Wednesday, February 06, 2013 - A Trend of Banks Behaving Badly

A Trend of Banks Behaving Badly

by Sinclair Noe

DOW + 7 = 13,986
SPX + 0.83 = 1512
NAS – 3 = 3168
10 YR YLD -.05 = 1.97%
OIL + .20 = 96.84
GOLD + 4.10 = 1678.30
SILV +.03 = 31.95

At last count, 282 companies in the S&P 500 index had reported quarterly earnings and 74% were beating analyst earnings projections. Gas prices are up 7% in the past week. The Federal Reserve confirmed that one of its internal Web sites was hacked into yesterday. You might think the Fed databases are pretty secure. Turns out nothing in cyberspace is secure; just see what happened to the New York Times, the Wall Street Journal and the Department of Energy; and that's just the past couple of weeks. The Congressional Budget office says the US budget deficit this year will hit $845 billion, which sounds like a lot of money, but for the first time in a long time, it won't hit a trillion.

The Justice Department filed a $5 billion civil complaint yesterday accusing McGraw-Hill and S&P of three types of fraud, the first federal case against a ratings company for ratings related to the credit crisis. No surprise.

The transcripts of the Federal Reserve's FOMC meeting in 2007 show the Fed didn't trust the ratings agencies. Fed Chairman Bernanke said: “There is an information fog” that “is very much associated with the loss of confidence in the credit-rating agencies.”And Fed Governor Kevin Warsh said: the firms’ “credibility has been shot” and “it is much harder to see that this market will unwind itself in a rather kind and comforting environment.”

At the Aug. 7, 2007 meeting William Dudley said “disturbing delinquency trajectories” had prompted ratings agencies to downgrade a significant number of assets and that losses had “led to a fundamental reevaluation of what a credit rating means and how much comfort an investor should take from a high credit rating.” Dudley’s remarks sparked an FOMC discussion on the risk to the economy from declining confidence in ratings companies. Five years later, a civil suit is brought, and I'm reminded of an old, forgotten saying about justice delayed.

The Royal Bank of Scotland has become the third global bank to reach a settlement with US and British authorities related to manipulation of Libor, the London interbank offered rate; the interest rates that affect trillions of dollars of, well almost everything. We now have some trends.

The Royal Bank of Scotland agreed to pay criminal fines of $150 million to the Justice Department, and a $325 million civil penalty to the Commodity Futures Trading Commission, the regulatory agency that has taken the lead in these cases. An additional penalty of $137 million, will be paid to the Financial Services Authority in Britain. So, it will pay a total of more than $600 million to resolve the case.

Well, some of this fine might actually be paid by British taxpayers. In 2008, the British government had to bail out the Royal Bank of Scotland after the firm led a consortium to buy ABN Amro for $97 billion. RBS contributed around $37 billion for the ill-advised deal. The government, which plowed roughly $71 billion into the bank in the bailout, now owns 82 percent of RBS.

To help pay for the overall settlement, RBS said it would claw back past and present bonuses totaling $471 million from both the traders implicated in the rate-rigging scandal and from employees in the bank’s operations. Still, this is going to make it tougher for the British government to sell its shares. Since the bailout in 2008, the bank’s shares have plummeted, and are currently trading around 32 percent below the initial purchase price.

The other two banks that settled were Barclays and UBS. Barclays paid about $450 million. UBS paid $1.5 billion. For other banks looking to settle, they should figure on at least $500 million to the Justice Department and Commodity Futures Trading Commission, and the total could easily reach $1 billion if the governments of several nations are involved and the conduct by its employees was particularly problematic.

Barclays and UBS were required to have their Japanese securities operations plead guilty to one count of wire fraud, but it left the parent company untarnished by a criminal conviction. This should largely avoid the so-called Arthur Andersen effect on the bank by limiting the chances a bank will lose its ability to continue in business in the United States because of the conviction. The parent company does have to acknowledge its violations by accepting a statement of facts that describes how it violated the law. For Barclays and UBS, this came as part of a nonprosecution agreement, which means no criminal charges were ever filed against the banks.

