms? Structured investment vehicles (SIVs), Alt A
mortgages, subprime loans, auction rate securities, enhanced cash, asset
backed commercial paper, collateralized mortgages (CMOs), tranches, credit
enhancement.
* In 2007, Fortune magazine ranked Lehman Brothers at the #1 Most Admired
Company among securities firm. Bear Stearns ranked second. Goldman Sachs
was a distant third that year.
July 10, 2020 - Beta(m)™ - a Breakthrough in Money Market Investing
* Join us for the unveiling of BETA(m)™ our new quantitative methodology for
evaluating money market risks and returns. Register for the inaugural webinar
on July 14.
* Applying modern portfolio theory to the money market space. Constructing
optimal money market portfolios along the efficient frontier. Integrating
modern portfolio theory and customized investment policies.
* Each set of short term investment policies has its own efficient frontier,
its own optimized portfolio, based upon risk and return tradeoffs as well as
liquidity requirements.
July 9, 2020 - Structure of the U.S. Banking System. Dodd Frank - Ten Years
Later
* According to the Federal Reserve Bank of St. Louis, there were 6,623
commercial banks in the U.S. when the Dodd-Frank Act (DFA) was signed in
July, 2010. That number fell to 4,427 in March, 2020. One third of all U.S.
commercial banks have disappeared in the ten years post Dodd-Frank.
* Measuring through Feb. 2020 to factor out the $2 trillion surge in bank
assets as a result of Covid-19 stimulus programs, U.S. banking assets had
grown by 51% since the act was signed. That barely outpaced nominal GDP
which grew by 44% over the nearly ten years. Clearly, DFA succeeded in
reduce the growth rate of the banking sector.
* Much like air in a balloon that simply moves around when the balloon is
squeezed, assets of non-bank financial instruments have surged. (See the
July 5, 2020 post below.)
* From the creation of the Federal Deposit Insurance Corporation (FDIC) in the
1930s and prior to DFA in 2010, there we between 150 to 175 new commercial
banks established each year. Most economists would view that as a sign of a
robust industry and successful capital formation.
* Between 2010-2018, only 19 new banks were chartered in total. 14 banks have
been chartered in the past year, a slight pick-up by still 90% below the
historical pace. For The Carfang Group, this effective halt in new bank
creation is a cause for concern.
July 8, 2020 The Financial Stability Oversight Council (FSOC). Dodd Frank -
Ten Years Later
* Following the financial crisis of 2008, there was a widespread recognition
that several regulatory agencies missed some warning signals or viewed them
too narrowly. To remedy this, our legislators decided to form an uber-agency
- the Financial Stability Oversight Council (FSOC) - comprised of the heads
of several financial regulatory agencies including the SEC, FDIC, OCC, CFPB
and CFTC, as well as the Federal Reserve Chair and the Treasury Secretary.
* A cynic might say that those very same agency heads who failed to see the
pre-crisis financial market dislocations would now form a committee to
oversee each other. Voila. Problem solved.
* In reality, this extended the regulatory processes, created additional
overlap and resulted in a double jeopardy. There are examples of agency heads
reaching informed conclusions but pressured to act against their better
judgment to accede to the will of the Treasury Secretary.
* FSOC was mandated to designate and supervise "systemically important
financial institutions" or SIFIs. This sweeping authority helped ensure that
the largest and most interconnected banks had more liquidity and were better
capitalized. However, it was also a tool used to harass insurance companies
and other non-banks, far removed from the market risk taking of 2006-08.
* Most telling, the Treasury website boasts that FSOC creates "collective
accountability". That oxymoron says it all!
July 7, 2020 Dodd–Frank Wall Street Reform and Consumer Protection Act - Ten
Years Later
* In two weeks, we mark the 10th anniversary of the signing of the Dodd–Frank
Wall Street Reform and Consumer Protection Act. Over these next two weeks,
The Carfang Group will write on these pages and provide color and
interpretation on how well it worked. We have commented extensively in
articles and in U.S. Congressional testimony, pointing our the successes and
failures.
* View our Congressional testimony here.
* Assessing the Impact of the Dodd-Frank Act Four Years Later (Tony Carfang
and Barney Frank - U.S. House).
* House Hearing on Banking Industry Regulations and Consumer Protection
(Carfang - U.S. House).
* The Impact of Regulation on Short-Term Financing (Carfang - U.S. House)
* Federal Support for Financial Institutions (Carfang - U.S. Senate)
* Read our anlyses here
* The Impact of the Dodd-Frank Act and Basel III on the Fixed Income Markets
and Securitizations
* Is Simpler Better? Limiting Federal Support for Financial Institutions
* Examining the Impact of the Volcker Rule on Markets, Businesses, Investors
and Job Creation
* The March Madness 2020 in the financial markets has provided the ultimate
stress test and is a useful lens through which to view the Act.
* Overall, we rate the bill a "C-".
