Home » Posts tagged 'citi'
Tag Archives: citi
“Too Big To Fail” … Fails
Bloomberg reports that Citigroup has failed the Fed’s new round of stress tests:
Citigroup Inc.’s capital plan was among five that failed Federal Reserve stress tests, while Goldman Sachs Group Inc. and Bank of America Corp. passed only after reducing their requests for buybacks and dividends.
Citigroup, as well as U.S. units of Royal Bank of Scotland Group Plc, HSBC Holdings Plc and Banco Santander SA, failed because of qualitative concerns about their processes, the Fed said today in a statement. Zions Bancorporation was rejected as its capital fell below the minimum required. The central bank approved plans for 25 banks.
And former FDIC chief Sheila Bair said that the whole bailout thing was really focused on bringing a very dead Citi back from the grave.
For example, the New York Times wrote in 2009:
Over the past 80 years, the United States government has engineered not one, not two, not three, but at least four rescues of the institution now known as Citigroup.
So why did the U.S. government give Citi a passing grade in previous stress tests?
Because they were rigged to give all of the students an “A”.
Time Magazine called then Secretary Treasury Tim Geithner a “con man” and the stress tests a “confidence game” because those tests were so inaccurate.
But the bigger story is that absolutely nothing was done to address the causes of the 2008 financial crisis, or to fix the system:
- Even though everyone knows that breaking up the big banks is essential to stabilizing the economy, it hasn’t happened. Indeed, they’re bigger than ever
- The faulty incentive system – huge bonuses that encourage reckless risk-taking by bankers – arestill here
- Even though rampant speculation helped destabilize the economy, speculation has shot through the roof
- Another big problem – shadow banking – has only gotten worse
- Derivatives? Washington has poured gasoline on the fire
- Cracking down on fraud and holding criminals accountable is perhaps the most important thing to fix the economy. So has this happened? Nope … just phony P.R.
Remember, Nobel prize winning economist George Akerlof has demonstrated that failure to punish white collar criminals – and instead bailing them out- creates incentives for more economic crimes and further destruction of the economy in the future.
Indeed, professor of law and economics (and chief S&L prosecutor) William Black notes that we’ve known of this dynamic for “hundreds of years”. (Actually, the government has ignored severalthousand years of economic wisdom.)
Heck of a job, guys …
Bernanke’s Legacy: A Record $1.3 Trillion In Excess Deposits Over Loans At The “Big 4” Banks | Zero Hedge
The history books on Bernanke’s legacy have not even been started, and while the euphoria over the Fed’s balance sheet expansion to a ridiculous $4 trillion or about 25% of the US GDP has been well-telegraphed and manifests itself in a record high stock market and a matching record disparity between the haves and the have nots, there is never such a thing as a free lunch… or else the Fed should be crucified for not monetizing all debt since its inception over 100 years ago – just think of all the foregone “wealth effect.” Sarcasm aside, one thing that can be quantified and that few are talking about is the unprecedented, and record, amount of “deposits” held at US commercial banks over loans.
Naturally, these are not deposits in the conventional sense, but merely the balance sheet liability manifestation of the Fed’s excess reserves parked at banks. And as our readers know well by now (hereand here) it is these “excess deposits” that the Banks have used to run up risk in various permutations, most notably as the JPM CIO demonstrated, by attempting to corner various markets and other still unknown pathways, using the Fed’s excess liquidity as a source of initial and maintenance margin on synthetic positions.
So how does the record mismatch between deposits and loans look like? Well, for the Big 4 US banks, JPM, Wells, BofA and Citi it looks as follows.
What the above chart simply shows is the breakdown in the Excess Deposit over Loan series, which is shown in the chart below, which tracks the historical change in commercial bank loans and deposits. What is immediately obvious is that while loans and deposits moved hand in hand for most of history, starting with the collapse of Lehman loan creation has been virtually non-existent (total loans are now at levels seen at the time of Lehman’s collapse) while deposits have risen to just about $10 trillion. It is here that the Fed’s excess reserves have gone – the delta between the two is almost precisely the total amount of reserves injected by the Fed since the Lehman crisis.
As for the location of the remainder of the Fed-created excess reserves? Why it is held by none other than foreign banks operating in the US.
So what does all of this mean? In a nutshell, with the Fed now tapering QE and deposit formation slowing, banks will have no choice but to issue loans to offset the lack of outside money injection by the Fed. In other words, while bank “deposits” have already experienced the benefit of “future inflation”, and have manifested it in the stock market, it is now the turn of the matching asset to catch up. Which also means that while “deposit” growth (i.e., parked reserves) in the future will slow to a trickle, banks will have no choice but to flood the country with $2.5 trillion in loans, or a third of the currently outstanding loans, just to catch up to the head start provided by the Fed!
It is this loan creation that will jump start inside money and the flow through to the economy, resulting in the long-overdue growth. It is also this loan creation that means banks will no longer speculate as prop traders with the excess liquidity but go back to their roots as lenders. Most importantly, once banks launch this wholesale lending effort, it is then and only then that the true pernicious inflation from what the Fed has done in the past 5 years will finally rear its ugly head.
Finally, it is then that Bernanke’s legendary statement that he can “contain inflation in 15 minutes” will truly be tested. Which perhaps explains why he can’t wait to be as far away from the Marriner Eccles building as possible when the long-overdue reaction to his actions finally hits. Which is smart: now it is all Yellen responsibility.