Sunday, November 30, 2008

Rate War

"Banks across the U.S. are engaged in a heated competition for deposits as the battered industry tries to shore up its funding sources. ... The result is a boon for consumers hungry for higher returns as the stock market lurches. But the moves are causing pain for large and small banks across the U.S. by squeezing their profit margins. ... But the scramble for deposits also poses a dilemma for lenders. Banks that don't boost interest rates to keep up with rival institutions will find it harder to attract money that can be funnelled into loans. ... Citigroup's chief financial officer, Gary Crittenden [GC], said the company has a wide array of funding sources world-wide that it can tap. He said Citigroup's high rates on U.S. deposits are worthwhile because they're still cheaper than other types of financing available to the company", David Enrich at the WSJ, 14 November 2008.

Isn't GC smart? Hey Pandit, how much do you pay this guy? Whatever it is, it's too much. Even GC figured out Citigroup is better off paying less than more for deposits. Wow! Interest rates are too low!


Printfaster said...

Let's see, interest rates are rising not because demand for loans is rising, but because loans are failing and the banks need cash to cover losses. Furthermore, with rising interest rates on deposits, the only loans that are profitable are very risky, high yield loans.

Hmmm. This is really ugly.
Liquidity trap? Banking collapse?

This is why having loans emerge from money centers is a very bad idea. I can remember the "It's a Wonderful Life" days when banks were all small town, and the bank president would shake my hand for a new car loan. The banker knew you. These days loans are stuffed into SIVs, CDOs, warehoused, and packaged. Statistics are being used to replace good sense.

Idiots. Time to dissolve the money center banks, reassert Glass-Steagall, and charter local banks. I do not think it would be a bad idea to limit bank capitalization to something around 1 billion dollars. Anything larger gets broken up by antitrust.

The large industrial capitalizations would go to investment banks, but would not mix consumer and small business banking with industrial banking.

Small banking has a different view of profit loss. Take the simple example of loaning to a barbershop to start up. Here the same bank would have loans to the building owner, the homeowners, and local business owners. The barbershop would increase the value of the property, local businesses and homes. A local bank can balance risk through means unavailable to large money center banks, and can make a better evaluation of the risk. Money center banks would be likely to lend to a second barbershop because of all the statistics that they get on the barbershop business, ignoring its effects on the local economy.

Admittedly, there is a huge overlay of cronyism in small town banking, but even that is limited, because locals would not put up with it. It becomes simply too visible. Current cronyism in Wall Street is largely invisible and uncontrollable, and not subject to shame.

Anonymous said...

Printfaster should write bank policy. I'll start an interbank market for small banks. I like the market cap caps. Chop up Citi.

Independent Accountant said...

I agree with you on Glass-Steagall. I considered your other suggestion from the "total asset" side and for about ten years, have favored an annual computation of total bank assets. Once done, I would prohibit any bank from having total assets over 1% of all bank assets. There should not be any "TBTF" banks.
I remember Jimmy Stewart's movie. 1946, I believe. I don't think the problem is the existence of money center banks, as in the "old days" you had small banks which had "correspondent" relationships with the large ones. The problem is the loan originators can package up garbage and sell it to "mullets". As long as they can sell bad loans, banks don't care who they lend to. Did you read Yves Smith's post on Robert Rubin at Naked Capitalism? If not, do so. That's an order!

I agree, Citigroup should be carved up like a Thanksgiving turkey.

Krupo said...

I was, and still feel, baffled when I learned about the American banking system.

In Canada we have 5 big banks, plus an array of smaller banks and credit unions.

This whole "break it up by region" thing in the US is odd, but then, so is the lack of strong regulations (which our banks fight against often, but which the recent credit market implosions indicate, aren't really such a Bad Thing after all).

Independent Accountant said...

Ever since Alexander Hamilton and Thomas Jefferson, the United States has fought over banking policy. The Jeffersonians wanted small banks lest the banks get too much political power. Great Britain and Canada have been under the sway of the Bank of England (BOE) since 1694. I say: kill the big banks. They are an instrument of class oppression. The Brits should throw off their chains and liberate themselves from the BOE too! It may seem strange to you, because you have always lived under such a regime. We don't need big banks.
As for central banks, read Karl Marx "Communist Manifesto", Plank Five! Marx favored a central bank, understanding it could be used to redistribute wealth. I do not favor "strong" banking regulations. I favor BRUTALLY forcing insolvent banks into bankuptcy and ruining their managements. It should be presumed that if a deposit taking institution fails, its management was criminal. You would be amazed how carefully banks would be run if their managements were afraid of going to prison.

Printfaster said...

Looks like we have company in breaking up big banks:

Wonder if anyone reads this blog.

Independent Accountant said...

To answer your question, yes. Naked Capitalism (NC) is one of my two favorite blogs. I link to it once or twice a week as Yves Smith, NC's author, will write what I planned to write on a topic and saves me the effort. Sometimes she uses the words I had in mind. It's eerie reading YS at times. NC has 1,996 Technorati authority points, making it the 487th most popular blog of the 110 million Technorati monitors. NC gets 35,712 daily page views according to Gongol, making it the fourth most popular economics blog. It's one of my daily "must reads".

Printfaster said...

OK, the dollar has finally ordered its headstone. It is really dead, from Goldman:
“We’ve seen that there is a market for government- guaranteed debt in euros”
What he is really saying is:
“We’ve seen that there is no market for government- guaranteed debt in dollars”

What is really funny is that this is FDIC insured since now Goldman is an FDIC bank. What is the limit to treasury liability? Sky is the limit.

Hardy har, har

Independent Accountant said...

Not so fast. See my 8 November 2007 post which mentions Roosa bonds.

Printfaster said...

Read your post on Roosa bonds.

I have to say the Goldman move has far greater implication, and scope.
Here is why.

FDIC loan activity under this scheme is neither limited nor viewable. If T were to issue Roosa's the numbers would be posted weekly. The amount of FDIC insured Euro debt would never be visible.

GS issuing FDIC Euro debt is a big, big, deal. It basically says the US banking system has gone belly up.