VACACIONES OCTUBRE 2016 (CLICK ON LINK)
The Promise of Bank Mergers
Xavier Vives
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BARCELONA – The banking business has fallen on hard times. The combination of persistent low interest rates, increasing regulatory compliance costs, and the rise of new competitors taking advantage of financial technologies (fintech for short) has produced, in Europe in particular, excess capacity and low profitability – and a strong temptation to merge.
In a difficult market, mergers – by enabling banks to cut costs, share information-technology platforms, and increase market power, thereby relieving pressure on margins and rebuilding capital – make sense. And the banks know it. Witness the recent merger talks between Deutsche Bank and Commerzbank, both of which have faced huge declines in market capitalization.
So a wave of mergers may be on the way. The question is whether that approach really can solve banks’ problems and benefit society.
To be sure, mergers and acquisitions are not always a matter of escaping trouble. In fact, M&A activity – both the number and size of transactions – was picking up before the 2008 global financial crisis, including across borders within and beyond the eurozone. After peaking in 2007, such activity diminished, as domestic restructuring took precedence, particularly in countries such as Greece and Spain, which had to implement difficult adjustment programs.
Moreover, the M&A approach does not always work. In October 2007, a consortium formed by the Royal Bank of Scotland, Fortis, and Banco Santander acquired ABN AMRO – the world’s biggest bank takeover to date. RBS and Fortis failed soon after and had to be rescued.
Nonetheless, supervisory bodies favor mergers to save banks in trouble. Competition authorities tend to be more reluctant, recognizing the danger that large-scale mergers can consolidate an anti-competitive market structure, while creating even more “too big to fail” banks that may cause financial instability in the future. But they are often overruled or compelled to acquiesce. The US Department of Justice agreed to the merger between Wells Fargo and Wachovia, among others, soon after the 2008 financial crisis, and the UK Office of Fair Trade was overruled in the merging of HBOS and Lloyds.
Competition is not the only source of merger-related tension among authorities. There is also friction between national supervisors, who prefer domestic mergers, and supranational supervisors, who prefer cross-border mergers within their jurisdiction (the eurozone, in the European Central Bank’s case). The benefits of cross-border consolidation are that market power is diluted in a large market, and more diversification is obtained, though these gains come at the price of weakened cost synergies.
From the banks’ perspective, cross-border mergers may potentially be the better option, as long as they occur within a single supervisory framework. That way, they can benefit from common supervision and resolution. The eurozone’s new supervisory framework, supervised by the ECB and possessing a common resolution authority, reflects this recognition of the benefits of cross-border mergers.
But Europe lags when it comes to such mergers, owing to a broader lack of financial integration. Indeed, in the European Union, member countries’ own banks tend to be the dominant players in the domestic market – say, BNP Paribas in France or UniCredit in Italy.
In the United States, by contrast, the same large banks – such as Bank of America, JPMorgan Chase, and Wells Fargo – tend to dominate a large number of different states.
US banks have had more space to diversify. For European banks – which must navigate vast differences in culture, language, and law in pursuing cross-border mergers – this has been much more difficult, especially because many of them also need to cut overcapacity drastically.
As a result, in the near term, European banks are more likely to pursue domestic – or, at most, regional – consolidation.
For the United Kingdom, which voted in June to “Brexit” the EU, the situation is particularly complicated. The UK long benefited from an open policy on acquisitions by foreign banks, which allowed, for example, the Spanish Santander Group to bid for Britain’s Abbey National in 2001.
But Brexit will probably move supervision of UK-based banks out of the EU framework, raising the cost of cross-border deals and implying a loss to British consumers. As the UK banking sector’s competitiveness suffers, the temptation to return to the kind of light-touch regulation that enabled the crisis in the first place could intensify.
As for the rest of Europe’s banks, now might be the time to consider the merger option.
Mergers are no silver bullet, but they could help to alleviate serious problems relatively quickly – though, in the longer term, the banks would still have to tackle the legacy of heavy and rigid structures and rebuild their reputations, with a strong focus on consumer service and fairness.
