Bursting bubbles

Bank Of England Advisor 'We've Intentionally Blown The Biggest Government Bond Bubble In History'

A key Bank of England policymaker has warned of the risks to global financial stability when "the biggest bond bubble in history" bursts

Blacklisted News,

13 June, 2013

In a wide-ranging testimony to MPs, Andy Haldane, Bank of England director of financial stability, admitted the central bank's new financial policy committee is taking too long to force banks to hold more capital and appeared to criticise the bank's culture under outgoing governor Sir Mervyn King.Haldane told the Treasury select committee that the bursting of the bond bubble – created by central banks forcing down bond yields by pumping electronic money into the economy – was a risk "I feel acutely right now".

He also said banks have now put the threat of cyber attacks on the top of their the worry-list, replacing the long-running eurozone crisis.

"You can see why the financial sector would be a particularly good target for someone wanting to wreak havoc through the cyber route," Haldane said.

But he described bond markets as the main risk to financial stability. "If I were to single out what for me would be biggest risk to global financial stability right now it would be a disorderly reversion in the yields of government bonds globally." he said. There had been "shades of that" in recent weeks as government bond yields have edged higher amid talk that central banks, particularly the US Federal Reserve, will start to reduce its stimulus.

"Let's be clear. We've intentionally blown the biggest government bond bubble in history," Haldane said. "We need to be vigilant to the consequences of that bubble deflating more quickly than [we] might otherwise have wanted."

The Bank of England later issued a statement, describing Haldane's remarks as his "personal view" and stressed that if it raised interest rates – stuck at record lows since March 2009 – too quickly the consequences might be severe. "Any attempt to return interest rates quickly to more normal levels would recreate recession conditions," the Bank of England. Haldane said the FPC was on alert to any bubbles created by the help to buy mortgage guarantee scheme for first-time buyers and house movers, stressing the scheme should be temporary. Referring to the US, he said: "Fannie Mae and Freddie Mac were temporary schemes and 75 years later they were still in place and blowing the world up."

He said the FPC, which meets quarterly at the Bank of England to spot the next financial crisis, had not been "entirely free" of political interference over the way the bailed out banks Royal Bank of Scotland and Lloyds Banking Group had been forced to raise more capital.

A member of the FPC since it was created by the coalition in 2011, Haldane admitted the body had "lacked clarity and decisiveness" in setting capital levels for banks after first starting making recommendations on capital in 2011 but not concluding the shortfall was £25bn until March 2013.

"With hindsight that was too long a period of uncertainty," Haldane said.

He had argued more capital should have been put into the major banks and that the Treasury's refusal to put more cash into RBS and Lloyds had "constrained" options available to the FPC.

In his written evidence he seemed to refer to the management style of the outgoing governor. Haldane wrote that one of his personal objectives as "to contribute making the bank a more conversational, less hierarchical, more diverse, somewhat humbler organisation as a way of improving its accountability credibility and the quality of its decision making".

Andrew Tyrie, the chairman of the Treasury select committe, later raised comments made by Haldane and Donald Kohn, an external member of the FPC who also gave evidence, about the need to give the FPC power to limit the risks banks can take through the so-called leverage ratio. Haldane described this ratio as "the most robust measure of bank capital adequacy".

International regulators are setting a leverage ratio at 3% by 2019 – which allows banks to leverage their capital 33 times – and the FPC had wanted the ability to be able to adjust this ratio to limit the risks banks run.

"Mr Haldane told us that 'a 33 times leveraged banking system sends shivers down my spine, if it were to be a long-run goal for financial stability'," said Tyrie. "The government should accept the banking commission's recommendations without further delay and grant the FPC this power," Tyrie said.

Haldane said: "For the FPC not to have been given directive powers over this instrument is a significant structural flaw in the current macro-prudential regime."

"Bail-ins" for British banks

FDIC & BANK OF ENGLAND CREATE RESOLUTION AUTHORITY FOR UNLIMITED CYPRUS-STYLE “BAIL-INS” FOR TBTF BANKS!