* It began with an "A+" set of objectives to promote the financial stability
of the United States by:
* improving accountability and transparency in the financial system,
* ending "too big to fail",
* protecting the American taxpayer by ending bailouts,
* protecting consumers from abusive financial services practices, and for
other purposes.
* It quickly descended into barely passing grade territory as two thousand
pages of directives sowed confusion and raised compliance costs for all
capital markets players, forcing smaller firms to close or merge into one
of the giants.
* By outsourcing the actual rule writing to multiple, competing agencies,
the jumble of inconsistent and overlapping regulations created a
regulatory overhang that slowed the markets for years. Working with
different timetables, conflicting objectives and a wide range of
competencies (or lack thereof), these agencies tripped over each other
and confused markets for years.
* Securities and Exchange Commission
* Commodities Futures Trading Commission
* Controller of the Currency
* Federal Deposit Insurance Corporation.
* Fortunately, coming in to the pandemic, the U.S. banking system was as
strong as it has ever been. We will give Dodd-Frank some of the credit.
However, more of that credit goes to the Basel III global framework for
banks.
* On the other hand, we would fault some Dodd-Frank provisions for the
seizing up of the U.S. commercial paper markets and for the reluctance of
the largest U.S. banks to fully facilitate the rollout of the Payroll
Protection Program and other government stimuli.
* Over the next two weeks, we will delve into the various planks of the Act
including:
* Too Big To Fail
* Systemic Risk
* Eliminating Bailouts
* The Financial Stability Oversight Council (FSOC)
* GSEs like Fannie Mae and Freddie Mac (see the Aug. 13, 2019 post below)
* Volcker Rule
* Consumer Finance Protection Bureau (CFPB)
* Stay tuned.
July 5, 2020 Largest Financial Institutions - Ten Years After Dodd-Frank
* In 2010 when Dodd-Frank was signed into law, financials comprised 15.6% of
the S&P 500. Their impact is now only 10.6%.
* There are certainly apples and oranges issues when comparing commercial
banks, central banks and asset managers. But no matter how you slice it, the
league tables have changed radically since the passage of Dodd-Frank. (We're
still waiting for second quarter numbers.)
* Remember when banks were the worry? Remember names like Bank of America,
JPMorgan Chase, Citibank? Recall "systemically important". Well? Barney
Frank, Chris Dodd and others put an end to that.
* It looks like June 30, 2020 data will show the U.S. Federal Reserve's twelve
banks having combined balance sheet assets of $7 trillion. That's up
eightfold since the beginning of the 2008 financial crisis. But today that
only get's them second place. BlackRock's assets under management (different
from balance sheet assets but market impacting, nonetheless) are likely to
top the listing, exceeding $7 trillion with Vanguard not too far behind in
the neighborhood of $5.5 trillion. Meanwhile, growth of "systemically
important" banking assets and liabilities have barely kept pace with growth
of GDP. We don't believe JPMorgan's balance sheet will top $3 trillion at
quarter end.
* Check back in a couple weeks when the official June 30 numbers become public.
July 2, 2020 - Big Finance vs. Big Tech
* Keep Your Eye on those Crypo-Regulatory Turf Wars. They're fierce.
* This intense clash of the titans is largely taking place behind the scenes
now that most headlines are on Covid.
* Even if you haven't heard much lately about Bitcoin, Libra, Ripple, Etheream
or dozens of others, there is plenty of action.
* Entrenched interests look to create regulatory barriers, keeping big tech out
of the digital currency realm even as big tech is rending old line payment
systems obsolete.
* Read our LinkedIn piece on the key issues shaping up in DC.
* We discuss the trends in digital currencies in our seminal piece "Megatrends
in Treasury, Money and Banking".
June 25, 2020 - Treasury Coalition's Global Recovery Monitor. Treasurers
prepare for the long haul.
* The Carfang Group is a founding member of Treasury Coalition which surveys
treasurers bi-weekly to monitor their activities and outlook as the Covid19
pandemic continues to unfold. Over 1,350 organizations have participated and
the findings are instructive.
* This week's respondents report healthy access liquidity but still see it as a
top concern. Corporate treasurers are less pessimistic about their accounts
receivable.
* Treasurers except a return to financial normalcy in about 11 months. That's
up from 10 months in the prior period. Most don't expect to see GDP growth
until 1Q2021.
* Most expect a "W' shaped recovery.
* The Carfang Group will go out on a limb a posit a square root shaped
recovery.
* Historic levels of stimulus and liquidity will take nominal GDP and stock
indices above their previous highs.
* Then three things will happen to flatline global economies for awhile:
* Stimulus will be slowly withdrawn slowing growth,
* New regulations will slow growth,
* Inflation arising from the stimulus will negatively impact some sectors
and countries.
* Read full article here.
* Take the 5 minute Global Recovery Monitor survey here and receive the
biweekly results as soon as they are published.
June 19, 2020 - Follow the money - U.S. Corporate Cash blasts through prior
record.
