Financial topics

[aedens]

Most will not risk the year on this week. We can watch the quants kill the market....

[Reality Check]

I don't know about all of you, but it makes me want to vomit.

Looking at what I just posted, I'm feeling a little queasy myself.

This is my take on what might be making the more thoughtful folks on this forum ill.

The following two reports, when taken together, might explain it:


Sentinel ruling may hurt MF Global clients
By Tom Polansek and Ann Saphir
CHICAGO | Thu Aug 9, 2012 8:18pm EDT
News Service report here: http://www.reuters.com/article/2012/08/ ... 0T20120810
also here: http://www.chicagotribune.com/sns-rt-se ... 4237.story


ORDERLY LIQUIDATION OF A FAILED SIFI
SIFI = "Systemically Important Financial Institution"
March 2012
STRICTLY PRIVATE AND CONFIDENTIAL
Overview of Orderly Liquidation Authority labeled page 1 - starting on Page 2 of Linked Document
Illustrative Example of a JPMC Orderly Liquidation labeled page 8 - starting on Page 9 of Linked Document
JPMC = "J. P. Morgan Chase & Company" one of the Largest Bank Holding Company
The above report can be found on the website of Harvard Law University here: http://www.law.harvard.edu/programs/abo ... e/baer.pdf

The first report, on a Federal Appeals Court case, related to the bankruptcy of a Financial Institution in 2007, is most concerning when considered together with the second report.

The second report describes in substantial detail, but at the overview level, what will happen under the Dodd-Frank Law, passed by Congress when Nancy Pelosi was Speaker of the U.S. House of Representatives and Harry Reid was Majority Leader of the U.S. Senate ( the vote in both houses was along party lines with only 3 Republican in each body voting with the Democrats ). This description includes the recently adopted financial system regulations written by the Obama administration under authority of the Dodd-Frank Law.

1.
"Regulations, including those issued under the Dodd-Frank Act, mandate that large and systemically important financial institutions (SIFIs) maintain detailed and robust recovery and resolution plans: "
Banks must compile, in advance of a crisis, two, different plans, one to avoid bankruptcy, and the second, a pre-planned bankruptcy plan, detailing who the banks recommend the winners and losers will be in a bankruptcy, as follows:
"Recovery plan details the actions a firm would take to avoid failure" ( bankruptcy ) "by staying well-capitalized and well-funded in the case of an adverse event, JPMC has a comprehensive recovery plan
Resolution plan" ( pre-planned bankruptcy plan ) "details strategies for rapid, orderly and least-cost resolution under ordinary insolvency law" ( bankruptcy law ) "in the event of failure (without the use of taxpayer money)
JPMC will submit a resolution plan on 7/1/2012, an executive summary of which will be available for public review" The immediately preceding quotes come from the linked report on Harvard Law Schools website.

2.
The Dodd-Frank Law creates an alternative process to U.S. Bankruptcy Law, for determining who the winners and losers are, when a bank has failed and needs to go through a bankruptcy process. Unlike the U.S. Bankruptcy Courts, the Dodd-Frank Alternative process does not involve Judges, nor does it allow review by Federal Appeals courts of the decisions made in the alternative process, in addition it's decision are final and are intended to be complete in a matter of just a few day without the months of due process of a Bankruptcy Court:
"Orderly Liquidation Authority (OLA) was created by the Dodd-Frank Act to establish a new system, if needed, for the resolution of failed financial institutions (limited to potentially systemically important financial companies).
Bankruptcy is still the primary resolution process, OLA is only a fall-back option to mitigate systemic consequences"
The United States government's executive branch acting through the Federal Deposit Insurance Corporation the "FDIC is granted authority to close, liquidate and resolve a failing SIFI so that:
Shareholders and creditors bear all losses, with no exposure for taxpayers" ( meaning no exposure for the U.S. government ) The immediately preceding quotes come from the linked report on Harvard Law Schools website.

3.
The President of the United States, acting through his at will employee, the Secretary of the Treasury, makes all decisions as to winners and losers in the alternative bankruptcy process provided for by the Dodd-Frank Law. The President, using the same decision process, determines if the alternative bankruptcy process will be used:
"Treasury Secretary, in consultation with the President, after recommendation by Board of Governors and Designated Regulator (principally FDIC or SEC), can invoke OLA to resolve a SIFI when, among other things:
The SIFI is in default, or in danger of default, or no viable private sector alternative is available to prevent the default, or The SIFI’s failure and its resolution (through traditional bankruptcy) would have serious adverse effects on the financial stability of the United States" The immediately preceding quotes come from the linked report on Harvard Law Schools website.

