Regulation issues, scandals and a protracted slow-growth economy seem to have finally caught up with big Banks. The Banking sector is rapidly getting so skewed that ONLY a complete collapse of the current Banking System could lead to the Re-Building of a new improvised & a dramatically different & a Transparent Financial System. What are strongly needed now are radical restructuring changes in the financial sector, including increased & vigilant regulation.
For months, JP Morgan Chief Executive Jamie Dimon had no idea of the size of the losses brewing inside his bank, signaling to many investors that major banks are too big and too complex to manage. Gone is the time with the Lehman collapse, when the world saw banks as, “The Bigger, the Better” or “Too Big to Fail”. They have to get smaller so they can manage better. They have to give up the idea of being a universal bank holding company that jams together businesses that have nothing to do with each other.
As Given in Forecast 2012 – There will be corruption and the rooting out of corruption. Industry barons will do all within their power to maintain their advantages at this time through strong links to government. The awareness of the suffering of the underprivileged has scarcely begun. What we will see over the next few years is the extreme polarization of right-wing solutions. Finally by 2024, there will be little that remains of the autocratic structures that are currently being put in place to safeguard the Banks and corporations whose survival is currently threatened. Read more…as posted on Jan 18 – 2012
Ever since the 2008 financial crisis, U.S. Banks and their investors have held out hopes of a return to the good times, when lending profits steadily rose and commercial and investment banking flourished together. Revenue from lending, trading and advising corporate clients on mergers is still weak, and low interest rates continue to squeeze profits on loans and other investments. Banks and their already depressed stocks appear headed for a long, grim future.
Loan growth is not keeping up with deposit growth. A protracted period of low interest rates puts a lot of pressure on balance sheets. Even if banks are making more loans to better borrowers, they are doing so less profitably. Large sized investors & top institutional clients are increasingly reluctant to invest in any bank stocks because of the uncertainty about the U.S. Presidential elections, the end-of-year tax-and-budget “fiscal cliff” battle and ongoing problems with the global economy. For many banks, however, issues go deeper than just a slowing economy. Capital markets businesses, including trading stocks and bonds, are just not as profitable as they used to be. Trading volumes are in a long-term downtrend globally, and regulators are clamping down on banks’ ability to bet their own money. Major commercial banks with investment banking arms, along with standalone investment banks such as Goldman Sachs Group will suffer. “Nine out of the 10 biggest capital-markets banks in the world can’t earn their cost-of-equity capital,” said NYU’s Smith, a former partner at Goldman Sachs.
There are some banks, to be sure, that have stuck to their commercial bank knitting and won perennial plaudits and strong valuations like Wells Fargo Corp, the fourth largest U.S. bank by assets, and U.S. Bancorp. These banks have strong credit controls, have generally avoided cut-rate pricing to gain market share, and have been gradually adding fee-based, rather than interest-centered, businesses. But then how many can you quote with a clear conscience in the same category?
JP Morgan Chase & Co’s derivative losses of almost $6 billion and the Libor interest-rate-fixing scandal in the last few months may prove to be the proverbial “Straw that broke the camel’s back.”
LIBOR Rate-rigging Banks scandal:
After the massive Lehman collapse & the shakedown in several organizations across nations as an aftermath of the Realty Sub-prime lending issue which rattled the financial world in 2008, there was this huge hole to come out of in terms of getting the trust back, and now it’s just that much deeper.
Libor is used for $550 trillion of interest rate derivatives contracts and influences a wide array of financial products from mortgages to credit cards, and Global financial Regulator Mark Carney said it was crucial that markets be able to have “absolute confidence” in it. Dozens of banks, including JP Morgan Chase & Co and Deutsche Bank, are under investigation in the rate-rigging Libor scandal, where banks low-balled the rate to profit on trades and hide their own borrowing costs during the 2007-09 financial crises.
Britain’s biggest banks are under pressure to tell investors how much they expect the Libor rigging-scandal will cost shareholders when they start to report first-half earnings this week. Barclays Plc (BARC) was fined a record 290 million pounds ($450 million) last month for manipulating the benchmarkLondoninterbank offered rate. Civil lawsuits may cost the bank a further 626 million pounds, according to Morgan Stanley analyst Betsy Graseck. Royal Bank of Scotland Group Plc, Lloyds Banking Group Plc (LLOY) and HSBC Holdings Plc (HSBA) may pay as much as 2.2 billion pounds in fines and legal costs, Graseck said in a July 12 note. – Bloomberg reports.
Libor is the fourth scandal to hit the U.K.industry in the past 14 months that may erode earnings. The country’s biggest banks by assets have already set aside 6.9 billion pounds to compensate customers improperly sold insurance. They are also under investigation for mis-selling interest-rate swaps to small businesses. Separately, HSBC may be fined for failures in money- laundering controls that U.S. Senators say gave terrorists and drug cartels access to the country’s financial system.
Some of the world’s largest insurers for corporate directors and officers could be on the hook for hundreds of millions of dollars in claims over the next few years to cover legal costs for people caught up in the LIBOR scandal. As a result of those costs, which insurers fear could accumulate for the next few years, already rising insurance rates stand to go even higher for all companies. Directors and officers (D&O) insurance pays a wide range of defense costs for executives who get sued as a result of business decisions, from the initial inquiries all the way through the last stages of trial or settlement.
