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Saturday, April 15, 2017

In today’s lead story at the Financial Times, Big US banks defy calls that they should be broken up, American megabanks make clear that they don’t think much of the financial savvy of investors or the business press. In quarterly earning calls, bank analysts were pressing executives on the news reports that former Goldman exec, now director of the National Economic Council Gary Cohn told senators last week told a group of senators that he was in favor of Glass-Steagall break-up-the-banks style legislation.

Our comments:

Wake me up when this gets serious. Cohn made it clear that he supported a breakup bill. While Trump has also said he wanted to revive Glass-Steagall, he didn’t say that very often on the campaign trail and there are many things he did say often and pretty consistently, like questioning why the US is carrying so much of the cost of NATO, he’s either reversed himself or is now backing a weak-tea version that his base regards as a sellout, such as Trump’s promises about NAFTA. Plus any Glass-Steagall type bill gets passed only over rabid anti-regulation House Financial Services committee chairman Jeb Hensarling’s dead body.

Don’t buy Jamie Dimon’s Brooklyn Bridge. Big complicated banks are not good for investors, no matter how much banks put their hands on their hearts and try to convince you otherwise. Here was the argument, per the pink paper:

The biggest banks in America are defying calls to break themselves up, arguing that the benefits of size and diversity were on display during a very mixed set of first-quarter results.

At JPMorgan Chase, finance chief Marianne Lake said on Thursday that the bank’s universal model was a “source of strength” for the broader economy, as she unveiled a 20 per cent drop in quarterly profits from consumer banking.

In the investment-banking part of the business, however, profits were up 64 per cent from a bleak period a year ago, boosted by a surge in bond trading and plenty of sales of debt and equity by big companies.

Anyone with proper finance training can tell you this is nonsense. Investors should be making portfolio diversification choices, not corporate execs asserting “synergy” on their behalf. Investors love earnings streams that are not much or better yet negatively correlated with the stock market; that’s one of the reasons they were willing to pay hedgies their inflated management and carry fees. Hedge funds promised returns that didn’t synch with stock market averages. When that proved to be less and less true and the results weren’t so hot generally, investors started beating a major retreat from the strategy.

If banks have all sorts of interesting return profiles hidden away in their various business lines, it would be much better in terms of the overall returns for investors owning those stocks to break them up.1

However, big complicated banks are good for securities analysts, since the complexity gives them more to do and thus creates the appearance that they are adding value to investors. So don’t expect any critical scrutiny of this bank PR from them.

The idea that bigger banks are better is a flat-out canard that we’ve debunked regularly since the inception of this site. Suffice it to say that every study ever done of US banks shows that they have a slightly negative cost curve once a certain asset size threshold is passed. Translation: bigger banks are actually have higher expenses per dollar of bank assets than smaller banks.

Now you might say, “But what about those bank mergers where they fire lots of people! Doesn’t that prove bank consolidation saves costs?”

No. The cost curve issue means the banks that were combined could have gotten those expenses lowered all on their own, and maybe some more. However, mergers provide an excuse to do what managements normally are too nice or too lazy to do, which is get ruthless about headcount.

Finally, the one real synergy is one that is dangerous to the public: the use of bank deposits to fund derivatives. Yes, Virginia, a whole lot of derivatives are booked in bank depositaries. For instance, to a bit of outcry, in 2011, Bank of America moved derivatives from Merrill Lynch into Bank of America NA. And why was that? The banking subsidiary had a better credit rating, meaning lower costs, because that’s where the deposits sat. As we wrote at the time:

Even though I’ve expressed my doubts as to whether Dodd Frank resolutions will work, dumping derivatives into depositaries pretty much guarantees a Dodd Frank resolution will fail. Remember the effect of the 2005 bankruptcy law revisions: derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs. So this move amounts to a direct transfer from derivatives counterparties of Merrill to the taxpayer, via the FDIC, which would have to make depositors whole after derivatives counterparties grabbed collateral. It’s well nigh impossible to have an orderly wind down in this scenario. You have a derivatives counterparty land grab and an abrupt insolvency. Lehman failed over a weekend after JP Morgan grabbed collateral.

But it’s even worse than that. During the savings & loan crisis, the FDIC did not have enough in deposit insurance receipts to pay for the Resolution Trust Corporation wind-down vehicle. It had to get more funding from Congress. This move paves the way for another TARP-style shakedown of taxpayers, this time to save depositors. No Congressman would dare vote against that.

