Excess Reserves Provide $38 Billion In Riskless Bank Profits A Year

By Anthony B. Sanders

No one was expecting any interest rate changes from The Federal Reserve yesterday, but I was hoping that The Fed was going to announce a reversal in their policy of paying interest to banks for depositing their excess reserves with The Fed as opposed to lending it out to businesses and individuals.

(Bloomberg) — The Federal Reserve left interest rates unchanged and stayed on course to hike in December despite recent jitters in financial markets and a critical president.

The U.S. central bank said “economic activity has been rising at a strong rate” and job gains “have been strong,” acknowledging a drop in the unemployment rate, while repeating its outlook for “further gradual” rate increases in its statement Thursday following a two-day meeting in Washington.

Risks to the outlook appear “roughly balanced,” the Federal Open Market Committee said, leaving that language unchanged from the prior meeting in late September. Inflation expectations, which have slipped slightly in recent weeks according to some measures, were described as “little changed, on balance,” the same as in the last statement.

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Well, if risk is so roughly balanced, why do banks still have so much money parked at The Federal Reserve in the form of Excess Reserves?

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M1 Money Multiplier FINALLY Exceeds 1.0

By Anthony B. Sanders

As Banks Reduce Their Excessive Reserves

It has been an agonizing 10 years since the housing bubble collapse and the financial crisis, not mention a surge in banking regulations such as Dodd-Frank and the creation of the Consumer Financial Protection Bureau.

But 10 years after, the M1 Money Multiplier has FINALLY broken through the 1.0 barrier.

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The M1 Multiplier means that every dollar created by the FED (an increase in the monetary base M0) will result in a <1 dollar increase of the money supply (M1), as is evident from the figure below. So, the credit and deposit creation of commercial banks is limited in this case. The banks are still holding on to a lot of excess reserves, but that amount is finally starting to comedown so that the M1 Money Multiplier has finally broken the 1.0 barrier.

Continue reading M1 Money Multiplier FINALLY Exceeds 1.0

Wall Street Competes With Unregulated Banks for the Riskiest Loans

By Anthony B. Sanders

Fewer Mortgage Originations, More C&I Lending From Banks

When compared to the 2000s, commercial banks have largely changed their mix of lending from single-family mortgage originations to business (commercial and industrial) lending. “Unregulated” entities like Quicken and PennyMac Mortgage Investment Trust have picked up share in the single-family mortgage origination space.
On one side are major banks, which are diving back into high-risk corporate lending now that U.S. regulators have loosened up.On the other are so-called shadow lenders — private equity shops, boutique banks and other financial players that muscled in on this business when regulators restrained the big banks five years ago.The result: ever-growing competition to provide junk-rated debt used in corporate takeovers. It could turn out to be a “race to the bottom,” said Frank Ossino, a senior portfolio manager at Newfleet Asset Management in Hartford, Connecticut.For the $2.3 trillion-plus market in junk bonds and leveraged loans, the question is whether all this competition ultimately brings new, greater risks. Underwriters have already been piling more and more leverage onto companies and watering down various protections for investors. Much of that debt is being packaged into complicated structured investments at a pace reminiscent of the subprime boom a decade ago.

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Continue reading Wall Street Competes With Unregulated Banks for the Riskiest Loans

Tank de la Bank

By Tim Knight

As I trust I have made clear, the financial sector is a favorite right now for shorting. This chart of the XLF is, based on over 30 years of staring at charts, one of the most exciting and enticing opportunities I have ever laid eyes on. The analog and breakdown have, thus far, been spot-on.

As the earnings season kicks off, some of the earliest reporters are big banks like Wells Fargo and Citigroup. I was thus eager to see this morning how pre-market trading was going now that their earnings are released. It’s a step in the right direction.

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In Dodd We Trust

By Tim Knight

What is it with Texas politicians and the banking industry?

I thought Texans were supposed to be all about cattle and oil. Yet over the decades it seems like they are first in line, shoving themselves even in front of New Yorkers, to provide whatever aid, assistance, and comfort that big banks require. It’s bizarre.

The most famous example, of course, being the Gramm–Leach–Bliley Act in 1999, championed by this genius:

When public “servants” are whoring themselves out to any particular industry, they couch it in the mask of freedom and progress. This was no exception, as Senator Gramm said at the time:

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Curse of the Zombie Junk

By Jeffrey Snider

If the road to Hell is paved with good intentions, in economic terms the paving is done by zombies. We’ve all heard of the convention regarding Japanification. In desperation trying to avoid a worse fate, many of Japan’s tortured financial institutions were left open and operating so as to not force losses too much at a time. Rather than allow for recovery, these zombie banks locked Japan’s economy into its so-called deflationary mindset from which it has yet to escape almost three decades later.

Zombie banks were not the only undead firms in Japan’s lasting fall. These eventually gave way to a proliferation of zombie firms, largely industrial, who made up the vast majority of that country’s NPL problem lingering well into the 21st century. Firms that creative destruction would have destroyed long ago were purposefully propped up often on official approval simply because central bankers fear 1929 as if that is the only route to long-lasting depression.

Just as the global economy has exhibited the same symptoms as Japan’s did in the nineties, starting with one lost decade for it already, several OECD researchers last year raised the zombie issue in the non-financial context (at least with regard to Europe).

Policies that spur more efficient corporate restructuring can revive productivity growth by targeting three inter-related sources of labour productivity weakness: the survival of “zombie” firms (low productivity firms that would typically exit in a competitive market), capital misallocation and stalling technological diffusion…As the zombie firm problem may partly stem from bank forbearance, complementary reforms to insolvency regimes are essential to ensure that a more aggressive policy to resolve non-performing loans is effective.

In places like Italy where Italian banks are bursting with NPL’s, there is an obvious link between them and Italy’s descent into further upheaval.

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Phone Call from a Bank Manipulator, Special Report 1 April

By Keith Weiner

This topic is so timely and so important, that we publish this special report in lieu of our normal weekly Supply and Demand Report.

After our recent article debunking manipulation, we got a phone call from a man whom we will call Jim Bailey (all names have been changed to protect the innocent and the guilty). Jim worked on the London gold desk at a major financial institution. He told us that a lot of what we said was spot on. However, he said in no uncertain terms that manipulation does occur. Here is Jim’s story, as related to us by phone on Friday.

It was seven years ago, today. Lord Horace Abernathy came into our office. I knew of Abernathy, of course, he was my boss’ boss’ boss. A power broker, his value to the bank was not so much in his managerial skills, but his connections in government. His seat in the House of Lords was invaluable.

He did not ask after the traders’ health, or make any other small talk. He is a Lord and traders are mere peasants. He just said, “Chancellor Osborne needs you to make silver go down.”

There was a long silence, as nearly a score of traders gaped at each other.

“Gold too, of course.”
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