The Fourteenth Banker Blog

January 19, 2011

Institutional Deeds, Personal Choices

Filed under: Running Commentary — thefourteenthbanker @ 11:55 AM

H/T Credit Writedowns for this piece addressing causation of our economic malaise. The gist is that the problem is neither the business cycle nor structural imbalances.  Quoting Harold Meyerson of the Washington Post:

This grim new reality has yet to inform our debate over how to come back from this mega-recession. Those who believe our downturn is cyclical argue that job-creating public spending can restore us to prosperity, while those who believe it’s structural – that we have too many carpenters, say, and not enough nurses – believe that we should leave things be while American workers acquire new skills and enter different lines of work. But there’s a third way to look at the recession: that it’s institutional, that it’s the consequence of the decisions by leading banks and corporations to stop investing in the job-creating enterprises that were the key to broadly shared prosperity.

While I agree with this premise, we need to share the blame a little more broadly. Large banks and corporations are filling a vacuum. Yes, they help create the forces that create the vacuum, but nevertheless it is our inability to govern ourselves politically, financially, or consumptively  that allows the collective to go down a path that in retrospect was foolish. We did more in an intentional fashion to build the export machines of Japan and Germany than we did to build our own. We allowed other nations to be more frugal and save and invest while we spent and borrowed. We allowed our education system to become mediocre for a country of our prosperity. We let the free market misallocate our resources while China had an industrial policy that has created a relative competitive advantage in manufacturing that will be very hard of us to rebalance. Let me come back to culpability.

CR digs deeper on changes in family income over the last 60 years. Basically we had 30 years of income growth that was across the spectrum of income levels. Then, for the last 30, we have had disproportionate income growth among the very wealthy and relative stagnancy among the vast majority.

For thirty years after World War II the wealth of the country increased in a balanced manner. The average income containing the greater contribution from the top earners of the day, grew at a rate very similar to the income growth of the broader population, represented by the median.

Yes there were “fat cats” and they had significantly larger incomes than the bulk of the population. And these top incomes grew over those three decades, but at almost the same rate as the majority of the populace.

Then something happened. From 1979-2009 it appears that the American pie suddenly got smaller. In the later three decades the real median income growth was less than 10% of the rate seen from 1949 to 1979. And as the pie got smaller, the fat cats took a much larger share. The average income grew at a rate 254% that of the median income. You might say that, as the cow gave less milk, the top of the economic ladder skimmed more and more cream off the top.

Meyerson identifies the force majuere to be corporate America:

Our multinational companies still invest, of course – just not at home. A study by the Business Roundtable and the U.S. Council Foundation found that the share of the profits of U.S.-based multinationals that came from their foreign affiliates had increased from 17 percent in 1977 and 27 percent in 1994 to 48.6 percent in 2006. As the companies’ revenue from abroad has increased, their dependence on American consumers has diminished. The equilibrium among production, wages and purchasing power – the equilibrium that Henry Ford famously recognized when he upped his workers’ pay to an unheard-of $5 a day in 1913 so they could afford to buy the cars they made, the equilibrium that became the model for 20th-century American capitalism – has been shattered. Making and selling their goods abroad, U.S. multinationals can slash their workforces and reduce their wages at home while retaining their revenue and increasing their profits. And that’s exactly what they’ve done.

Yes, this is what they have done. And “they” are responsible. Yet, “they” are a reflection of us. “They” have filled the vacuum that we left for them. Granted, we stupidly did not know that this is what they would do.

So now we stand at a point in time. The headlines of the last few days have shown that our largest banks have a big interest in Facebook and Groupon. These are quick scores. They are to be sold to investors that are also looking for quick scores. The banks skim the fees and the investors look for a fast bounce and then get out before the next technological innovation, leaving the slow witted holding the bag while the company valuations eventually decline.

Are you powerless over this allocation of resources? No. These allocations of resources are based on anticipated revenue streams from the participation of the masses, the shrinking middle and growing underclasses in spending their time and resources reflexively on what these services promote. I am not saying they are all bad? They are a reflection of us. Our desire to communicate and affiliate is not a bad thing. But is our way of going about it the best way? Is a ‘not bad’ thing the same as a good thing?

