Monday, February 19, 2018

FDIC Chairman's "Living Will" Speech @ Wharton, NY Fed Revises GDP Down, FDIC Publishes Annual Report & Survey Shows Slight Wage Relief

Remarks by Martin J. Gruenberg, Chairman, Federal Deposit Insurance Corporation “Resolving a Systemically Important Financial Institution: A Progress Report”, The Wharton School University of Pennsylvania; Philadelphia, PA


You can learn a great deal by listening to the "public" speeches given by Fed leadership. It's one thing to give testimony on Capital Hill, it's quite another to give a speech in front of people that actually know what you're talking about. In this speech, Gruenberg, the Chairman of the FDIC, discusses the actions taken over the past 10 years to ensure against another "Great Recession".

He discusses the establishment of the Dodd-Frank Act and the authority it gave the FDIC to manage the orderly failure of banks in times of crisis. Among other things, the new authorities gave the FDIC:

        The ability to place the financial firm, including its holding company, into a receivership process;
        An Orderly Liquidation Fund to assure liquidity for the orderly wind down and liquidation of the failed firm;
        Authority to impose a short stay on derivatives contracts; and
        The ability to coordinate with foreign authorities in the case of a firm with global operations.

"The progress has been substantial and I believe not well appreciated," Gruenberg concludes. What hasn't he and his team been appreciated for?


The Evolution of the Living Will Process


As a way to create a framework around an orderly bank liquidation, the FDIC created the living will process. According to Gruenberg, the living will "required both the Federal Reserve and the FDIC to consider the objectives of the process, the standards and the guidance that would need to be provided to the firms to achieve the objectives, and the means of engagement with the firms to assist them in following the guidance". This process required banks to provide a description of the following:

    The firm’s strategy for orderly resolution in bankruptcy during times of financial distress;
    The range of actions the firm proposes to take in resolution; 
    Liquidity and capital needs and resources of the firm;
    A description of the firm’s organizational structure, material entities, interconnections, and interdependencies; and
    The firm’s corporate governance process. 

The only thing that really matters here is liquidity. With the right liquidity and capital resources, any crisis can be avoided or at least pushed off, but for how long?


The truth is, none of these changes would have saved Lehman Brothers or Bear. None of these resolutions would have made AIG confess to creating bad securities. The truth is, everything happened exactly how the banks wanted it to happen. They got a huge bailout, 10 years of free money, and trillions in reserves at the Fed. To top it all off, Dodd-Frank approved a resolution to pay banks for those reserves. Who pays the interest? We do. The American taxpayer. We don't control rates or the amount of reserves held at the Fed, but we have to pay whatever rate the Fed sets on those reserves. Sounds fair. This is why people are gravitating toward Bitcoin and precious metals.

In other news, Nowcast is a forecast of the upcoming GDP announcement. It was updated and revised down to 3.11%. The leading causes are due to a decline in:
  •     capacity utilization,
  •     industrial production,
  •     general business conditions (as reported in a daily brief last week); and,
  •     retail sales.

In other words, all things driven by consumer demand are starting to decline, while anything driven by debt (inflation, pricing and housing) are on the rise.

The Empire State Manufacturing Survey/Business Leaders Survey included a supplemental survey on wages, a critical piece of the consumer demand equation. Wages are of key interest because without wages, GDP will continue to fall -- not everyone has access to massive amounts of debt. What does the survey show? Job openings are taking longer to fill, manufacturers are hiring more, and starting pay is going up. Will it be enough to impact earnings? My guess is no. Why? Wall Street doesn't like wage increases.

If you like what you're reading, please join my mailing list to receive blog posts and updates as they occur. If you're an investor with all of your assets tied up in the stock market and cash, you might want to consider a few diversification strategies. Gold is the oldest asset in the world and it's inflation proof. Bitcoin is the gold standard for the cryptocurrency world, which is the fastest growing asset class in the world. Diversifying your portfolio into one or both of these assets can help to insure your portfolio against a stock market crash or inflation.

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