Just about every major banker and finance minister in the world is meeting in Washington, DC, this week, following two rushed, secretive meetings of the Federal Reserve and another instantaneous and rare meeting between the Fed Chair and the president of the United States. These and other emergency bank meetings around the world cause one to wonder what is going down. Let’s start with a bullet list of the week’s big-bank events:
- The Federal Reserve Board of Governors just held an “expedited special meeting” on Monday in closed-door session.
- The White House made an immediate announcement that the president was going to meet with Fed Chair Janet Yellen right after Monday’s special meeting and that Vice President Biden would be joining them.
- The Federal Reserve very shortly posted an announcement of another expedited closed-door meeting for Tuesday for the specific purpose of “bank supervision.”
- A G-20 meeting of finance ministers and central-bank heads starts in Washington, DC, on Tuesday, too, and continues through Wednesday.
- Then on Thursday the World Bank and the International Monetary Fund meet in Washington.
- The Federal Reserve Bank of Atlanta just revised US GDP growth for the first quarter to the precipice of recession at 0.1%.
- US banks are widely expected this week to report their worst quarter financially since the start of the Great Recession.
- The European Union’s new “bail-in” procedures for failing banks were employed for the first time with Austrian bank Heta Asset Resolution AG.
- Italy’s minister of finance called an emergency meeting of Italian bankers to engage “last resort” measures for dealing with 360-billion euros of bad loans in banks that have only 50 billion in capital.
President Obama’s meeting with Fed Chair Yellen
It is rare for presidents to meet with the chair of the Federal Reserve. The last time President Obama met with Janet Yellen was in November of 2014, a year and a half ago. It is even more rare for the vice president of the United States to join them. In fact, I’ve heard but haven’t verified that it has never happened in a suddenly called meeting with the Fed before.
For security reasons, the president and vice president don’t regularly attend the same events. There are, of course, many planning sessions or emergency meetings where they do get together, but not with the head of the Federal Reserve. Emergency meetings where the VP is included in the planning session would include situations related to dire national security in case the VP winds up having to take over.
(George Bush and Dick Cheney were exceptional to the point that everyone commented on how often the VP was included in meetings with the president, but I always figured that was because George Bush couldn’t think and speak without Cheney acting as the ventriloquist.)
In fact the meeting with the prez and vice prez is so rare that the White House is bending over backwards to assure the entire nation that the president is not meeting with Yellen to try to influence the Fed, which is required to act independently of politics (so they claim).
According to the White House, President Obama is meeting with the Fed chair and Biden to discuss the nation’s “longer-term economic outlook,” even though Yellen just told the entire nation that the economy was strong and had arrived nearly back at “full health.” The president says they will be “comparing notes.” Do their notes about the nation’s outlook disagree? “Compare notes” sounds sufficiently vague to cover everything imaginable.
White House spokesman Josh Earnest said both Obama and Yellen are focused on ways to expand economic opportunities for the U.S. middle class. He called the meeting an opportunity for the two to “trade notes” while emphasizing that Yellen makes decisions about monetary policy independently. (SFGate)
Either such meetings are, indeed, extremely rare, or the White House doth protest to much because they spent more time this week emphasizing what the president was not going to do than what he was going to do in assuring us all that the president will not try to influence Yellen.
“The president has been pleased with the way that she has fulfilled what is a critically important job,” Earnest said. He added that Obama has “the utmost respect for the independent nature of her role.”
Earnest also said that, “even in a confidential setting” Obama would not “have a conversation that would undermine” the Fed’s ability to make “critical financial decisions independently.” I’m waiting to here the next words — “trust us!”
If such meetings with the Fed are so rare they require careful defensive explanation, why the sudden call of the meeting, oddly timed between two specially called, emergency meetings of the Fed — or, at least, “expedited” meetings of the Fed. It can’t just be that the president wants to plan what he will be saying at this week’s G-20 conference, if he’s to speak there. That kind of planning would happen in advance because one knows the conference is coming. One striking peculiarity of the president’s meeting with the Fed is that it appeared to have been called immediately after the Fed announced Monday’s “expedited” meeting of the Board of Governors.
We are in an election cycle, and I already speculated in my last article that, with the anti-establishment, Fed-hating candidates Sanders and Trump doing so well in their bids for the presidency, we could be sure the Administration would be doing all it can with the Fed to put some accelerant on this economy and forestall the recession that I believe we have already begun.