What could you do intentionally to change your future? I have no ill-will for Groupon or its founders. But I promise you that if there is a net 20% decrease in subscribers, Wall Street will not allocate those resources that direction. If instead you buy a small solar panel, Wall Street will allocate resources in that direction.

Let’s begin making conscious choices to make our future better.


January 15, 2011


Filed under: Running Commentary — thefourteenthbanker @ 5:20 PM

Does humanity have the ability to be intentional in its evolution?  Consider this.

Forcing consumers to use domestically produced ethanol is one of the single biggest boondoggles ever committed by the corrupt brainless twits in Washington DC. Ethanol prices have soared 30% in the last year as the supplies of corn have plunged. Only a policy created in Washington DC could drive up the prices of gasoline and food, with the added benefits of costing the American taxpayer billions in tax subsidies and killing people in 3rd world countries.

The grand lame duck Congress tax compromise extended a 45-cent incentive to ethanol refiners for each gallon of the fuel blended with gasoline and renewed a 54-cent tariff on Brazilian imports. The extension of these subsidies, besides costing American taxpayers $6 billion per year, has the added benefit of driving up food costs across the globe, causing food riots in Tunisia, and resulting in the starving of poor peasants throughout the world.

What are the economics of Ethanol?

Ronald R. Cooke, author of Oil, Jihad & Destiny,created the chart below to estimate the true cost for a gallon of corn ethanol. Cooke describes a true taxpayer boondoggle:

It costs money to store, transport and blend ethanol with gasoline. Since ethanol absorbs water, and water is corrosive to pipeline components, it must be transported by tanker to the distribution point where it is blended with gasoline for delivery to your gas station. That’s expensive transportation. It costs more to make a gasoline that can be blended with ethanol. Ethanol is lost through vaporization and contamination during this process. Gasoline/ethanol fuel blends that have been contaminated with water degrade the efficiency of combustion. E-85 ethanol is corrosive to the seals and fuel systems of most of our existing engines (including boats, generators, lawn mowers, hand power tools, etc.), and can not be dispensed through existing gas station pumps. And finally, ethanol has about 30 percent less energy per gallon than gasoline. That means the fuel economy of a vehicle running on E-85 will be about 25% less than a comparable vehicle running on gasoline.

Real Cost For A Gallon Of Corn Ethanol

Corn Ethanol Futures Market quote for January 2011 Delivery $2.46
Add cost of transporting, storing and blending corn ethanol $0.28
Added cost of making gasoline that can be blended with corn ethanol $0.09
Add cost of subsidies paid to blender $0.45
Total Direct Costs per Gallon $3.28
Added cost from waste $0.40
Added cost from damage to infrastructure and user’s engine $0.06
Total Indirect Costs per Gallon $0.46
Added cost of lost energy $1.27
Added cost of food (American family of four) $1.79
Total Social Costs $3.06
Total Cost of Corn Ethanol @ 85% Blend $6.80


The 107 million tons of grain that went to U.S. ethanol distilleries in 2009 was enough to feed 330 million people for one year at average world consumption levels. More than a quarter of the total U.S. grain crop was turned into ethanol to fuel cars last year.

So what is going on in the rest of the world? According to this journalist, we are getting to the point where there will not be enough food, period. It is not a matter of surpluses in one place and shortages in another. We are looking at the possibility of shortages, period.

So is our ethanol policy wise? Or is it a result of the power of politics and business?

Do we have the ability to evolve and be intentional to bring about change in these power dynamics and institute sensible policies?




January 10, 2011


Filed under: Running Commentary — thefourteenthbanker @ 7:26 PM

I just want to share a simple concept that underscores the nature of mega-banking today. For years the banks have suffered from significant customer attrition, that is, customers that leave. Years ago this was a matter of some concern.

However, in the 2000’s, the largest banks achieved dominant distribution and scale advantages which, along with the TBTF cost of funds subsidies, made business production relatively easy. Now, I am not commenting on the quality of much of that business. I am just saying it could be acquired, revenues booked, and bonuses paid.

