Living in a Low Growth World

Posted on May 16, 2013

Michael Drury, Chief Economist, McVean Trading and Investments LLC – Reprinted with Author’s Permission

Perhaps the question we are asked most frequently is when things will get back to normal, meaning in most investors’ eyes the way they were before Lehman.  Unfortunately, our answer is “That bird has flown” and we are now dealing with, and will continue to deal with for many years, a very different environment.  The mainstay of that difference is a lack of trust between those that have money to invest and those that want to use it for risky undertakings, and, in particular, a lack of trust in the banking system that used to intermediate between these two groups.  The result is a glut of savings available to “safe” investments driving risk-free yields to very low levels.  However, the central banks, by buying bonds and manipulating long term interest rates lower, are introducing a significant risk of capital loss into even “risk-free” assets.  Investors are both moving and driven out the risk and yield curves, and returns on riskier investments are falling.  The decline in returns at the precise time many investors want to start spending investment income has pushed up prices for proven existing income flows.  Meanwhile, a combination of distrust and a reduced pool of money that will wait long periods before income is produced have generated fewer green-field investments in physical plant and equipment, resulting in a slower potential growth path for the economy.

We are neither monetarist nor Keynesian, but rather institutionalist and a storyteller.  We see the current situation as the culmination of a long path where growing reliance on banks and the central bank to maintain economic growth has run aground.  Both re-establishing trust and balance in the old system or building a new one will take time – likely many years … read the rest

Winds of Change: Banking

Posted on May 8, 2013

John Mason – Originally Published at Seeking Alpha – Reprinted with Authors Permission

Another Executive Leaves JPMorgan…” reads the headline of the business section in the New York Times. The question is, what is going on at JPMorgan Chase (JPM)?

The timing of this last leaving is raising questions. The latest major departure is Frank Bisignano, the co-chief operating officer. The questions are about the status of Jamie Dimon, Chairman and Chief Executive Officer of JPMorgan, the “persistent executive turnover,” and the up-coming board meeting where a debate is raging about whether or not Mr. Dimon should hold both top positions.

To me, there are two reasons for the recent departure events. First, Mr. Dimon is in control and he does not like what has happened inside JPMorgan over the past two years or so, with “the London Whale” and other events that have tarnished the “bravo” image of Mr. Dimon and his bank. The activity going on inside the bank remind me of a “turnaround” operation!’

But, there is a second reason for the things that are going on. Mr. Dimon is moving JPMorgan into the future.

If this is true, then this whole effort is to move JPMorgan into the future in the face of the “hostile” regulatory environment that exists, in the face of the changes that information technology are forcing on the banking industry, and the changing nature of the financial industry.

If I were Mr. Dimon, my feeling would be that the current regulatory environment “sucks”!

Being John Mason, my feeing is that the current regulatory environment “sucks”!

In either case, the basic feeling is that I really don’t want to run a bank. I want to run something different.

Second, whatever is being done in the financial industry, the future of commercial banking…of finance … read the rest

Coming M&A Boom Will Not Cure Real Economy’s Ills

Posted on March 3, 2013

Authored by John Mason – Originally Published at Seeking Alpha – Reprinted with Authors Permission

Behind almost all of the economic problems we are now facing is the need for economic restructuring. The world needs to move on and politicians and others are fighting to keep things as they are.

To me, this is one of the reasons why the common liberal/Keynesian solution to our current difficulties is more government spending, more stimulus. The common refrain is to push things right back into where they were. Push people back into construction jobs; push workers back into the auto plants; and push the untrained into information technology. Unfortunately, the world has changed. We cannot keep trying to push people back into the jobs they once held, or, push people into jobs they have not been trained for.

Everyone is excited about the boom in mergers and acquisitions. I have been among those, like James Less, Vice Chairman of JPMorgan Chase & Co. who said, “The Goldilocks era of post-crisis M&A has never been an if, but a when.”

For two years or more, I have been writing that the larger, better off companies, the larger money managers, are just waiting for the right environment to begin the acquisition binge. In terms of high profile the Dell (DELL) deal kind of kicked things off.

In the past two weeks, there have been at least four major deals announced. These have included the Dell buyout; the Comcast (CMCSA)(CMCSK) acquisition of GE’s (GE) stake in NBC Universal; the acquisition of American Airlines (AAMRQ.PK) by US Air (LCC); the Berkshire (BRK.A)(BRK.B)/3G Capital acquisition of H. J. Heinz Co. (HNZ); and the Liberty Global (LBTYA)(LBTYK)(LBTYB) … read the rest

Damn Those Shadow Banks!

Posted on March 3, 2013

Authored by John Mason – Originally Published at Seeking Alpha – Reprinted with Authors Permission

What do we do about the shadow banks or, more politely, alternative finance sources? David Reilly brings us some of the regulatory dilemma in the Wall Street Journal, “Too Big to Fail Casts a Very Long Shadow.”