A recession would prove Trump and Sanders right in their statements about a coming recession or about the failed recovery actions of the Fed and Wall Street. So, the Fed and the President have every reason to work together to make sure an announcement of recession never happens. That could be what “comparing notes” on the economy’s future means — how do we assure the economy doesn’t fall apart in the next few months before the election since we have that common interest?
(In that case, the president is right that he will not be influencing the Fed — not in the sense of telling it what to do. He will be brainstorming with the Fed what they can both do in their own self-interest. No need for presidential persuasion or coercion because the Fed’s head is in the noose with the presidents if this economy fails.)
That would explanation why the White House is saying, in advance of any accusations, that the president isn’t trying to influence the Fed. They want to get ahead of the story. (Of course, it could just be that they recognize such rare meetings will lead to the kind of speculation I’m now brattishly doing.)
Tuesday’s specially called meeting of the Board of Governors under “expedited procedures”
Here is the announcement the Fed posted at the end of last week for Monday’s meeting (italics mine):
Advanced Notice of a Meeting under Expedited Procedures
It is anticipated that the closed meeting of the Board of Governors of the Federal Reserve System at 11:30 AM on Monday, April 11, 2016, will be held under expedited procedures, as set forth in section 26lb.7 of the Board’s Rules Regarding Public Observation of Meetings, at the Board’s offices at 20th Street and C Streets, N.W., Washington, D.C. The following items of official Board business are tentatively scheduled to be considered at that meeting.
Meeting Date: Monday, April 11, 2016
Matter(s) Considered 1. Review and determination by the Board of Governors of the advance and discount rates to be charged by the Federal Reserve Banks.
A final announcement of matters considered under expedited procedures will be available in the Board’s Freedom of Information and Public Affairs Offices and on the Board’s Web site following the closed meeting.
…Dated: April 7, 2016
The promised update after the meeting merely added,
Effective April 11, 2016, the meeting was closed to public observation by Order of the Board of Governors 1 because the matters fall under exemption(s) 9(A)(i) of the Government in the Sunshine Act (5 U.S.C. Section 552b(c)), and it was determined that the public interest did not require opening the meeting.
I’ve worked with boards for enough years to know they can always find a reason something is not in the public interest … and to know how generically they word things whenever they have a closed-door session. One day later, the Fed put out an announcement of another special meeting to be held on Tuesday, after the suddenly scheduled meeting with the president:
Advanced Notice of a Meeting under Expedited Procedures
It is anticipated that the closed meeting of the Board of Governors of the Federal Reserve System at 2:00 PM on Tuesday, April 12, 2016, will be held under expedited procedures, as set forth in section 26lb.7 of the Board’s Rules Regarding Public Observation of Meetings, at the Board’s offices at 20th Street and C Streets, N.W., Washington, D.C. The following items of official Board business are tentatively scheduled to be considered at that meeting.
Meeting Date: Tuesday, April 12, 2016
Matter(s) Considered 1. Bank Supervisory Matter
A final announcement of matters considered under expedited procedures will be available in the Board’s Freedom of Information and Public Affairs Offices and on the Board’s Web site following the closed meeting.
…Dated: April 8, 2016
O.K. Two expedited, closed meetings in a row accompanied by a meeting with the president and vice president in between, which the White House, itself, associated with these closed-door meetings, that is so rare it required special White House defense as to what would not be happening in the president’s meeting between these two sessions.
The first meeting was nominally to talk about setting interest rates, which the FOMC will be meeting to consider again later this month, having just postponed their scheduled increase in March. The second meeting is more interesting. If you have served on board or worked with boards that go into closed session, you know they always use the most generic terminology that is still truthful when announcing the meeting and when reporting in minutes what happened in the meeting.
The fact that it is a bank supervisory matter makes it sound like a particular concern, not a general discussion about supervisory policy. Something is the matter somewhere that requires an immediate meeting right after another immediate meeting … behind closed doors. That particular matter immediately requires central-bank supervision.
Boards hold closed meetings when they have to talk about specific institutions or individuals with details that they don’t want to go public. This all comes very close to sounding like some bank somewhere is in trouble, and the trouble is big enough to call a special meeting of the very august board of governors right after they just had a special meeting, and if you know these kinds of guys, they don’t like wasting their time in excessive meetings.
Naturally, I am as curious as you probably are about why so many last-minute meetings behind closed doors and with the president and vice president at a time when all major central bank heads in the world will be meeting with finance ministers in Washington, DC. So, I cast about for some possible related stories in order to what could be the matter, and I found several very hot issues going on this same week.
The recession that has already begun — Atlanta Fed revises US GDP down AGAIN!