4.
The Dodd-Frank Law makes clear that both Share Holders and Creditors are to bear the costs of bankruptcy except other banks, who are also creditors, which are critical to the financial system, are to suffer no loses.
"FDIC is granted authority to close, liquidate and resolve a failing SIFI so that:
Shareholders and creditors bear all losses
OLA preserves the going concern value of the restructured firm for the benefit of the most senior creditors, protection of taxpayers and the financial system overall" The immediately preceding quotes come from the linked report on Harvard Law Schools website.

Which brings us back to the first report.

Under the decision of the Bankruptcy Court, and the Federal Appeals court that reviewed that decision,
The depositors of the money in segregated deposit accounts, do not own their own money in those accounts, instead the financial institution that had physical control of the money owned it, and the depositors were only creditors of the financial institution, and,

Other Financial Institutions ( other creditors of the Bankrupt Financial Institution ) that had made secured loans to the Bankrupt Financial Institution had a senior creditor's right to monies owned by the depositor, prior to the depositor making cash deposits into the, now bankrupt, financial institution. In other words, other Financial Institutions were entitled to the money of depositors because they were all just Creditors ( including the depositors ) and there was not enough money for everybody, so the depositors lost, and the other financial institutions won. Because the other Financial Institutions had a superior ( more senior ) Creditors claim against the depositors money.

Remember, under the Dodd-Franks law, the alternative bankruptcy process also required that preference be given to creditors ( like banks ) that were critical parts of the U.S. financial system.

[aedens]

Yep, a few of us have been there real time RC. Now define Equity and equity. You can see the surety claim
remands status which was conveyed. The Framers of the U.S. Constitution recognized the providence of equity by writing in Article III, Section 2, Clause 1, that the "judicial Power shall extend to all Cases, in Law and Equity." All states eventually allowed for the judicial exercise of equity, and many states created Special Courts of equity, which maintained procedures distinct from those of courts of law.

[Higgenbotham]

This is my take on what might be making the more thoughtful folks on this forum ill.

That's part 1 and part 2 is what is on the Fed balance sheet which represents the alternative to depositors who want to make an exit from these institutions. We could start by saying that depositors now have every reason to want to do so. In other words, impetus has been created for bank runs, or for riots and civil unrest if they refuse to give it. Looking at the Fed balance sheet, we see another tangled up mess. For those who like gold, there is gold listed there and at first glance one would say it is miniscule, but that's not the case as it is valued on the balance sheet at "face value" of $42.22 and, at today's price, the Federal Reserve Notes are about 40% gold backed. Moving to some of the other line items we notice there are no short term bills anymore and we know the Fed has moved out on the curve with operation twist, as well as posted MBS as collateral at, once again, "face value" so those holdings are subject to depreciation. In a deflation, if gold were to collapse and bonds were to default, the notes might actually end up to be of little value compared to t-bills but in any case it is going to get very messy.

[aedens]

If a event is triggered in that context the next issue would be sticks and stones resolved anyway.
The whole format is what it is. Fuedal, since the intent never changed in the contruct of common law
status. Also that gets back to the definition of currency and gun powder backing it all over again.
Alpha monkeys and fiat has a intrinsic value of zero.

[Reality Check]

...
depositors who want to make an exit from these institutions. We could start by saying that depositors now have every reason to want to do so. In other words, impetus has been created for bank runs, or for riots and civil unrest if they refuse to give it.
...

I can imagine multiple different reasons people might be rolling out these regulations, and for writing the law that enabled the regulations.

Some may actually believe by creating these regulations they may be preventing them from ever being needed.

Others may believe they can control when they will be used and what the results of them being used will be.

For example, some may want a good political crisis to implement fundamental political change in the United States, but they do not want the crisis until after the election.

Others may view a profound economic crisis as a once in a lifetime opportunity to enhance, or protect, their own wealth and power, but again not before the election. The current politicians appear to be purchasable, and a completely new crop might not be.

But as you say, or at least my understanding of what you are saying, the timing and the results of this may not be as controllable as some would hope.

Even a substantial minority of upper middle class depositors pulling the deposits out could trigger cascading bank runs.