At the same time, if a merger strategy is to work for the good of society, competition must be preserved. If incumbents simply continue to get larger, blocking new competitors from entering the market, they will end up facing intrusive regulatory compliance programs and higher capital requirements. New market entrants would have more flexibility and thus might be able to offer new, more appealing deals to customers.
This is why bank supervision and competition policy must work in tandem to ensure a level playing field. On one hand, regulations must apply to all firms performing banking functions, including new fintech institutions. On the other hand, implicit subsidies to too-big-to-fail banks must be dropped.
Bank mergers hold much promise, particularly in Europe. To realize their potential will require the right policy mix, focused on consumer protection and fair competition. Europe’s banks and banking authorities will need to step up their game.
Clear And Present Danger!
Chris Vermuelen
The cycle since 2009 has been different from other market cycles in one significant manner.
That having been said, it is the global central banks that have intentionally pushed interest rates to zero and below. This encouraged investors to speculate on the equity markets, which have now become dangerously overvalued, overbought, and "over bullish" - extremes according to all measures. In my opinion, this has deferred - and not eliminated - the disruptive unwinding of this speculative episode.
That having been said, it is the global central banks that have intentionally pushed interest rates to zero and below. This encouraged investors to speculate on the equity markets, which have now become dangerously overvalued, overbought, and "over bullish" - extremes according to all measures. In my opinion, this has deferred - and not eliminated - the disruptive unwinding of this speculative episode.
They have encouraged an historic expansion of public and private debt burdens with equity market overvaluations that rivals only those of the 1929 and 2000 extremes on reliable valuation measures. The brazen experimental policies of central banks have amplified the sensitivity of the global financial markets to economic disruptions and distortions of value in relation to investor risk aversion.
It is very clear that a zero interest rate policy has encouraged yield-seeking speculation by investors. As I have previously discussed in many of my past articles, monetary easing in and of itself does not support the financial markets. Easy money merely stimulates speculation while investors are already inclined to embrace even more risk. The FED's aggressive and persistent easing will fail to prevent this market collapse.
Any financial professional who has any understanding of how securities are priced should know that elevating the price that investors pay for financial securities does not increase aggregate wealth. Financial securities (stocks) are nothing but a claim to some future set of cash flows. The actual wealth is embroiled in those future cash flows and the value-added production that generates them. Every security that is issued MUST be held by someone until that security is retired. Therefore, elevating the current price that investors pay for a given set of future cash flows simply brings forward investment returns that would have otherwise been earned later on. The FED is leaving poorly compensated risk on the table for the future!
The total debt of the United States has reached gigantic proportions well beyond 2008.
The crisis ended in the second week of March of 2009, precisely when the Financial Accounting Standards Board (FASB) responded to congressional pressure and changed rule FAS157 so as to remove the requirement for banks and other financial institutions to mark their assets to market value. The mere stroke of a pen has eliminated any chance of widespread defaults by making balance sheets look financially stronger. The new balance sheets may be great in the short term, but, ultimately, have become weapons of mass destruction.
The Race To Debase Continues...
As of September 2nd, 2016, the BLSBS disappoints with a print of just 151,000 jobs. This will eliminate the possibility of a FED funds increase, however, do not be surprised if some FED officials emerge to tell you otherwise, as we are already experiencing some counter-intuitive moves within several of the markets.
The true unemployment rate is ACTUALLY U-6! Consequently, the U-6 rate more accurately reflects a natural, non-technical understanding of what it means to be unemployed. Including discouraged workers, underemployed workers, and other people who exist on the margins of the labor market, the U-6 rate provides a broad spectrum of the underutilization of labor within the country. In this sense, the U-6 rate is the TRUE unemployment rate, which is close to 10%.
U-6 Unemployment Rate 
Concluding Thoughts:
In short, this incredible bull market in stocks, which we have embraced since 2009, is quickly nearing its end. The FED’s mass easy money policies, stock buyback programs, and accounting rule changes have simply masked/covered up most of the financial mess people, businesses, and global economies are in.
Eventually all these tactics to cover-up and kick the financial can down the road will start to fail. One they start failing, things will quickly get really ugly for the entire economy for those not knowing how to avoid and profit from market weakness.