The president’s meeting with the Fed and the Fed’s two meetings with the Fed were all called right after the Atlanta Federal Reserve Bank revised the revisions of its previous revisements to say the US economy now looks like it will report in for the first quarter at 0.1% growth.
It seems I cannot write fast enough to keep up with the Federal Reserve’s downward revisions of anticipated US GDP growth for the first quarter of 2016. No sooner did I click “publish” on my last article where I noted they had just revised their estimates of GDP down to a 0.4% growth rate than I read an article stating they have revised it again down to 0.1%!
Isn’t this where I said this quarter was going? That last number is within a rounding error of going negative and is less then the margin of error for their data. It was only back in February that the Fed anticipated a cruising speed of 2% growth for GDP in the first quarter. They have revised that number down almost every week.
Of course, the fact that the Fed and the President called an unscheduled, closed-door meeting to include the VP does not mean there is any connection between the events, and I certainly am not concluding even for myself that there is something dire happening here … but stay with me. There is more to perk the ears.
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US banks expected to report worst quarter financially since start of the Great Recession
That’s no minor announcement for a coincidence in timing. What if the numbers to be reported are even worse than has been anticipated, and the Fed is seeing bank trouble in some of those numbers, and the President has received advanced information about some of those numbers? What if they foresee turmoil as the numbers come out? All speculation on my part, of course. What isn’t speculation on my part is that Wall Street is already predicting that this week’s quarterly bank reports are going to look like the start of the Great Recession, and some pretty big players are using some pretty severe language.
Analysts say it has been the worst start to the year since the financial crisis in 2007-2008 and expect poor first-quarter results when reporting begins this week…. Analysts forecast a 20 percent decline on average in earnings from the six biggest U.S. banks, according to Thomson Reuters I/B/E/S data. Some banks, including Goldman Sachs Group Inc (GS.N), are expected to report the worst results in over ten years. (Reuters)
Whoa! That means a report for Goldman Sachs that is worse than any time just prior to or during the Great Recession! When you consider how bad the last decade has been, being worse than that is pretty bad. Moreover, the timing is considered unusually nasty:
This spells trouble for the financial sector more broadly, since banks typically generate at least a third of their annual revenue during the first three months of the year…. Bank executives have already warned investors to expect major declines…. Citigroup Inc (C.N) CFO John Gerspach said to expect trading revenue more broadly to drop 15 percent versus the first quarter of last year. JPMorgan Chase & Co’s (JPM.N) Daniel Pinto said to expect a 25 percent decline in investment banking. Several bank executives have warned about declining quality of energy sector loans.
“The first quarter is going to be ugly and we don’t think that necessarily gets recovered in the back half of the year,” said Jerry Braakman, chief investment officer of First American Trust, which owns shares of Citigroup, JPMorgan, Wells Fargo and Goldman. “There are a lot of challenges ahead.”
Yes, one of the biggest areas of bank troubles is emerging now from defaults in the energy sector that I have been saying will play a major role in birthing this banking crisis. (Translate that primarily oil and gas.)
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BofA’s Michael Contopoulos warned last week, it may be the worst default cycle in history with “cumulative losses over the length of the entire cycle could be worse than we’ve ever seen before.”
Over the weekend, the FT got the memo with a report that … said that “the global bond default rate by companies is running at its highest since 2009 with the US accounting for the vast majority, according to rating agency Standard & Poor’s. A further four defaults this week, with three coming from the troubled oil and gas sector, pushed the overall tally to 40 with a little over a quarter of 2016 done.” (Zero Hedge)
According to the Wall Street Journal, these defaults are from “massive energy loans that most investors didn’t even know about until recently.” The recovery rate of these bad debts is falling extremely fast.
The growth of the high-yield bond market allowed drillers to take on far more debt than in past booms, leaving them more vulnerable to default. The emergence of shale technology allowed companies to expand reserves and the loans backed by those properties. Some of those loans may now be underwater. (Bloomberg)
You can thank the Fed’s zero-interest-rate policy for that easy, crazy credit bubble!
Is anyone starting to feel a little financial crisis deja vù? Last time it was declining housing-sector loans. This time, as I’ve been saying for the last few months we would soon see, it’s declining energy-sector loans. Same song, different verse. Looks like all of that is now materializing.
In code words, Wells Fargo tells us that their trench-worthy report has not even begun to fully write down the bad debts or move into foreclosures that would cause write-downs: (That is, at least, what I read in public bankerspeak.)