So while the actual figures would differ at each bank, let’s say you acquire new retail customers equal to 30% of your book and lose customers equal to 20% of your book.  That would be a net gain customer gain of 10%.

Here’s the kicker. If you could bring that production in, but focus the customer attrition on the least profitable customers, you could grow earnings at more than 10%. Voila, lots of book profits to pay bonuses on. Once you squeeze the maximum profits out of a client, if there is not much else to be had, you just treat the client poorly and if they leave, so what? Retention efforts are focused on the highest monetary value clients and the rest are left to mostly self-service through what are called the “least cost” channels.  These are internet, offshore 800 numbers, and getting shuffled away from overworked branch staff.

The customer has no value as a human being, but is just an economic widget.  So if you feel widgetized, it was probably intentional.

Why do I bring this up today? I have some accounts at a bank and would be a reasonably profitable customer for them. Occasionally I try to change something to simplify or optimize or to set something up for my kids. Every time I do this, once a year or so, my “packaged account” gets modified and somehow one of the accounts is left out of my list of free accounts. Then I get hit with a fee. It is the systems that do it. I either have to go to great trouble to get a refund, or just live with it. So if I, probably in the top 20% of their retail customers as far as balances go, experience this, I hate to think what happens to the other 80%. I suppose they have the same problems but can’t get the refund at all.

January 9, 2011

Simon Johnson on Bill Daley Appointment

Filed under: Running Commentary — thefourteenthbanker @ 12:55 PM

Simon wrote a direct and balanced response to the appointment of Bill Daley. Here is the problem as he sees it, with a focus on systemic risk:

Today’s most dangerous government sponsored enterprises are the largest six bank holding companies: JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley.  They are undoubtedly too big to fail – if they were on the brink of failure, they would be rescued by the government, in the sense that their creditors would be protected 100 percent.  The market knows this and, as a result, these large institutions can borrow more cheaply than their smaller competitors.  This lets them stay big and – amazingly – get bigger.

In the latest available data (Q3 of 2010), the big 6 had assets worth 64 percent of GDP.  This is up from before the crisis – assets in the big six at the end of 2006 were only about 55 percent of GDP.  And this is up massively from 1995, when these same banks (some of which had different names back then) were only 17 percent of GDP.

And what do we get as a society for having a massive “bet” on these banks?

No one can show significant social benefits from the increase in bank size, leverage, and overall riskiness over the past 15 years.  The social costs of these banks – and their complete capture of the regulatory apparatus – are apparent in the worst recession and slowest recovery since the 1930s.

As regards the appointment itself, it raises this question:

This is not a left-right issue – again, look at the list of people who co-signed Professor Admati’s recent letter to the Financial Times.  This is a question of technical competence.  Do the people running the country – including both the executive branch and the legislature – understand economics and finance or not?

If the country’s most distinguished nuclear scientists told you, clearly and very publicly, that they now realize a leading reactor design is very dangerous, would you and your politicians stop to listen?  Yet our political leadership brush aside concerns about the way big banks operate.  Why?

And for the rest of us, here is the issue.

Most smart people in the nonfinancial world understand that the big banks have become profoundly damaging to the rest of the private sector.

If I slip into a fantasy for a moment, I can picture a patriot in Bill Daley’s position stepping up to the moment and saying that from his stint in the financial sector, he now has a full grasp on the dysfunction in the banking system. And that as a matter of national priority, the President intends to lead a continued and informed effort to both dismantle the current structure and build a constructive structure in its place. End of fantasy.



January 7, 2011

So Bill Daley, Who’s Your Daddy?

Filed under: Running Commentary — thefourteenthbanker @ 7:26 AM

Yesterday President Obama heralded his newly appointed Chief of Staff, to great fanfare from the Republicans, US Chamber of Commerce, Wall Street Journal and others. According to the Wall Street Journal,

The selection of Mr. Daley shows that the president is more concerned with reaching out to the independent voters and to the Republicans who now control the House and have greater numbers in the Senate.

Per CNN,

Daley is the son of legendary Chicago Mayor Richard J. Daley and brother of the city’s current mayor, Richard M. Daley. He runs Midwest operations for the investment bank JP Morgan Chase, and his appointment is expected to help patch up Obama’s frosty relations with the business community after nasty battles over health care reform, taxes and government regulations.