Silver Doctors

30 March, 2013

*BREAKING SD ALERT*

On Wednesday, SD broke the news that Canada had buried a provision for depositor bail-ins for systemically important banks deep inside its official 2013 budget, and stated that the Cypriot bail-in was not just a one-off event, but is in fact the new collapse template for the entire Western banking system.

We suspected that the same policy change had been made by the US & the UK, but was simply yet to be discovered, buried in the website of a Federal agency.

We suspected correctly…

In the introduction, the resolution informs readers that the FDIC and the Bank of England have been working together to formulate the new bail-in model for future bank failures:

The Federal Deposit Insurance Corporation (FDIC) and the Bank of England—together with the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of New York, and the Financial Services Authority— have been working to develop resolution strategies for the failure of globally active, systemically important, financial institutions (SIFIs or G-SIFIs) with significant operations on both sides of the Atlantic.

The goal is to produce resolution strategies that could be implemented for the failure of one or more of the largest financial institutions with extensive activities in our respective jurisdictions. These resolution strategies should maintain systemically important operations and contain threats to financial stability. They should also assign losses to shareholders and unsecured creditors in the group, thereby avoiding the need for a bailout by taxpayers.

The joint US/UK resolution states that depositor haircuts are already legal in the UK thanks to the 2009 UK Banking Act:

In the U.K., the strategy has been developed on the basis of the powers provided by the U.K. Banking Act 2009 and in anticipation of the further powers that will be provided by the European Union Recovery and Resolution Directive and the domestic reforms that implement the recommendations of the U.K. Independent Commission on Banking.  Such a strategy would involve the bail-in (write-down or conversion) of creditors at the top of the group in order to restore the whole group to solvency.

And that the legal authority has already been given in the US buried in Dodd-Frank:

It should be stressed that the application of such a strategy can be achieved only within a legislative framework that provides authorities with key resolution powers. The FSB Key Attributes have established a crucial framework for the implementation of an effective set of resolution powers and practices into national regimes. In the U.S., these powers had already become available under the Dodd-Frank Act. In the U.K., the additional powers needed to enhance the existing resolution framework established under the Banking Act 2009(the Banking Act) are expected to be fully provided by the European Commission’s proposals for a European Union Recovery and Resolution Directive (RRD) and through the domestic reforms that implement the recommendations of the U.K. Independent Commission on Banking (ICB), enhancing the existing

resolution framework established under the Banking Act.

The development of effective resolution strategies is being carried out in anticipation of such legislation.

The unsecured debt holders can expect that their claims would be written down to reflect any losses that shareholders cannot cover, with some converted partly into equity in order to provide sufficient capital to return the sound businesses of the G-SIFI to private sector operation. Sound subsidiaries (domestic and foreign) would be kept open and operating, thereby limiting contagion effects and cross-border complications. In both countries, whether during execution of the resolution or thereafter, restructuring measures may be taken, especially in the parts of the business causing the distress, including shrinking those businesses, breaking them into smaller entities, and/or liquidating or closing certain operations.

The resolution states that while the US would prefer large financial institutions be resolved through ordinary bankruptcy, depositor wealth confiscation will be pursued in the case of a systemically important institution (i.e. BOA, JPMorgan, Goldman Sachs, etc):

As demonstrated by the Title I requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), the U.S. would prefer that large

financial organizations be resolvable through ordinary bankruptcy. However, the U.S. bankruptcy process may not be able to handle the failure of a systemic financial institution without significant disruption to the financial system.

 

The resolution authority states that shareholders would lose all value prior to depositor scalpings:

Under the strategies currently being developed by the U.S. and the U.K., the resolution authority could intervene at the top of the group.  Culpable senior management of

the parent and operating businesses would be removed, and losses would be apportioned to shareholders and unsecured creditors. In all likelihood, shareholders would lose all value and unsecured creditors should thus expect that their claims would be written down to reflect any losses that shareholders did not cover.

Under both the U.S. and U.K. approaches, legal safeguards ensure that creditors recover no less than they would under insolvency.

 

The banksters plans for a bail-in resolution agency include investment banks and clearing houses as well as deposit bearing institutions!!!