And in case you think I’m exaggerating, the FDIC objected to the move, but the Fed took the position that it would “give relief” to the bank holding company. Bank of America took the position it has the authority to make this move, and since JP Morgan then had 99% of the notional value of its $79 trillion of derivatives booked in its depositary, JPMorgan Chase Bank NA, there was ample precedent. 2

And as we’ve also written regularly, over the counter derivatives are the biggest source of interconnected among too-big-too-fail banks. So getting derivatives out of depositaries would shrink the derivatives market by making them more costly and reduce systemic risk.

Keep your eye on the ball of the real reason for bankers wanting ginormous banks: executive pay. Bank CEO and C-suite pay is a function of bank size and complexity. Simpler, smaller banks mean much less egregiously paid top brass.

Thus bear in mind the incentives for banks to bulk up: The bank that buys another bank gets to pay everyone at the top more, and the execs of the gobbled-up bank get huge consolation prizes. And all sorts of other people are feeding at the trough too: merger & acquisition professionals, lawyers, accountants, and all sorts of consultants and integration specialists. Our reader Clive will probably tell you the folks that have it the worst who still stay on the payroll are the people in IT.

Fortunately, even without all understanding the sordid details, the great unwashed public understands that overly large banks are hard to unwind and will therefore always be propped up, and separately exercise too much political power. But whether popular support will ever become important to Trump is very much in doubt.

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1 Absent, of course, breakup costs, but don’t expect banks to give you an honest idea about that if the threat starts looking more serious.

2 Yes, most of these are plain vanilla swaps. But still, no subsidy of this sort is warranted. Taxpayers should not be backstopping capital markets activities.

Under pressure over Israel, Portland divests from all corporations

Charlotte Silver

https://electronicintifada.net/blogs/charlotte-silver/under-pressure-over-israel-portland-divests-all-corporations

Portland, Oregon, has voted to divest all city funds from corporations, in a move that is being greeted with a mixture of praise and disappointment from activists who have been pushing for a socially responsible investment policy for years.

The 5 April city council vote came after the city worked for more than two years to create a mechanism to ensure that it does not invest in corporations that are complicit in a range of abuses.

The grassroots divestment push began four years ago, when a coalition of activists came together to campaign against city investments in Wells Fargo bank and Caterpillar, corporations involved in the private prison industry and human rights abuses of Palestinians.

In December 2014, the city created the Socially Responsible Investments Committee, which was tasked with devising a “do not buy” list of corporations.

Last September, the committee published its first report, naming nine companies whose practices violate environmental, health, labor, business or human rights standards.

The report specifically cited Caterpillar’s “practice of selling custom weaponized military equipment and its involvement in human rights controversies, including direct maintenance and support of Israeli military bulldozers during attacks on Palestinian residences, orchards and other property.”

Blanket ban

But what began as a rigorous process to determine which corporations should be placed on a “do not buy” list, ended last week with a blanket prohibition on investing in any company.

Last week’s vote overcame top city officials’ attempts to continue investing in companies they see as crucial revenue streams for the city.

“This is a win,” Hyung Nam, a member of the Socially Responsible Investments Committee, told media. “The city is actually willing to lose money to their budget because they want to get out of these big corporate nightmares.”

But others regret that by imposing a blanket ban on corporate investments, the city avoids rebuking the most egregious bad actors.

“We thought it was important for the city to specifically call out corporations for violating socially responsible criteria,” Rod Such told

The Electronic Intifada.

Such, a member of the Occupation-Free Portland coalition and a regular contributor to The Electronic Intifada, said there was “a little disappointment” among the broad coalition of groups that had worked for divestment.

“Behind the scenes”

Such believes that part of the motivation to impose the blanket ban was to avoid dealing with a new campaign every year, with a new corporate target.

He also fears that some city officials wanted to avoid denouncing corporations like Caterpillar, whose equipment Israel uses as weapons against Palestinians.

“The goal was to get someone on the city council to openly make a public statement condemning Caterpillar’s role in the occupation,” Such said. “Even the most progressive member of the city council said, ‘I won’t go there.’”

