Is the end near for big banks ?

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In order to answer this question we clarify why we are even asking it. At the heart of every crisis lies a credit bubble. But why do bubbles form?

If you look at a chart of the S&P 500 historical values, you will certainly notice a trend that every 10 years there is a financial crisis. Bubbles should not occur if capital markets function the way they are described to function in textbooks, since prices of assets should always reflect true risk and rational expectations. After every bubble bursts, the first question always is why did everyone not realise there was a bubble? Perhaps too many people have a vested interest in the continuation of a bubble and therefore choose to ignore the signs. So there is definitely a cyclical feel to all of this. However, we can’t ignore how the banking sector has changed in the past 20 years and must also consider this into account. In the crash of 2008, big banks proved that they can’t be seen a growth sector any more.

Where do we go from here?

This only goes to prove furthermore that banks should probably be seen as a highly regulated public utility business. Many would argue that banks should return to their origins – acting as intermediaries – converting checking and saving deposits to consumer and commercial loans. That is a crucial public service – vital for keeping the economy healthy. That is the historic and fundamental role of banks. After securitization proved that moral hazard is a real risk for our economy, maybe it’s time that big banks return to their original role. The idea is definitely resurfacing, as the regulations serve as proof of this. However, we should also consider that if banks are to become “public utilities”, a term which is often synonymous with “natural monopoly”, there is a risk that big banks will cement their “too big to fail” narrative.

Are there any other alternatives?

Even if big banks don’t become “Public utilities”, they would still definitely have to change their business models to adapt to the new social, economic, regulatory and technological environment. This is where FinTech comes into the conversation. Financial Technology as it is called, represents the emerging financial services sector of the 21st century. Most big banks still use mainframe computers, which are reliable, but slow. That’s why in the U.S. transactions sometime take 3 days to process. Recently however, there have been a number of startup companies that have emerged on the market, that provide operational transactions at a very low cost. Other lending innovators enable users to bypass traditional intermediaries (banks) with a peer-to-peer lending platforms. Companies that offer financial planning and portfolio management have emerged as popular alternatives to traditional wealth managers – big part of the global banking conglomerates (like Citigroup for example) balance sheet. New financial startup companies are extracting the most profitable portions of the baking models, leaving banks struck with less profitable activities.

In order for big banks to survive, they must change their business model. Of course they are not doomed and the end of big banks is a bit exaggerated. They could still use their superior resources to buy up FinTech companies. FinTech companies have manage to acquire little over $12 billion dollars in venture capitalism for 2016, while 5 of the biggest banks in the world control assets of $15 trillion. FinTech companies look like peanuts compared to them. So the FinTech sector is still hardly making a dent. The bigger threat comes from companies like Amazon, Facebook and Ali Express, who have large databases of their clients. In order to price risk appropriately, banks should know their customers- how likely are they to default. This is where the information data bases that these relatively new big companies possess come into play. However, big banks still have the advantage, as they already have banking licences and can use depositor’s money to give out loans.

Nevertheless, new FinTech startups could serve as a wakeup call for big banks. The rise of this kind of companies gives big banks a very clear path to follow: Fewer physical branches, fewer staff, introducement of new technologies, which will result in easier transactions, integration of cloud computing and data storage into the system.

Does it really matter who the president is?

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Couple of  months ago was election time in the US and everyone had to choose the team they would support. I’ve always found elections in general really interesting. How people, friends, family members just choose sides and could argue for hours which side is best. What if there is no best side? I followed the elections very closely and I found it fascinating how much of a popularity contest the whole elections and political process really is.

We, as people are generally not interested in certain policies, simply in the persona of the candidate. Donald Trump presented himself as not a part of the establishment – an outsider. This certainly won him a lot of supporters, that were fed up with the current system, that has done nothing for them. For most people it’s almost impossible to find any real differences between democrats and republicans. They all make deals behind closed doors, while we argue which side is best. When they are giving interviews on politically correct mainstream media shows, they pretend to be against each other, but in truth they serve the same masters.

How much does it cost to get in office?

Running a political campaign ain’t an easy thing, nor cheap. You gotta have a lot of sponsors and influential people behind you if you want to win. Do you really think that all those people won’t come for favours when a certain candidate wins an election?

In the last 18 years big companies have spent in total over $6,000,000,000 dollars in lobbying fees. Over $6,000,000,000 have entered the pockets of our “representative”. But the question is who do they really represent? Because it is certainly not us – the people. It is mostly big business corporations and certain influential groups.

The message I want to send is not one of apathy – the apathy comes from the politicians. They don’t care about us, they only care about their own interest. This is not a free market system. The bigger government you have, the bigger the corruption. We should not let ourselves be fooled by populists and liars that only want more for themselves and less for everybody else. And this is all in front of us – we just have to read the data.