The introduction of a statutory bail-in resolution tool (the power to writedown or convert into equity the liabilities of a failing firm) under the RRD is critical to implementing a whole group resolution of U.K. firms in a way that reduces the risks to financial stability. A bail-in tool would enable the U.K. authorities to recapitalize an institution by allocating losses to its shareholders and unsecured creditors, thereby avoiding the need to split or transfer operating entities. The provisions in the RRD that

enable the resolution authority to impose a temporary stay on the exercise of termination rights by counterparties in the event of a firm’s entry into resolution (in other words, preventing counterparties from terminating their contractual arrangements with a firm solely as a result of the firm’s entry into resolution) will be needed to ensure the bail-in is executed in an orderly manner.

The existing Banking Act does not cover nondeposit-taking financial firms, notably investment banks and financial market infrastructures (clearing houses in particular), the failure of which, in many cases, would also have significant financial stability consequences. The Banking Act also has limitations with regard to the application of resolution tools to financial holding companies. The U.K. is in the process of expanding the scope of the Banking Act to include these firms. This is expected to be achieved through the introduction of the U.K. Financial Services Bill, which is due to complete its passage through Parliament by the end of this year.

 Exactly as played out with the Cyprus template, depositors will receive equity shares in the new, bailed-in institution:

The remaining claims of the debt holders will be converted, in part, into equity claims that will serve to capitalize the new operations. The debt holders may also receive convertible subordinated debt in the new operations. This debt would provide a cushion against further losses in the firm, as it can be converted into equity if needed. Any

remaining claims of the debt holders could be transferred to the new operations in the form of new unsecured debt.

 

Exactly as played out with the Cyprus template, depositor funds will be stolen in whatever quantities are required to keep the TBTF zombie bank afloat:

Once the recapitalization requirement has been determined, an announcement of the final terms of the bail-in would be made to the previous security holders.

This announcement would include full details of the write-down and/or conversion.

Debt securities would be cancelled or written down in order to return the firm to solvency by reducing the level of outstanding liabilities.  The losses would be applied up the firm’s capital structure in a process that respects the existing creditor hierarchy underinsolvency law. The value of any loans from the parent to its operating subsidiaries would be written down in a manner that ensures that the subsidiaries remain solvent and viable.

For now (until the rules are changed when a greater need for funds arises, funds will only be stolen from depositors with more than the FDIC insured $100,000 in their account:

Insofar as a bail-in provides for continuity in operations and preserves value, losses to a deposit guarantee scheme in a bail-in should be much lower than in liquidation.

Insured depositors themselves would remain unaffected. Uninsured deposits would be treated in line with other similarly ranked liabilities in the resolution process, with the expectation that they might be written down.

 

In order for the resolution to work, the banksters state that the public must be convinced their deposits are safe, when in fact they are subject to bail-in confiscation:

 

Similarly, because the group remains solvent, retail or corporate depositors should not have an incentive to “run” from the firm under resolution insofar as their banking

arrangements, transacted at the operating company level, remain unaffected.  In order to achieve this, the authorities recognize the need for effective communication to depositors, making it clear that their deposits will be protected.

0.1% interest on savings deposits with the now VERY REAL THREAT OF COMPLETE CONFISCATION in the US & UK doesn’t sound like such a great return to us.

The Fed appears to be making a calculated play to force savings out of the TBTF banks and into stocks and real estate, a move that is likely to backfire spectacularly.

UK: Negative interest rates?

Bank of England mulls negative interest rates

Deputy Governor floats plan that could mean new charges for customers

the Independent,

26 February, 2013

People across Britain could see their savings hit or face new charges on their current accounts after a senior official at the Bank of England proposed the “extraordinary” measure of imposing negative interest rates on banks.

Deputy Governor Paul Tucker said the idea of charging high street banks to store money centrally, rather than paying them interest, should be explored as a way of easing the flow of credit to the stagnant economy.

“I hope we will think about whether there are constraints to setting negative interest rates,” he told MPs on the Treasury Select Committee. Although such a move has been discussed by the Bank of England in the past, Mr Tucker’s comments are the strongest indication yet that it is under serious consideration.