* The Carfang Group reported that U.S. corporate cash surpassed $3 trillion for
the very first time, providing an ample cushion to help weather the Covid19
storm. Checkable bank deposits, money market mutual funds, bank time
deposits and the direct investments all showed strong growth.
* FDIC reported that bank deposits grew by $1.2 trillion in the first quarter,
including a $760 billion increasingly in accounts larger than the insured
$250,000.
* Bank reserves held at the Federal Reserve at the end of May were $3.2
trillion, almost double the $1.63 trillion total at year-end.
* Banks earn interest on these reserves called IOER (Interest on Overnight
Excess Reserves) as a result a post 2008 emergency program that never
expired. We opposed IOER when first implemented and continue to oppose it.
Literally, banks get paid to hold the cash at the Fed and not lend it out.
* Connect the dots. The Fed announces an alphabet soup of stimulus programs to
pump money into the markets. That cash finds its way from corporate coffers
and ultimately into banks. The banks let it sit in their reserve accounts at
the Fed earning interest.
* So did the Fed just print money and pump it back on to its own balance sheet?
Hmmmm.
June 11, 2020 - Treasury Coalition's Global Recovery Monitor hopeful.
* The Carfang Group is a founding member of Treasury Coalition which surveys
treasurers bi-weekly to monitor their activities and outlook as the Covid19
pandemic continues to unfold.
* Over 1,200 organizations have participated and the findings are instructive.
* 46% except a "W" shaped recovery whereas only 6% expect a "V"
* Very few companies report treasury staff moving back on site.
* Treasurers except a return to financial normalcy in about 10 months.
* Although concerns about liquidity have lessened, accounts receivable remain a
problem.
* Take the 5 minute survey here.
June 5, 2020 - Playing the blame game already.
* Regulators appear to be scapegoating money market funds for contributing to
the panic in the financial markets in March.
* The commercial paper markets froze in mid March, imperiling the ability of
corporations to efficiently raise cash to fund their operations. Interest
rate spreads widened to as much as 200 basis points.
* Keep in mind that the Fed lowered interest rates in two steps in early March.
So the widened CP spread was more like CP rates moving somewhat higher while
Fed rates dropped an unprecedented 125 bps in a few short weeks.
* Prime money market funds had historically been the largest buyer of corporate
commercial paper. The Securities and Exchange Commission, goaded by FSOC,
promulgated draconian regulations which took effect in 2016 resulting in 60%
or $1 trillion of assets exiting prime funds. Of course, this rendered them
unable to buy the corporate paper when the liquidity markets tightened in
March, sending corporate borrowers scrambling. We predicted this in April,
2017 here.
* During March, investors withdrew another 25% their Prime fund assets. You
could hear the dog whistlers shout "run". Of course, that was dwarfed by the
40% drop in equities and even some bonds but no dog whistles there.
* So now they'd have you believe that Prime funds were somehow responsible for
the CP crunch in March and require another round of regulation. Hmmmm.
August 13, 2019 - On Dodd-Frank Act, SIFIs, Fannie Mae and Freddie Mac
* To some, it's a bit surprising that Fannie Mae and Freddie Mac, with a
combined $5.7 trillion in total assets have emerged largest unscathed from
the Dodd-Frank fallout. In fact, they are stronger than ever.
* But should they continue to escape the reach of FSOC and now be designated as
SIFIs, systemically important financial institutions?
* Yes, they are subject to annual stress tests but escape some of the more
draconian SIFI obligations.
* Dr. Alex J. Pollack, former head of the Federal Home Loan Bank of Chicago
offer this concise syllogism today on Real Clear Markets.
1. SIFIs must be regulated by the Fed.
2. Fannie and Freddie are obviously SIFIs.
3. Therefore, Fannie and Freddie must be regulated by the Fed.
* If you believe in the Dodd-Frank Act, it is simply “Q.E.D.”
March 3, 2019 - Five Decades of Corporate Treasury in the U.S.
* As part of its 40th anniversary festivities, London based Association of
Corporate Treasurers invited Tony Carfang to document the parallel period of
corporate treasury in the U.S. Read the full article here.
* 1970s - 15,000 banks in U.S., many prohibited from branching. Paper based
transactions. High inflation with interest rates approaching 20%. Reg E
lays early groundwork for electronic banking.
* 1980s - Monetary Control Act unleashes innovation. ACH grows. Treasury
workstations emerge. Banks consolidate. Treasury Management Association
come of age.
* 1990s - Money funds, sweep accounts and investment portals take hold.
Liquidity management and payment operations come together in the modern
treasury department.
* 2000s - Global supply chains and regional treasury centers take center stage
as treasury departments globalize. Global banks emerge as the transaction
banking powerhouses.
* 2010s - Business analytics and intelligence tools introduced in corporate
treasury. Cyber security issues become problematic.
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The Carfang Group periodically updates this page with important information for
financial professionals. Our decades of experience in the markets and first
hand dealings with key players affords us a unique perspective. Most of all, we
help you look beyond the headlines and understand what is really happening and
how it will affect you and your company.
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