So I am open-minded about this. Clearly Obama needs a change in program and needs someone who can reach across the aisle. But reaching across the aisle is not the same as capitulating.

Even the Huffington Post reporting is fairly sanguine on this.

Daley, the son and brother of Chicago mayors, has always been the Inside Daley, the one who deals quietly with the powers that be in the city and country — the brokers of money, commerce, family and tribal politics.

Daley is an ancestral Democrat, which means that he believes in the government’s role in helping people survive and live a decent life. He is an Irishman through and through, with a fierce faith in friends and loyalty. He is a big-city guy, at home in big-city haunts.

But he is not an ideologue of the left or right. He helped Bill Clinton pass free-trade agreements, even though Democratic union bosses hated them. Now a banker, he opposed some provisions of the bank-reform bill. He also expressed skepticism about the political and substantive wisdom of Obama’s spending a year on health care reform. He’s not for government for government’s sake.

The question for Daley is “who’s your daddy?” The revolving door between Wall Street and Washington power elites is still revolving. His predecessors have proven to be lap-dogs. As a big bank insider, Daley knows. He knows the games being played. He knows the scare tactics used to manipulate Washington for what they are, scare tactics designed to keep the status quo. He knows the business tactics and the business ethics. He knows the compensation structure and what it incents. He knows what management really cares about. He knows why executives shun shareholder empowerment. He knows why they offshore so many jobs. He knows why trading operations are housed where they are and how trans-national banks play the regulatory arbitrage game globally. He knows if the books are cooked. He knows if Primary Dealers get a heads up on Fed market actions and why they win in trading virtually every day, whichever way the markets move. He knows if they trade against their customers. He knows why they fight transparency. He knows why they fear Elizabeth Warren and may attempt to castrate her budget.

With this knowledge comes a greater responsibility.

Our financial system is past its prime. It is not longer suitable for the evolving society. So will Daley stand for the entrenched interests, or muster the courage to help the President usher in a new age by rigorous enforcement and funding of Dodd-Frank, such as it is, and by pressing for additional measures to close gaps in the legislation? Should a new crisis emerge, will he allow the process of creative destruction to take place with adequate systemic safeguards as proposed by Bill Black and Randall Wray? Will he permit bondholders to take the haircuts their risks and rewards warrant or will he support the big bank subsidy of implicit TBTF status?

Bill Daley, who’s your daddy?

January 4, 2011

Bank of America Settlement

Filed under: Running Commentary — thefourteenthbanker @ 11:02 AM

So what to make of the Bank of America settlement reported yesterday? At first blush, it appears to be another backdoor bailout of this TBTF bank. According to Barry Ritzholtz, the settlement amounts to 1 cent on the dollar of potential put back claims.

A premium of $1.28 billion was paid to Freddie Mac to resolve $1 billion in claims currently outstanding. But the kicker is that the deal also covers potential future claims on $127 billion in loans sold by Countrywide through 2008. That amounts to 1 cent on the dollar to Freddie Mac.

The stock market cheered with B of A shares up 6.4% on the day on the belief that this settlement helps “size” the remaining settlements the bank will have to make.

According to the Wall Street Journal,

…some investors wonder if Fannie and Freddie actually got the best deal possible, or where looking to help reduce the unease around mortgage-repurchase risk that has dogged financial institutions and B of A in particular.

Brian Moynihan, CEO of B of A, may have nailed it best in his cryptic statement, “These actions resolve substantial legacy issues in the best interest of our shareholders,”

Taking that at face value, B of A won the negotiation in favor of its shareholders and against the shareholders of Fannie and Freddie, that is, us.

This particular fraud is just one fraud. One of the better write-ups recently was by Zero Hedge and has to do with the representations made by B of A in the sale of MBS to Allstate, which is representative of sales of MBS to everybody under the sun. Allstate has filed suit against B of A on the basis that the quality of the securities and the mortgages in the securities was appreciably less than represented. In other words, there were already embedded losses in the securities and B of A knew it and sold it to a trusting buyer.

To sum it up, nothing new to report here.



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