It is hoped that the prospect of negative interest rates would encourage banks to lend more - but analysts warned that it would dent banks’ profitability and that the sector would probably respond by cutting interest rates on savings accounts, or even introducing current account charges.

“It’s very clear this would be expected to bring downward pressure on the rates savers can expect, pushing them down towards zero,” said Malcolm Barr of JP Morgan.

It is thought that the banks would seek to make a profit by lending the funds out to companies and households. The Swedish central bank imposed negative interest rates in 2009 with this goal in mind.

But any move that further eroded the returns of savers, even indirectly, would face a backlash. Savings rates paid by high street banks have fallen to record lows since the Bank slashed its main policy rate to 0.5 per cent in March 2009 to support the freefalling economy. The average rate on an easy access savings account today stands at around 2 per cent - less than the annual inflation rate of 2.7 per cent.

Savers have also complained of being squeezed indirectly by the Bank’s Funding for Lending Scheme, which has provided high street banks with new sources of cheap funding, removing the pressure on them to compete for deposits by offering attractive rates.

Another concern is that the Bank’s £375bn Quantitative Easing scheme has pushed down the value of annuities - although the Bank has pointed out that the money printing programme has also bolstered the value of pension pots by boosting share prices, leaving people, ultimately, no worse off.

Despite floating the idea of negative interest rates, Mr Tucker was careful to stress that no decision had been made. “It would be an extraordinary thing to do and it needs to be thought through carefully,” he said. Mr Tucker, who was an unsuccessful candidate to succeed Sir Mervyn King as the next Governor in July, added: “[It’s] not something anyone should clutch on to as the answer to the universe.”

Mr Tucker’s idea was described as a “panic measure” by Ros Altmann, an expert on pensions. “Interest rates are already negative for savers,” she said. “It’s hard to see why this would make a hoot of difference to lending when rates at 0.5 per cent haven’t.”

Andrew Sentence, a former member of the Monetary Policy Committee, said the Bank was still looking for monetary policy to deliver things that it was simply unable to achieve. “When you look at these options – just as we’re discovering with the Funding for Lending Scheme – you run into other problems, particularly for savers.”.

Samuel Tombs of Capital Economics said there were better ways for the Bank to boost lending, such as enhancing the generosity of the Funding for Lending Scheme.

However, not all financial analysts were dismissive of Mr Tucker’s idea. “Negative interest rates will increase the pressure to lend and the mortgage market would be a major beneficiary of any such action,” said Ray Boulger of independent mortgage advisers John Charcol.

Last year the International Monetary Policy Committee proposed the Bank should look at taking its main policy rate below 0.5 per cent in order to boost the economy. But monetary policymakers rejected this idea, arguing that it would damage the profitability of building societies.

The Bank of England

Mark Carney, Incoming Governor of the Bank of England, Dives Straight Into Monetarist Loony Bin

Mish's Global Economic Analysis,

12 December, 2012

Mark Carney, Bank of Canada governor and surprise pick to replace Mervyn King as incoming governor of the Bank of England, dove straight into the monetarist looney bin today with policy proposals.

The Telegraph reports Mark Carney hints at need for radical action to boost ailing economies 

 Mr Carney, the current Bank of Canada governor who takes over from Sir Mervyn King next June, said central bankers should consider committing to low interest rates until inflation and unemployment met “precise numerical thresholds”, or even changing “the policy framework itself” to stimulate a desperately weak economy.

His words were directed at the Bank of Canada but will be seen as a hint that he will push for radical action in the UK, where the economy has been stagnant for two years. On his appointment, he said that he would be going “where the challenges are greatest”.

Addressing the Chartered Financial Analyst Society in Toronto, Mr Carney said that in major slumps: “To achieve a better path for the economy over time, a central bank may need to commit credibly to maintaining highly accommodative policy even after the economy and, potentially, inflation picks up. 

“To 'tie its hands’, a central bank could publicly announce precise numerical thresholds for inflation and unemployment that must be met before reducing stimulus.”

He added: “If yet further stimulus were required, the policy framework itself would likely have to be changed. For example, adopting a nominal GDP level target could in many respects be more powerful than employing thresholds under flexible inflation targeting.”