The question is, “Should the U. S. Government look to backstop even more of the financial system than it already does?” The financial system is expanding. The financial system has already expanded.

Reilly writes that “the shadow-banking system is estimated at between $10 trillion to about $24 million, depending upon the activities included.” According to Federal Reserve System, the commercial banking system holds a little more than $13 trillion in assets.

According to the Federal Deposit Insurance Corporation (FDIC), the total of all assets held by all FDIC insured institutions is a little more than $14 trillion. According to Gary Gorton, Yale economist, in his latest book, “Misunderstanding Financial Crises: Why We Don’t See Them Coming,” the shadow banking system totaled something around $10 trillion to $14 trillion in the summer of 2008, just before the financial crisis started.

In June, 2008, the assets of the commercial banking system totaled just over $11 trillion; assets in all FDIC insured institutions totaled just over $13 trillion. Alternative financial institutions are something to deal with. And, alternative financial institutions are attracting more and more attention.

The issue about shadow banking is one about systemic financial collapse. And, in other words, as Federal Reserve Governor Daniel Tarullo stated before the Senate Banking Committee last week, the regulation of this part of the financial system is the issue “we should be debating in the context of too big to fail.”

Reilly writes, “While banks have faced tighter oversight, the shadow banking market remains a … read the rest

Dell Deal: A Sign Of The Future?

Posted on February 9, 2013

Authored by John Mason

Things are changing in the financial markets. Financial institutions are starting to make money again in mortgages. Money market funds are “flush with cash.” Collateralized Debt Obligations (CDOs) and Collateralized Loan Obligations (CLOs) are staging a comeback.

And, now there is the $24 billion deal by Michael Dell to take his company private. The interpretation of this transaction that I am most interested in is the one being mentioned in almost all the stories coming out in the press: “This is the largest corporate privatization since the financial crisis and the largest tech buyout ever.”

I am not interested so much in whether or not Dell, Inc. (DELL) is eventually saved. What I am interested in is what is happening in finance. It appears as if money is being mobilized again.

Goodness knows, the Federal Reserve has done just about everything it can to push money out into the economy. Comedians have gotten serious about QE1 and QE2 and QE3 … and QEfinity!

It has only been in the past six months or so that there has been any evidence of funds creeping out of the commercial banking system into other parts of the economy. But now, evidence seems to be growing of money flowing into other parts of the economy. This latest transaction, the creation of a large buyout deal, with the growing possibility that others are thinking about more deals, or even mergers and acquisitions, is very encouraging.

Over the past couple of years, myself and others have wondered about all the cash being built up in the coffers of large corporations. It seemed as if these large organizations were piling up cash hoards in preparation for moving in on less well-off institutions and making deals while the getting was good and while interest … read the rest

Commercial Banking Industry Continues To Shrink

Posted on December 8, 2012

John M. Mason

The FDIC statistics for the commercial banking system are out for the third quarter. There were 54 fewer commercial banks in existence at the end of the third quarter than at the end of the second quarter. The FDIC only closed twelve banks during this time period.

The number of problem banks in the banking system dropped to 694, down from 732 at the end of the second quarter. Is the banking system getting healthier? This decline of 36 banks is a smaller number than the decline that took place in the banking system as a whole.

Over the past year, the banking system shrank by 184 commercial banks, the number fell by 455 in the previous twelve months. The banking system is getting smaller in terms of the number of banks, but larger in terms of the size of banks.

As of September 30, 2012 there were 6,168 commercial banks in the banking system, down 184 from September 30, 2011. But, the number of commercial banks with assets of less than $100 million dropped by 175 banks. Over the past two years, the number of banks in this size category fell by 350 banks.

Banks whose assets ranged from $100 million to less than $1 billion dropped by 17. Over the past two years the number of banks in this asset class dropped by 123.

Commercial banks with assets in excess of $1 billion rose by 8 banks. They gained 18 banks over the last two years.

In terms of assets, banks with fewer than $100 million in asset size declined by slightly more than 7.0 percent in total assets. Commercial banks within the middle range kept about the same number of total assets over the year, while those banks that were more than $1 billion in asset size grew … read the rest

Citigroup Changes Reflect Banking Industry in Transition

Posted on December 6, 2012

John M. Mason

Banking, in the past, has always been about people. Banking was built up around customer relationships and you had to have people to create customer relationships.

Bank of America (BAC) has about 275,000 employees; Wells Fargo (WFC) has some 265,000; JPMorgan Chase (JPM) has about 260,000; and Citigroup (C) also has around 260,000 employees.

Banks needed people to relate to their customers, to entertain their customers, to solve problems for their customers and to smile at their customers. People, we were told, were the “face” of the bank.

But, observers of the actions taken by Citigroup argue that this is only the first step, according to a piece in the Wall Street Journal, the “opening salvo in a wave of cutbacks, business sales and other moves that could reduce the company’s global reach.” In another article in the Journal it is argued that this move “had better not turn out to be the whole show. Citi still needs reinvention.”