[Reality Check]

This is my take on what might be making the more thoughtful folks on this forum ill.

That's part 1 and part 2 is what is on the Fed balance sheet which represents the alternative to depositors who want to make an exit from these institutions
...
Looking at the Fed balance sheet, we see another tangled up mess. For those who like gold, there is gold listed there and at first glance one would say it is miniscule, but that's not the case as it is valued on the balance sheet at "face value" of $42.22 and, at today's price, the Federal Reserve Notes are about 40% gold backed. Moving to some of the other line items we notice there are no short term bills anymore and we know the Fed has moved out on the curve with operation twist, as well as posted MBS as collateral at, once again, "face value" so those holdings are subject to depreciation. In a deflation, if gold were to collapse and bonds were to default, the notes might actually end up to be of little value compared to t-bills but in any case it is going to get very messy.

That is the part I just do not fully ( or more likely, even partially ) comprehend.

The MBS - which I assume are Mortgage Backed Securities, in the FEDs balance sheet, appear to be only those insured by the quasi-agents of the United States Government. And the U.S. taxpayer, through the federal government is slowly, but surely, eating those loses with the ongoing bailouts of the quasi agencies.

And the totals on the Fed Balance Sheet just do not seem that huge compared to the overall debt bubble ( both private and public ), and the leveraging of that bubble with speculative ( instead of hedge ) Credit Debt Swaps and other derivatives that do not require owning the underlying asset, or a business contract to actually purchase and take physical deliver of the underlying asset.

What is it that you see when you look at the FED balance sheet that factors into this ?

How is "what is on the Fed balance sheet" the representation of " the alternative to depositors who want to make an exit from these institutions"?

Are we just talking cash in the form of paper U.S. dollars, or gold, as the alternatives ( to deposits in institutions ) represented by the FED balance sheet?

http://www.federalreserve.gov/releases/h41/Current/

[Reality Check]

If a event is triggered in that context the next issue would be sticks and stones resolved anyway.
The whole format is what it is. Fuedal, since the intent never changed in the contruct of common law
status. Also that gets back to the definition of currency and gun powder backing it all over again.
Alpha monkeys and fiat has a intrinsic value of zero.

Which brings us back to this type of planning:

http://www.washingtontimes.com/news/201 ... r-of-2016/

http://www.tradoc.army.mil/tpubs/pams/tp525-3-1.pdf

[Higgenbotham]

But as you say, or at least my understanding of what you are saying, is that both the timing and the results of this may not be as controllable as some would hope.

That's my guess, yes. The longer things are controlled and made more complicated, interdependent, and opaque, then the more unpredictable and messier the results will be when the gerry rigged mess comes unglued. Even those of us who have been studying for a long time have no agreement as to the best course of action. But, as Mohammed El-Erian recently advised, "Indeed, as a famous investor once observed, the rational thing to do when you see a line outside a bank is to join it; and if you do not have your deposits at that bank, go quickly to where you do and join the line there." Good advice I would say. Likewise, if you start to see people selling stocks, it might be a good idea to join them, etc. John calls it generational panic.
http://www.cnbc.com/id/47843948/Guest_B ... k_Election

[Higgenbotham]

That is the part I just do not fully ( or more likely, even partially ) comprehend.

The size of what I posted from the Fed's balance sheet only matches the Federal Reserve Notes in circulation (which are required by law to be collateralized). Collateralized means one dollar of currency in circulation has one dollar face value of dollar denominated assets offsetting it (or backing it). The collateral is the assets of the Fed. The Federal Reserve Notes are the liabilities of the Fed. So what you have underlying a Federal Reserve Note is some gold, some long term US government bonds, etc. Agencies are the mortgages issued by Fannie Mae, etc., whereas MBS are the securitized mortgages issued by private financial institutions.

For more information, this blog has discussed this issue and I think his understanding is pretty good: http://suddendebt.blogspot.com/2008/03/fed-as-bank.html I don't recall him talking about the gold on the Fed's balance sheet.

As far as the overall size of the Fed's balance sheet, which is larger now than just the currency, it's not that large but the concern people have is the reserves, which I haven't discussed, can theoretically be multiplied to many fold their current level by the private banking system if demand for credit were to return.

But even if someone comes to understand what's at issue, it still can't be predicted how the market will respond to this knowledge, and there are many ways this could resolve if the Fed's balance sheet goes bad.