The Gathering Nuclear Storm
Lulled to believe nuclear catastrophe died with the Cold War, America is blind to rising dragons.
By Mark Helprin
Even should nuclear brinkmanship not result in Armageddon, it can lead to abject defeat and a complete reordering of the international system. The extraordinarily complicated and consequential management of American nuclear policy rests upon the shoulders of those we elevate to the highest offices. Unfortunately, President Obama’s transparent hostility to America’s foundational principles and defensive powers is coupled with a dim and faddish understanding of nuclear realities. His successor will be no less ill-equipped.
Hillary Clinton’s robotic compulsion to power renders her immune to either respect for truth or clearheaded consideration of urgent problems. Theodore Roosevelt’s secretary of state once said that he was “pure act” (meaning action). Hillary Clinton is “pure lie” (meaning lie), with whatever intellectual power she possesses hopelessly enslaved to reflexive deviousness.
Donald Trump, surprised that nuclear weapons are inappropriate to counterinsurgency, has a long history of irrepressible urges and tropisms. Rather like the crazy boy-emperors after the fall of the Roman Republic, he may have problems with impulse control—and an uncontrolled, ill-formed, perpetually fragmented mind.
None of these perhaps three worst people in the Western Hemisphere, and few of their deplorable underlings, are alive to the gravest danger. Which is neither Islamic State, terrorism, the imprisoned economy, nor even the erosion of our national character, though all are of crucial importance.
The gravest danger we face is fast-approaching nuclear instability. Many believe it is possible safely to arrive at nuclear zero. It is not. Enough warheads to bring any country to its knees can fit in a space volumetrically equivalent to a Manhattan studio apartment. Try to find that in the vastness of Russia, China, or Iran. Even ICBMs and their transporter-erector-launchers can easily be concealed in warehouses, tunnels and caves. Nuclear weapons age out, but, thanks to supercomputing, reliable replacements can be manufactured with only minor physical testing.
Unaccounted fissile material sloshing around the world can, with admitted difficulty, be fashioned into weapons. And when rogue states such as North Korea and Iran build their bombs, our response has been either impotence or a ticket to ride.
Nor do nuclear reductions lead to increased safety. Quite apart from encouraging proliferation by enabling every medium power in the world to aim for nuclear parity with the critically reduced U.S. arsenal, reductions create instability. The fewer targets, the more possible a (counter-force) first strike to eliminate an enemy’s retaliatory capacity. Nuclear stability depends, inter alia, upon deep reserves that make a successful first strike impossible to assure.
The fewer warheads and the higher the ratio of warheads to delivery vehicles, the more dangerous and unstable.
Consider two nations, each with 10 warheads on each of 10 missiles. One’s first strike with five warheads tasked per the other’s missiles would leave the aggressor with an arsenal sufficient for a (counter-value) strike against the now disarmed opponent’s cities. Our deterrent is not now as concentrated as in the illustration, but by placing up to two-thirds of our strategic warheads in just 14 submarines; consolidating bomber bases; and entertaining former Defense Secretary William Perry’s recommendation to do away with the 450 missiles in the land-based leg of the Nuclear Triad, we are moving that way.
Supposedly salutary reductions are based upon an incorrect understanding of nuclear sufficiency: i.e., if X number of weapons is sufficient to inflict unacceptable costs upon an enemy, no more than X are needed. But we don’t define sufficiency, the adversary does, and the definition varies according to culture; history; the temperament, sanity, or miscalculation of leadership; domestic politics; forms of government, and other factors, some unknown. For this reason, the much maligned concept of overkill is a major contributor to stability, in that, if we have it, an enemy is less likely to calculate that we lack sufficiency. Further, if our forces are calibrated to sufficiency, then presumably the most minor degradation will render them insufficient.
Nor is it safe to mirror-image willingness to go nuclear. Every nuclear state has its own threshold, and one cannot assume that concessions in strategic forces will obviate nuclear use in response to conventional warfare, which was Soviet doctrine for decades and is a Russian predilection now.