Departments need to go. Subsidiaries need to go. And, so on and so forth. The bank needs to be structured for the twenty-first century.

I certainly agree that commercial banks need to restructure. And, I certainly agree that banks need to become less of a “people” business. But, this is all a part of the evolution of the banking industry.

Let me begin with a true story.

In 1972, I joined the faculty of the Finance Department of the Wharton School at the University of Pennsylvania. This department was one of the leaders in the “new wave” of financial research talking about “betas” and the “CAPM model” and other such exotic topics of the time.

My background was banking and there were no courses at the time at Wharton about the management or … read the rest

The Bankers Are Way Ahead Of The Regulators

Posted on November 20, 2012

The Financial Stability Board (FSB), a global financial policy group comprised of regulators and central bankers, just released new information on the status of the “shadow banking” industry. First, the FSB reported that from 2002 through 2011 the shadow banking industry grew by $41 trillion. Second, the shadow banking industry now is estimated to have $67 trillion in assets.

Note, as of November 7, 2012, the Federal Reserve H.8 statistical release shows that the total assets of all commercial banks in the United States amounts to a little less than $13 trillion. Third, the United States has the largest amount of shadow banking assets in the world, about $23 trillion.

Note, the share of activity based in the United States “has decline from 44 percent in 2005 to 35 percent in 2011.” The eurozone has $22 trillion in assets while Great Britain has $9 trillion.

What is a shadow bank? Lord Adair Turner, the U.K. regulator that led the FSBs work stated, “If it looks like a bank and quacks like a bank, it has got to be subject to bank-like safe-guards.” So, shadow banking is like pornography, it is what is in the eye of the beholder … in this case the regulator. It looks, therefore, as if we are in for another major round of rules and regulation for the finance industry … worldwide!

Looking for a job? I have seen many, many references to the health industry as the place to be if you want to get employed over the next decade or so. Looks to me like we have another growth industry here! If you want to get employed in a good steady job for an extended period of time become a regulator of the financial industry. Sounds like there are going to be plenty of jobs available and … read the rest

Evolving Financial Institutions

Posted on November 20, 2012

So much of the world is in transition, why do people want the commercial banking industry to be what it was many years ago? This is just not going to happen.

As I have written many, many times, finance is information! We have seen, over the past fifty years or so how the advancements in information technology have contributed, for better or worse, to the innovations that have taken place in financial institutions and financial instruments.

Given the continuing advancements in the information technology field how can we not expect the financial field to continue to evolve? Check out all that is being done in mobile banking these days. At least in my area of the world I am seeing more and more advertisements about mobile banking and what it does for the customer.

And, this is just the ground level. More and more people you talk with and read about claim that they have only gone into a bank office once or twice in the past two or three years. And, the only reason they went into the bank was to complain about not receiving notifications from the bank that their interest rates were being dropped. If this is not enough, read David Wolman’s book, “The End of Money” (Da Capo Press, 2012).

But, who is going to even keep their money in a typical commercial bank? I don’t. I work with an institution that satisfies my banking needs and ties all my financial relationships together so that I can move seamlessly from one asset class to another almost instantaneously.

How about my mortgage? (Yes, I have one!) The commercial bank I know set me up with their affiliated mortgage that immediately sold the mortgage to Wells Fargo (WFC), which now just services the loan because it is owned by Fannie … read the rest

August 2012 – The Future of Small Business Financing

Posted on August 23, 2012

Everyone loves small business.

At least that’s what the politicians want you to believe.

The reality is different. Small business is under attack from every quarter. Government policies favor large banks and large multinational businesses. Credit is tight and the banks favor the larger borrowers. Increased regulations stifle innovation and protect large incumbents that can afford teams of lawyers and lobbyists.

What’s the little guy to do? Waiting for the politicians to change the system is wishful thinking. Smart business people find ways to prosper in every environment.


And the current environment is not great for small firms. The Federal Reserve Senior Loan Officer survey has recently confirmed what we have suspected for some time: banks have been more generous in easing underwriting requirements for larger companies than they have been for smaller companies. Paynet, which maintains data on 17 million small business loans, reports that lending conditions for small firms have deteriorated in recent months after two years of bounce back from the 2009 bottom.  For additional details go to the full article on Capital Matters.


Financial Market Risk
And there’s a risk that things could get a lot worse for businesses that don’t tie down their financing soon.  We just published an article on Seeking Alpha that has received a great deal of attention with more than 14,400 page views so far. Our thesis is that the Fed’s zero interest rate policy has led to a situation where longer term treasury bonds are trading at yield levels that provide a spread to inflation far below the historical norms. Markets eventually return to their mean and often overshoot it so there is growing risk in the longer term debt market. Our concern is two-fold. First, that individual investors need to be aware of the potential impact of this return to the mean … read the rest

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