“In one sense our goal was to get the city to stop investing in Caterpillar. In that sense we won,” Such said. “But in the large political sense, we didn’t win. But I think we got a step closer.”

According to Such, the Jewish Federation of Portland and the Israeli government-funded group StandWithUs testified against listing Caterpillar on the do not buy list.

The Jewish Federation says it also went into action “behind the scenes – and quietly” to defend several other companies involved in Israel’s occupation – Hewlett-Packard, G4S and Motorola.

“Victory for citizen activism”

In December 2016, the city council decided to suspend all corporate investments until the city treasury reassessed the investment policy.

At the 5 April city council meeting, Portland Mayor Ted Wheeler proposed scrapping the city’s own do not buy list and instead deferring to a New York-based ratings firm that helps identify responsible companies for city investments.

Wheeler argued that the city could not afford the loss in revenue from moving all of its investments out of corporations.

The city treasurer estimates it will cost an annual $3-5 million dollars.

About one-third of Portland’s $1.7 billion investment portfolio is currently in corporate bonds and securities.

Wheeler also said he was generally against divestment, because “he sees it as a lost opportunity to influence corporations from the inside,” according to a local report.

But city commissioner Dan Saltzman argued for an outright ban on corporate investments.

“I think it’s the wiser course to get out of the business altogether, because I don’t really want to have to do this once or twice a year, and have the same discussion over 21 companies,” Saltzman said.

In casting her vote with Saltzman, city commissioner Chloe Eudaly said, “I can’t dismiss the symbolism and meaning of Portland taking a stand on these issues.”

“This decision is a huge victory for citizen activism,” Maxine Fookson, of Jewish Voice for Peace and Occupation-Free Portland, said in a press release.

Fookson added that although activists would have preferred the city to keep its socially responsible investment policy, the decision to pull all corporate investments “at least ensures that our tax money will not be complicit in human rights violations in Israel/Palestine and elsewhere.”

EPA Chief Says US Should Exit Paris Deal

https://www.commondreams.org/news/2017/04/13/even-pruitt-its-outrageous-epa-chief-says-us-should-exit-paris-deal

"Even for Pruitt, It's Outrageous": EPA Chief Says US Should Exit Paris Deal

'Pulling out of the Paris climate accord would damage the U.S. more than it damages the Paris agreement or climate action globally'

By Nadia Prupis, staff writer

Environmental Protection Agency (EPA) chief Scott Pruitt on Thursday explicitly called for the U.S. to remove itself from the Paris climate agreement, one of his strongest remarks yet expressing his opposition to the landmark deal to keep global warming below 2°C.

"Paris is something we need to look at closely. It's something we need to exit in my opinion," Pruitt said in an interview on "Fox & Friends."

"It's a bad deal for America," he said. "It's an 'America second, third or fourth' kind of approach."

The Trump administration has already taken steps to undo landmark climate regulations, such as the executive order President Donald Trump signed last month that called for repealing former President Barack Obama's Clean Power Plan, which requires states to slash emissions and was a central component of the U.S.'s plan to meet its Paris goals.

Pruitt said adhering to the global climate treaty would cost American jobs, a claim which environmentalists—and, increasingly, even fossil fuel companies—say is wrong.

Nathaniel Keohane, the Environmental Defense Fund's vice president on global climate, told InsideClimate News that "[p]ulling out of the Paris climate accord would damage the U.S. more than it damages the Paris agreement or climate action globally."

"American leadership on climate is the key to attracting jobs and investment in the industries and sectors that will define the 21st century," Keohane said.

Tiernen Sittenfeld, senior vice president for government affairs for the League of Conservation Voters, added, "Even for Scott Pruitt, this is outrageous and beyond the pale."

"The U.S. helped to lead the world on this treaty and it's clear that other countries are moving ahead because they see the incredible opportunities it offers," Sittenfeld said.

Kim Glas, executive director of the BlueGreen Alliance, a coalition of labor and environmental groups, also said Thursday, "Administrator Pruitt's statements are unsurprising. He just can't seem to grasp what the vast majority of Americans and scientists have already figured out: climate change is real, it is happening now and human activities are causing it."

The Paris agreement "is a good deal for America," Glas said. "It will help ensure that America leads the way globally in creating quality jobs designing, manufacturing, and installing the clean energy technologies needed to reduce the carbon pollution that is driving climate change."