The average American believes that the richest fifth own 59% of the wealth and the bottom 40% own 9%. The reality is strikingly different. The top 20% of US households own more than 84% of the wealth, and the bottom 40% combine for a paltry of 0,3%. The Economic Inequality is far worse than we think. Unless we do something now, it will only get worse from here and I don’t believe that the current system that we have in place is capable of dealing with this problem. It is only us – the people that can really make a difference.

Trump to break up big banks

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On Monday in an interview for Bloomberg President Donald Trump announced that he and his team are considering reviving the famous Glass-Steagall act. This move will effectively break up commercial from investment banks and will bring stability back to the sector.

What is the Glass-Steagall act?

In the past commercial and investment banks were separated entities. The key feature which distinguishes commercial banks from any other type of financial institution is that a commercial bank must have a banking license. This permits them to accept deposits from the public. The price of being allowed to accept deposits is that banks must subject themselves to stricter regulations.

Today however, after the Gramm-Leach-Bliley act was passed in 1999, by then President Clinton (The Clinton clan fucking up the country since the 90s) commercial and investment banks have mostly merged and formed “complex financial institutions”, as they’re known by the regulators.

What went wrong?

This has enables securitization process and banks have change their business models. 30 years ago if you wanted to obtain a mortgage for your house, the lender expected you to pay them back. Since the development of securitization however, people who make the loan are no longer in danger if there is a risk it to be repaid. In the old system, when a homeowner paid their mortgage every month, the money went to the local lender. So the lenders were very careful who they gave money to. In the new system lenders sold the mortgages to investment banks, who then packaged them into what’s called a CDO(collateralized debt obligation) with other loans (credit card debt, car loans etc.) and sold them to investors. So now, when the person who obtained the loan paid his monthly instalments, the money didn’t go to the bank that gave them the loan in the first place – they went to investors from all over the world. Therefore, now, the person who gave the loan, didn’t bare the risk of that transaction. It’s not surprising how moral hazard can occur out of this situation. And that is exactly what happened, the banks gave mortgage loans to virtually anybody, these people later defaulted on their loans and the bubble burst. So it’s understandable how the public lost confidence in the financial institutions.

Necessary change.

It comes as no surprise that Donald Trump wants to break up big banks, really. They are the main cause for the last financial crisis and the bubble that is being formed right now (hyperlink here). If Trump goes to proceed with this he will definitely make a step in the right direction in Making America Great Again. Not to mention how many people already want to impeach him and if he is to survive he must make sure that the next recession hits after his term ends. He already knows that there are massive bubbles in 5 or 6 different sectors and it’s only a matter of time before these bubbles burst.

Weapons of mass destruction.

 

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We live in a modern world, which is constantly evolving and changing. Nowadays, you do not need to bomb a country in order to destroy it. Derivatives will do a much better job. You’re probably asking yourself what is a derivative? Derivative is a contract between two parties based upon an asset. Its value is dependent on the fluctuations of the price of that asset. Essentially, derivatives are bets.

The derivatives market was one of the main reasons for the financial meltdown in 2008, which costs exceeded $23 trillion only in bailouts. It left 12,5 million people unemployed, 8 million people lost their homes, 130 million of benefits and left 46,2 million people in poverty – the largest number in the 52 years for which poverty estimates have been published.

Is this enough numbers for you? I already wrote an article on why the next financial crisis is imminent. Here is one more reason why we can’t escape our faith. The 2008 crash was largely caused by the unregulated derivatives markets. And if you think the problem has been fixed, you’re mistaken.

If used right, derivatives are a useful tool of hedging risk, however if not – these could be the new weapons of mass destruction that Warren Buffet warned us about. Let’s take for an example American International Group (AIG) – the insurance giant that lost almost $100 billion in 2008. How did this happen? Well, let’s say that you are a pension fund manager. Part of your charter says that you can only invest in very safe investments, because you can’t risk all the life’s work of honest workers. You can only invest in things that are rated AAA – the highest standard. However, some major corporation (let’s call it corporation K) needs a loan, but is only rated at BBB – not high enough rating. So what do you do, the corporation needs money and you have money to spend. This is where AIG comes in with the so called credit default swaps – an insurance on the loan. So you lend the corporation a small loan of a $1 billion dollars with 10% interest. But in order to stay in the clear in front of the investors in the fund – the hardworking Americans you need to package the whole deal and declare it “safe”. So you go to AIG (a company with AAA rating, almost impossible to fail right?) and strike a deal with them. They will insure the loan in exchange for an insurance premium – 2% of the loan payments. Now, all of a sudden the loan has a rating of AAA, because it is insured by AIG.