This admission does, however, subject the banks to additional legal liability in cases file by those that relied on Libor for everything from mortgage rates to derivatives. Plaintiffs in such cases will now be armed with plenty of evidence provided by the government.

In an interesting twist, the Royal Bank of Scotland accepted a deferred prosecution agreement under which federal prosecutors filed a wire fraud charge that will be held in abeyance as long as the bank continues to cooperate.

So a precedent is set; pay a fine; throw a foreign subsidiary under the bus; walk away with a slap on the wrist.

The US Postal Service is cutting back. Beginning in August, there will be no more Saturday delivery of mail. The Postal Service would continue to deliver packages on a six-day schedule, and post offices would continue to be open on Saturdays. Cutting back Saturday mail delivery is expected to save $2 billion per year. Since 2010, the agency has reduced hours at many small, rural post offices and cut staff, and also announced plans to reduce the number of its mail processing plants. Last April, the Senate passed a bill that provided retirement incentives to about 100,000 postal workers, or 18 percent of its employees, and allowed the Postal Service to recoup more than $11 billion it overpaid into an employee pension fund. But post office officials say the cuts and staff reductions are not enough. Last year, the Postal Service had a net loss of $15.9 billion.

The postal unions and some businesses say the move to 5-day delivery is bad; it could be tough for customers, especially those in rural areas, or the elderly, and for many small businesses. The Postal Service continues to suffer losses of $36 million a day and is headed for projected losses of about $21 billion a year by 2016. A major reason for the losses is a 2006 law that requires the agency to pay about $5.5 billion a year into a future retiree health benefit fund; literally paying for benefits for employees that haven't even started work yet.

US corporate profit margins have never been higher. Lately it has been popular to point out that higher corporate profits have come at the expense of falling employee compensation. This might change as the economy improves:  companies might invest more to satisfy greater demand, new intellectual property will spread to competition, and higher employment will increase labor's bargaining ability. 

But how do we speed this up? Corporate investments have become a place to store wealth, as opposed to growing the businesses. The problem with corporations storing wealth is that it isn't nearly as good for most of us as investing in innovation and hiring employees. Some of retained earnings are socked away for tax reasons, some are the collection of high-tech companies that are past their innovative prime, but a lot of earnings are being used to buy back company stock. These stock buy backs sound good to shareholders and corporate executives, but it is a short-term maneuver that doesn't yield any long-term gain in production or profit.

A new report by the Corporation for Enterprise Development shows nearly half of US households  (132.1 million people) don't have enough savings to weather emergencies, or finance long-term needs like college tuition, health care and housing. According to the Assets & Opportunity Scorecard, these people wouldn't last three months if their income was suddenly depleted. More than 30 percent don't even have a savings account, and another 8 percent don't bank at all. 

We're not just talking about people who living people the poverty line, either. Plenty of the middle class have joined the ranks of the "working poor," struggling right alongside families scraping by on food stamps and other forms of public assistance. More than one-quarter of households earning $55,465-$90,000 annually have less than three months of savings. And another quarter of households are considered   net worth asset poor, " meaning that the few assets they have, such as a savings account or durable assets like a home, business or car, are overwhelmed by their debts."

The report shows household median  net worth  declined by over $27,000 from its peak in 2006 to $68,948 in 2010, and at the same time, the cost of  basic necessities like housing, food, and education have soared. Part of the problem is fixed cost, the things that are difficult to "cut back" on. Housing, health care, and education cost the average family 75 percent of their discretionary income in the 2000s. The comparable figure in 1973: 50 percent.

When consumers can't keep up with the costs, they fall into a debt trap. The average borrower carries more than $10,700 in credit card debt, one in five households still rely on high-risk financial services that target low-income and under-banked consumers.