The proposals would be anathema to Sir Mervyn, who has publicly refused to abandon the inflation target or commit to long-term low rates.

Economic Lunacy

Only arrogant fools think they can overpower markets without causing even more severe problems down the road.

If fiscal and monetary stimulus worked, Japan would be a glowing success today instead of having a debt to GDP ratio approaching 250%.

The US housing bubble is another case in point. 

By holding interest rates too low, too long Fed chairman Alan Greenspan bailed out banks then deep in hock with nonperforming loans to South America and dotcom companies going bust. The end result was a housing bubble far bigger than the dotcom tech bubble that preceded it.

Indeed, Fed policy has spawned bubbles of ever increasing amplitude over time. The only beneficiaries of those bubbles have been the banks and the already wealthy.

Carney the "Talented" Speaker

Carney is a  talented speaker, able to speak out of both sides of his mouth at once, each saying opposite things.

In light of Carney's "radical action" statements, please consider Bank of Canada warns of low-rate risk.

 The Bank of Canada says low-interest policies that it and other central banks have put in place are adding another layer of risk to the already stressed global financial system.

The Canadian central bank says that the near record level interest rates that have been in place since the 2008-09 recession are taking their toll on insurance companies and pension funds.

Low rates, it adds, are even increasing the appetite of investors to take risks in search of higher returns.

Bank governor Mark Carney has warned about the dangers of low interest rates — which most Canadians consider a good thing — sporadically in the past.

Also consider these December 11, snips from the Globe and Mail.

 “Our current guidance indicates that some policy action may be necessary, encouraging a degree of prudence in household borrowing,” Mr. Carney said in his speech, echoing the warnings of the Bank of Canada’s last policy statements.

As it has said in the past, the biggest domestic threat to financial stability “continues to stem from the elevated level of household indebtedness and stretched valuations in some segments of the housing market.”

Nothing like warning about debt and low interest rates, while pledging to keep interest rates low until artificial central planning targets are met. 

Carney stated the central bank "would clearly say we are doing so" if it chose to act on consumer debt.

Yep, I don't doubt that. Indeed, I suggest that Carney would notify banks in advance of any major policy moves.

Goldman Sachs Background

Let's back up a bit and look at Carney's background as listed on Wikipedia. 

 Carney spent thirteen years with Goldman Sachs in its London, Tokyo, New York and Toronto offices. His progressively more senior positions included co-head of sovereign risk; executive director, emerging debt capital markets; and managing director, investment banking. He worked on South Africa's post-apartheid venture into international bond markets, and was involved in Goldman's work with the 1998 Russian financial crisis.

Goldman's role in the Russian crisis was criticized at the time because while the company was advising Russia it was simultaneously betting against the country's ability to repay its debt.

From a Goldman Sachs and JP Morgan standpoint, Carney is the perfect candidate to head the Bank of England. Who could possibly be better than a currency crank promising clear signals, with a background of advising Russia while betting against it?

As a practical matter, however, should Carney actually implement his "radical action" policies, I suggest the UK would quickly be in ruins.

The Keiser Report

From Travellerev:

“Update: If you want to organize debt resistance for yourself here is a handy PDF to help you on your merry way.

Most of us don’t know how cheap our debts are  to buy up for debt collectors who, once they acquire those debts, squeeze us for every penny they can get out of us. Here is a group who does something entirely novel. They buy debt for cents on the dollar and forgive them. How novel and how incredibly promising for our future and for those of us who have say, debt due to medical conditions”.

Keiser Report: Hermaphrodite Banking

In this episode, Max Keiser and Stacy Herbert welcome Mark Carney to the City of London freak show at which Max predicts that Carney will play the bearded hermaphrodite who devalues the pound by 25 percent and yet only manages to introduce an ice age of economic growth. Max and Stacy also compare the rebels robbing the central bank in Goma to the Goldman Sachs takeover of central banks in Europe.

In the second half, Max Keiser talks to professor and author, Andrew Ross, about the 'angel capitalists' striking debt across America and about the historic Black Friday strike at Walmart.