John Shrewsberry, Wells Fargo’s chief financial officer, said on a January call with analysts. “We were working with each customer to help them work through this. It doesn’t do us any good to accelerate an issue, or to end up as the holder of a number of oil leases as a bank.”
Since we start the big-bank reporting season on Wednesday, we should know right away if this is the next leg down in the Epocalypse, but you will probably have some coded language to look through. Something as big as this would certainly merit a flash meeting with the president and vice president, multiple meetings of the board of governors, and a G-20 financial summit in Washington along with meetings with the IMF and World Bank.
Not saying that’s what it is. Just sniffing out the kinds of stories that could be related to all these meetings, some planned earlier, others suddenly and all held somewhat secretively.
Austrian bank failure echoes Great Depression
Five and a half years ago, I wrote an article here that mentioned how the Great Depression took its second and deepest plunge in 1931 because of the failure of a private Austrian bank named Credit Anstalt.
In May 1931, a Viennese bank named Credit-Anstalt failed. Founded by the famous Rothschild banking family in 1855, Credit-Anstalt was one of the most important financial institutions of the Austro-Hungarian Empire, and its failure came as a shock because it was considered impregnable…. The fall of Credit-Anstalt—and the dominoes it helped topple across Continental Europe and the confidence it shredded as far away as the U.S.—wasn’t just the failure of a bank: It was a failure of civilization. (Bloomberg)
Now, as I’ve been writing about the start of what I believe will be the the second and worst dip of the Great Recession, another Austrian bank is crumbling.
Austria created Heta Asset Resolution AG when it nationalized all the bad loans of Hypo Alpe-Adria-Bank International five years ago to rescue that bank and its depositors by creating a “bad bank” to contain the problems. It went down something like this:
Hypo Alpe-Adria bank, when it was still owned by the small Austrian state of Carinthia, was a cesspool of corruption. It involved bankers, politicians, and powerbrokers in Austria and the Balkans. It was the perfect union of money and power. Investigators found 160 instances of suspected fraud….
Six of the bank’s former executives have been convicted of crimes.
“I’m not aware of a criminal case bigger than this one,” explained Christian Böhler, whose forensics team started investigating the bank in 2011. “It was a mix of greed, criminal energy, and utter chaos.” (Wolf Street)
Hypo’s troubles began, much as Credit Anstalt’s had before it, when it was required to adjust its books to reflect the true value of its collateral assets after the value of real estate in southeastern Europe collapsed. Everything fell apart upon the realization of how little it was actually worth.
Austria’s central bank governor Ewald Nowotny and his task force recommended that Hypo’s toxic assets of €17.8 billion should be put into a “bad bank.” But to stop the drag on public finances, the federal government should not guarantee Hypo’s bonds. At the time, Austrian taxpayers had already plowed €4.8 billion into Hypo to bail out these bondholders.
He then explained on TV to incredulous Austrians that this deal would nudge the budget deficit over the 3% limit set by the Maastricht Treaty and push the government’s debt from 74.4% of GDP to 80% of GDP. This one rotten, state-owned bank in Carinthia was causing this much damage to the country’s finances!
The government, at that point, set a one-year moratorium on all payments to the “bad bank’s” bondholders.
After burning through 5.5 billion euros of taxpayer money to no avail and discovering a 7.6-billion-euro hole in its balance sheet still remained to be filled, Finance Minister Hans Joerg Schelling ended support in March 2015. Surprise, surprise, the bad bank created by the government to put a fence around all the bad debts of the original bad bank became nothing but a black hole of debt, swallowing all money poured into it with nothing to show for the effort. That didn’t stop Schelling from claiming the nationalized bank was in good health in order to put a good face on things, as leaders are inclined to do when dealing with really bad stuff in order to protect the public from a scare.
Yesterday, under the first application of Europe’s new forced “bail in” procedures, Austria ordered a haircut to the banks bondholders. Sighs. This is apparently what happens if your money is invested in a bank with “good health.”
It does, indeed, sound a tad bit like Credit Anstalt. Now the moratorium is up, and it’s time to start dishing out the bad news to the bondholders under Europe’s new rules:
Austria officially became the first European country to use a new law under the framework imposed by Bank the European Recovery and Resolution Directive to share losses of a failed bank with senior creditors as it slashed the value of debt owed by Heta Asset Resolution AG.