However, AIG doesn’t have $1 billion dollar in reserve in case of corporation A fails on their loan. In fact, AIG is a highly leveraged with very few capital in reserve. So any small miss fortune will sink the whole ship, as it happened in 2008. This is only a small example of how derivatives are used, so that bankers and insurance can keep their margins high and their bonuses big. Derivatives are essentially bets, simple as that.

The derivatives market as a whole is HUGE. It is estimated to reach more than $1,2 QUADRILLION. That is 10 times the size of the total world GDP. There are virtually available derivatives on every possible asset – equities, commodities, bonds, currency exchange and even the weather. Yes, bankers can bet on the weather.

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This problem wasn’t addressed after the crash of 2008 and derivatives market still remains a Ticking Time Bomb. Most of derivatives contracts are based on interest rates. Most big banks still have them on their balance sheets and even if 0,1% of the money insured by derivatives is at risk It would wipe out 10% of a bank’s equity. 1% would wipe out all of the bank’s equity. So next time when the news bombards you with news about North Korea, know that there is a far greater threat for the U.S.A. and the whole world, a new kind of weapon, invisible and yet- more deadly than most of the bombs in the world.

The next financial meltdown: When the party stops.

 

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It’s been 8 years since the last financial crisis and it seems like we all forgot what happened then, since nothing has change. Toxic CDOs are still being sold, banks are still giving out loans to everyone with an ID on himself, the stock market is at a record high, bankers are getting $millions in bonuses, consumers are buying stuff they don’t really need, on credit of course, houses, cars and almost everyone is getting into college. But what really causes recessions? Well and easy escape would be to say: greed. Greed is a human emotion and emotions can’t cause a massive bubble. Credit on the other hand, can.

There a couple of massive bubbles so let’s start with the stock market.

1st warning sign: It doesn’t take a genius to add 2+2. A quick look at the S&P 500 is all we need to understand that something is wrong here. Usually crisis appear every 10 or so years, sometimes sooner. Well, we are in year 8 already and the S&P is at a record high.

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2nd warning: Housing prices are record high again, especially in the big cities, where the economy has recovered the fastest. Subprime mortgages are again given to almost everyone with an ID on him – aided by the low mortgage rates and Dodd-Frank regulations that push banks toward lending to the upper middle class and wealthy.

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3rd warning: More scaring this time is that there are massive bubbles in other sectors as well. Car loans at a record high as well, toppling $1 trillion for the first time.

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More and more buyers who borrow to purchase used cars may find themselves overextended with a loan that stretches well beyond their fast-depreciating vehicles.

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Most of these people consider their cars to be an asset, which it is, but for the BANK, not the car owner. It’s a liability of the owner.

4th warning: I have already wrote about the massive bubble in higher education, but let’s summarize anyway. Outstanding student loans now exceed $1,5 trillion and more than 40% of borrowers are in default or behind on their payment.

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This is all thanks to the subsidized government programs that encourage more people to go to college than the real economy needs. So now we have hundreds of thousands of unemployed with the worst kind of debt: Student loans.

This is all encourage by the FED by the way, all three of the bubbles – the federal reserve bank of the U.S., which is nor federal, neither has any reserves. It’s a private entity, which is responsible for creating money (more on this in a separate article). It has set interest rates at almost record low – 1%. This means that banks get cheap money, which furthermore means that they can give out cheap loans to almost everybody.

5th warning: European banks are on the brink of failure. Greece has already defaulted 3 times, however it has been bailed out by the EU, because if Greece collapses, the rest of the Eurozone will follow. The closest to the collapse without any outside help being Italy, Spain, Portugal, France and Ireland. Germany and the U.K. are not in a better shape either as almost every country from the Eurozone has over 100% foreign debt as part of their GDP. This debt can’t be paid. This means only one thing: eventually almost all of the countries in the Eurozone will have to default.

6th warning: There is a massive bubble in Eastern Asia. China’s national and provincial governments have subsidized inefficient state-owned enterprises and exporters with easy credit and propped growth through excessive borrowing for wasteful public work and urbanization projects. This has resulted in massive housing bubble.China new home prices, year on year growth:

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Should this bubble burst and the yuan collapse, other Asian developing economies dependent on exports to China will easily become unable to service their debt.

We have all been drunk since the recovery started. All the important indexes are at a record high, everyone is borrowing, everyone is investing in the stock market, all seems great, the best times to be alive right? All these warning signs mean only one thing though – the party is just about to stop. And as after every other great party, there is a massive hangover in the morning, some pieces from the puzzle are missing and you are handed the check for all the fun you had. And don’t get it wrong. Someone will have to pay – I’m gonna take a wild guess and assume that this would be the taxpayers, while the bankers continue to receive those fat bonus checks.