'Goldman Sachs rules the world'

Goldman's Global Domination Is Now Complete As Its Mark Carney Takes Over Bank Of England

Zero Hedge,
26 November, 2012



Back on July 3, we made an explicit and very simple prediction: "now that the natural succession path at the BOE has been terminally derailed, it brings up those two other gentlemen already brought up previously as potential future heads of the BOE, both of whom just happened to work, or still do, at... Goldman Sachs:  Canada's Mark Carney or Goldman's Jim O'Neil. Granted both have denied press speculation they will replace Mervyn King, but it's not like it would be the first time a banker lied to anyone now, would it (and makes one wonder if this whole affair was not merely orchestrated by the Squid from the get go... but no, that would be a 'conspiracy theory'.)"


A few weeks later, in "On The Path To Global Goldmanation: Former Goldmanite Mark Carney To Head The BOE After All?" we added:

Granted both have denied press speculation they will replace Mervyn King, but it's not like it would be the first time a banker lied to anyone now, would it (and makes one wonder if this whole affair was not merely orchestrated by the Squid from the get go... but no, that would be a 'conspiracy theory'.)" We wonder if this speculation can be upgraded from conspiracy theory to conspiracy fact, now that Bloomberg itself has written a major article discussing just this suddenly very likely outcome.

From Bloomberg:

Carney Leading Bank of England Seen as Scandal Remedy

London is losing so much trust as the global financial center that Prime Minister David Cameron may need to consider an unprecedented choice for Bank of England governor: Mark Carney, the Canadian who polices the world’s financial system and has no ties to the bailouts or rigged markets tainting Labour and Conservative governments alike.

 

The 47-year-old Carney, who received his masters and PhD degrees from Oxford University, is no stranger to the City of London after working there with Goldman Sachs Group Inc. Now serving as governor of the Bank of Canada and the head of the Financial Stability Board, he is unscathed by the fallout from the 2008 financial crisis.

 

“Mark Carney is one of the brightest, most capable people I’ve ever met in global finance and central banking,” said Tim Adams, a former U.S. Treasury undersecretary who worked with Carney at Group of Seven meetings. “I’ve been around these circles a long time and he’s smart, politically savvy, a good manager and has an outstanding track record. It’s tough to find all those elements in a single person.”

 

Domestic candidates for the job include Gus O’Donnell, former head of the U.K. civil service, Financial Services Authority Chairman Adair Turner and Bank of England Deputy Governor Paul Tucker, a three-decade veteran at the bank.

There is one problem regarding the domestic candidates: none of them have Goldman on their resume, something which sets not only Mark Carney, but also Bill Dudley and Mario Draghi apart.

As for the punchline:

“Why not get a head that’s global? Bankers aren’t very popular, and a Canadian sounds like a good choice,” said Kent Matthews, a professor at Cardiff University and former Bank of England researcher. “It may well be that to restore credibility they have to look outside.”

 

So that's the strategy: play Carney off as a Canadian, instead of as Goldman. We wonder how many minutes the general public will be fooled by that particular strawman.

* * *

We are, once again, 100% correct, and have beaten all the bookie odds which had Tucker as a favorite and Mark Carney as a long odds outsider. Pity: all one needs to realize and remember how the events in the world play out is to remember one simple thing: GOLDMAN SACHS RUNS IT. Everything else is secondary.


As we expected months ago, it has just been confirmed.

• MARK CARNEY NAMED AS NEXT BANK OF ENGLAND GOVERNOR
• OSBORNE: CARNEY WILL BRING FRESH PERSPECTIVE
• OSBORNE: CARNEY WON'T COMMENT ON U.K. POLICY BEFORE TAKING POST
• BANK OF CANADA GOVERNOR CARNEY SAYS HONORED TO ACCEPT BOE ROLE
• OSBORNE SAYS U.K. NEEDS `THE VERY BEST' AT THIS TIME
• OSBORNE SAYS CARNEY IS BEST, MOST EXPERIENCED CANDIDATE
  

And as we showed back on July 26...

Europe before:




and After:





Finally, our conclusion from that article, which today merely encapsulated:

• Because with money printing squids like these, who needs sovereign states?
  

Q.E.D.