The highlights from the announcement…
- a 100% bail-in for all subordinated liabilities,
- a 53.98% bail-in, resulting in a 46.02% quota, for all eligible preferential liabilities,
- the cancellation of all interest payments from 01.03.2015, when HETA was placed into resolution pursuant to BaSAG,
- as well as a harmonisation of the maturities of all eligible liabilities to 31.12.2023. (SuperStation95)
This is actually some much-needed relief from how things used to work:
Throughout the Financial Crisis, and since, there has been one rule: bank bondholders will always be bailed out at the expense of everyone else. The sanctity of bank bonds reigned supreme, no matter what government and central banks had to do to keep it that way. Bank bonds weren’t allowed to be judged by the capital markets. They were simply untouchable. Underpaid and overtaxed workers would have to bail out bank bondholders when these recklessly managed banks collapsed.
That was the rule in the US when the Fed, and to a lesser extent the federal government, bailed out the banks. And that was the rule during the debt crisis in Europe. (Wolf Street cont.)
Europe’s new rules were intended to make sure that depositors did not take all the loss and that tax payers don’t absorb all the loss. Heta, because it was a government created “bad bank,” apparently does not have depositors, as it was the creditors and stock holders who were pooled into the “bad bank” who take the hit. The preferred creditors at the Austrian bank have been told they will have to take a 54% haircut, meaning the bonds they have purchased will recover forty-six cents on the euro.
The big-money (preferred) creditors of the bank, however, don’t like the new rules. They complained and are still holding out for ninety-two cents on the euro. That doesn’t bode well for anything being left for the smaller creditors, whose money will, in the very least, be kept in a lockbox for seven years because payouts to the non-Majors don’t wind up until 2023.
Major bond-holders demanding a smaller hit include Pimco, Commerzbank and the already deeply troubled Deutsche Bank. (Anybody see how things can quickly move down the line like dominoes when you consider the size of some of the worried creditors who are complaining that the hit will be too hard for them?)
The “subordinated liabilities,” as I understand the complex breakdown (for which I have been unable to find any clear definitions), appears to include bondholders who took a second position to the “preferred liabilities” in getting their money back and third-party investors in the bank. It also appears to include the partners in the bank. If so, then this is exactly how bank failures should happen. The investors are slated to lose 100% of their money first, allowing for the smaller loss by the bondholders.
It is the investors who elect the board that governs the bank and who fill the board positions and who make the decisions of who will be CEO; so, of course, they should lose all of their money before anyone else does. Creditors (bond holders) should be next, as they are often large institutions like PIMCO that have more than enough capacity to investigate risk before investing. Depositors should always be last, as most of them have no capacity whatsoever to investigate the real risk of banks and nowhere near enough money to put into a bank to make it worth a serious and useful investigation of risk. They are acting in trust … and particularly in trust that government regulators are doing their job.
Too bad the United States doesn’t operate this way!
What kind of spinoff can the settlement of Heta have to other institutions? Well, last month, the Association of German Banks had to bail out a small bank called Duesseldorfer Hypothekenbank AG because its hit as a creditor of Heta would have killed it. Though Duesseldorfer is a small bank, it was apparently deemed too big to fail because, once again, government bailouts went to the rescue.
Given that such an agreement happened on Sunday afternoon, and that central banks and regulatory bodies usually talk with other national bodies that may be affected, I have to wonder if the thought of how Europe might react on Monday had anything to do with Monday’s sudden meetings of the Fed.
Italian banks on final crash-landing approach
As if all that were not bad enough for the start of a week in banking news, Italy’s minister of finance called an emergency meeting over the past weekend of Italian bankers to engage “last resort” measures for dealing with 360-billion euros of bad loans in banks that have only 50 billion in capital.
Finance minister Pier Carlo Padoan has called a meeting in Rome on Monday with executives from Italy’s largest financial institutions to agree final details of a “last resort” bailout plan.
Yet on the eve of that gathering, concerns remain as to whether the plan will be sufficient to ringfence the weakest of Italy’s large banks….
Could that have had anything to do with the flurry of bank meetings in the US. I have no idea, but I do have to wonder, with so much smoke everywhere in the banking industry, is there a fire we need to know about? You can be sure, we’ll be the last to know, and any announcement of what’s really going down will hit like Bear Sterns or Lehman Brothers. One day, all the central bankers are talking like things are fine. The next day a major vertebrae is knocked out of the nation’s financial spine.
Or maybe presidents and central bankers are just making sure things generally hold together through the election cycle. Such a bad-news week for banks around the world certainly doesn’t sound like all is well as our smiling central bankers, president and VP, say it is. I don’t know any top secrets to reveal, but the smoke is killing me.
You can read more from David Haggith at his site The Great Recession Blog.