Got a Beef with US Bank Executives…How About Buying Some US Treasuries?

No I don’t believe the US government can run banks or auto companiesbetter than privately-incentivized skilled executives. But not allexecutives are created equal…some have proven to be worse at runningbanks and auto companies than the government…if this were not true wewould not have seen anything like what we did in the last 18 months.

No I don’t believe the US government can run banks or auto companies better than privately-incentivized skilled executives. But not all executives are created equal…some have proven to be worse at running banks and auto companies than the government…if this were not true we would not have seen anything like what we did in the last 18 months.

And even skilled bank executives like Dimon and Blankfein seem to have forgotten that without the government intervention, not even the top of the class would have survived the bank panic of 2008. Using FDIC insurance on debt issuance, receiving full settlement on counterparty liabilities with AIG, gaining access to the discount window for investment banks, taking all sorts of collateral for Fed funds, insuring money market liquidity, underwriting commercial paper, supporting mortgage market with massive liquidity and making $700bln in federal money available to banks to raise capital in exchange for preferred stock kept even Dimon and Blankfein employed. With TARP funds about to be repaid some of these banks executives are back to their old arrogant ways…we did US Treasury a favor taking TARP, buying Bear and Merrill and want as little government say over our business as possible. Good riddance Fed and Treasury.

What a bunch of ingrates. They seem to have forgotten the forest for the trees. The problem is not government overreach but private sector malfeasance. Private sector (banks and shadow banks) blew it. And all the warts of government overreach are part of the therapy for curing the illness…like a cancer patient cured by chemotherapy turning on his or her oncologist for loss of hair and a compromised immune system.

So this brings me to the latest bank head peeve. Why are US banks not buying US Treasuries with record cash balances and record low cost of overnight money? I am not a banker, but I would guess that a 30year US bond is counted as Tier 1 capital just as a cash deposit at the Fed is counted as Tier 1 capital. In Japan the banks bought JGB’s until the cows came home.

I think markets learned this week that large activist foreign central banks are still accumulating US Treasuries and are not dumping the dollar for gold or euros in any meaningful way (some SWFs and smaller central banks however may well be).

Maybe the Fed and Treasury never sent the memo. If I had to guess, UST and Fed are walking on egg shells with the banks after all the blow back on compensation, TARP and TARP strings. Like spoiled children. Again I think bankers should run banks, but bad bankers were in charge of banks (and allowed to go to town by bad bank regulators) and they pushed the peddle to the metal. It is chemo time.

US banks may be waiting for even higher yields (or memo from regulators) before doing their part of the public-private cure. If the US authorities and their partners running the banks can’t keep US rates from rising, well the prospects for a recovery are dim, very dim. Real estate investment and valuations will resume a steep rate of decline and foreclosures will rise even more rapidly. Remember the mantra on recovery in 2008 – can’t solve the economic and banking crisis until the real estate (residential and commercial) market stabilizes and starts to improve. Mantra of 2009 is stock market rally (built on hope) is necessary and sufficient condition for a recovery and end to the financial crisis.

Just because stocks are up and bank stocks are up a lot, should not put Treasury and Fed officials on their back feet when it comes to temporarily setting the rules of the game for the banks. Unfortunately, the Treasury forgot to set a minimum of Tier 1 capital to be held in US government debt as one of the prerequisites for exiting TARP. And this could mean a W-shaped recovery at best or an L-shaped lost decade at worst.

David Gilmore

Foreign Exchange Analytics has it's roots in both the emerging information technologies and the global economy that characterized the last two decades.  As currency transaction volumes soared in the wake of the 1985 Plaza accord, the need for timely concise information on what forces were driving and would drive exchange rates became critical.   David Gilmore was one of a new breed of analyst that saw a void of relevant, market moving... More