The sums involved are substantial. Consultants Towers Watson reported that in 2011, companies with more than $10 billion in assets on average carried $187.5 million in insurance coverage. More than a dozen banks are under investigation by authorities in Europe, Japan and the United States over the suspected rigging of the London Interbank Offered Rate (Libor), a key interest rate used to price trillions of dollars worth of financial products. Last month, Barclays paid a $453 million fine after admitting that its traders attempted to manipulate Libor, which is used to price loans and mortgages. Big claims could push costs up for everyone. Already, bankers looking to buy coverage are facing intense scrutiny from insurers. Among the biggest names in the market are companies like AIG, XL and Chubb. Another risk insurer’s face is that if customers can prove financial products were priced incorrectly due to Libor manipulation, errors and omissions insurance policies could be triggered as well.
Documents released by the New York Federal Reserve Bank this month showed regulators in theUnited States and England had some knowledge that bankers were submitting misleading Libor bids during the 2008 financial crisis to make their financial institutions appear stronger than they were.
The reliability of the LIBOR – London Inter-bank Offered Rate, which underpins transactions worth trillions of dollars, has been rattled by revelations that bankers manipulated it to profit on trades and hide their own borrowing costs during the crisis. -Proves our much earlier given Forecast to be accurate.
Among other details, the Fed documents included the transcript of an April 2008 telephone call between a Barclays trader in New York and Fed official Fabiola Ravazzolo, in which the unidentified trader said: “So, we know that we’re not posting um, an honest Libor”- Reuters reports.
Treasury Secretary Timothy Geithner, who was then head of the Federal Reserve Bank of New York, did not communicate in key meetings with top regulators, senior officials and investigators that British bank Barclays had admitted to Fed staffers that it was manipulating Libor, the Washington Post said.
Hundreds of bailed-out banks are still struggling to repay taxpayers and will soon find it even harder to make required dividend payments to the Treasury. Of the 707 banks that received taxpayer money from the governments Troubled Asset Relief Program starting in 2008, also known as TARP, about half have repaid the Treasury. However, 137 of those banks used a government-loan program to repay their taxpayer debts, according to the watchdog’s quarterly report to Congress.
And of the 325 banks still propped up with taxpayer money, 203 have missed dividend or interest payments, with some missing as many as 13 payments since receiving capital injections at the height of the financial crisis, said the report. Adding to their woes, the dividend that the bailed-out banks are required to pay to Treasury is set to increase to 9% from the current 5% as early as 2013. “Those banks are not able to raise the capital that is required to get out of TARP,” said Christy Romero, the special inspector general for the bailout program. “We are very concerned about those banks, and want those banks to stand on their own feet without government assistance,” she said.
Treasury has been trying to exit the Bailout Programs that have been criticized by Republican lawmakers for excessive government intervention. And Obama administration officials repeatedly stress that the bank bailouts, including the one used to directly inject capital into banks, have earned taxpayers more than $19 billion. This week, the Treasury said it would sell preferred stock and debt in 12 of the bailed-out banks. In June, Treasury successfully raised some $200 million from the sale of preferred stock in seven bailed-out banks. Treasury has been careful in saying that it will exit programs when the time is right and would not make decisions for political reasons.
According to the inspector general’s report, taxpayers have now lost $5.5 billion on its investment in insurer American International Group. The government’s remaining investment in the company is $30 billion, down from the initial $180 billion.
Quantitative Easing or Bailout Programs by the ECB or Loans from German Banks:
Bailout Programs done the German way aren’t really bailouts. They’re simply loans. Germany gives Spain money at below-market interest rates so Spain can pay back German banks. It adds to Spain’s debt, and makes that debt harder to pay back due to the austerity measures that are part of the deal. But it doesn’t do anything to help Spain out of its debt trap. In other words, it trades bankruptcy now for bankruptcy later.
That’s not to say later isn’t better. It is. At least if you’re talking about a small country like Greece. Kicking the can gives banks time to cut their exposure so that by the time the inevitable restructuring happens, it’s a non-event for markets. But Spain isn’t Greece. It’s much, much bigger. The German public might balk at the ever-increasing price tag and the Spanish public might balk at the ever-increasing depth of their slump.
Only the ECB can square this circle only if the Germans will let it. Spain needs Germany or the ECB to start buying its debt. The former would mean a bailout on the order of €400 ($485 billion) or so; the latter some kind of quantitative easing.Germanyhasn’t exactly been eager to okay either. That’s why we’re in the predicament we’re in now.
Well, part of the reason. The real reason is Germany’s refusal to admit their policies have failed. They failed in Greece. They failed in Portugal. They failed a little less in Ireland, but still haven’t exactly been a success. And they’re failing in Spain, which shouldn’t want another bailout.
Europe is running out of time to choose its fate. Spain can’t fund itself for long with 2-year bonds yielding 7.10%, 5 & 10 year at 7.77% today, may be only for a few weeks more. If Germany decides on another bailout that won’t work, the Euro is certainly doomed.