Ballistic missile defense is opposed and starved on the assumption that it would shield one’s territory after striking first, and would therefore tempt an enemy to strike before the shield was deployed. As its opponents assert, hermetic shielding is impossible, and if only 10 of 1,500 warheads were to hit American cities, the cost would be unacceptable. But no competent nuclear strategist ever believed that, other than protecting cities from accidental launch or rogue states, ballistic missile defense is anything but a means of protecting our retaliatory capacity, making a counter-force first strike of no use, and thus increasing stability.
In a nuclear world, unsentimental and often counterintuitive analysis is necessary. As the genie will not be forced back into the lamp, the heart of the matter is balance and deterrence. But this successful dynamic of 70 years is about to be destroyed. Those whom the French call our “responsibles” have addressed the nuclear calculus—in terms of sufficiency, control regimes, and foreign policy—only toward Russia, as if China, a nuclear power for decades, did not exist.
While it is true that to begin with its nuclear arsenal was de minimis, in the past 15 years China has increased its land-based ICBMs by more than 300%, its sea-based by more than 400%.
Depending upon the configuration of its missiles, China can rain up to several hundred warheads upon the U.S.
As we shrink our nuclear forces and fail to introduce new types, China is doing the opposite, increasing them numerically and forging ahead of us in various technologies (quantum communications, super computers, maneuverable hypersonic re-entry vehicles), some of which we have forsworn, such as road-mobile missiles, which in survivability and range put to shame our Minuteman IIIs.
Because China’s nuclear weapons infrastructure is in part housed in 3,000 miles of tunnels opaque to American intelligence, we cannot know the exact velocity and extent of its buildup.
Why does the Obama administration, worshipful of nuclear agreements, completely ignore the nuclear dimension of the world’s fastest rising major power, with which the United States and allies engage in military jockeying almost every day on multiple fronts? Lulled to believe that nuclear catastrophe died with the Cold War, America is blind to rising dragons.
And then we have Russia, which ignores limitations the Obama administration strives to exceed. According to its own careless or defiant admissions, Russia cheats in virtually every area of nuclear weapons: deploying missiles that by treaty supposedly no longer exist; illegally converting anti-aircraft and ballistic missile defense systems to dual-capable nuclear strike; developing new types of nuclear cruise missiles for ships and aircraft; keeping more missiles on alert than allowed; and retaining battlefield tactical nukes.
Further, in the almost complete absence of its own “soft power,” Russia frequently hints at nuclear first use. All this comports with historical Soviet/Russian doctrine and conduct; is an important element of Putinesque tactics for reclaiming the Near Abroad; and dovetails perfectly with Mr. Obama’s advocacy of no first use, unreciprocated U.S. reductions and abandonment of nuclear modernization. Which in turn pair nicely with Donald Trump’s declaration that he would defend NATO countries only if they made good on decades of burden-sharing delinquency.
Russia deploys about 150 more nuclear warheads than the U.S. Intensively modernizing, it finds ways to augment its totals via undisguised cheating. Bound by no numerical or qualitative limits, China speeds its strategic development. To cripple U.S. retaliatory capability, an enemy would have to destroy only four or five submarines at sea, two sub bases, half a dozen bomber bases, and 450 missile silos.
Russia has 49 attack submarines, China 65, with which to track and kill American nuclear missile subs under way. Were either to build or cheat to 5,000 warheads (the U.S. once had more than 30,000) and two-thirds reached their targets, four warheads could strike each aim point, with 2,000 left to hold hostage American cities and industry. China and Russia are far less dense and developed than the U.S., and it would take more strikes for us to hold them at risk than vice versa, a further indictment of reliance upon sufficiency calculations and symmetrical reductions.
Russia dreams publicly of its former hold on Eastern Europe and cannot but see opportunity in a disintegrating European Union and faltering NATO. China annexes the South China Sea and looks to South Korea, Japan and Australasia as future subordinates. Given the degradation of U.S. and allied conventional forces previously able to hold such ambitions in check, critical confrontations are bound to occur. When they do occur, and if without American reaction, China or Russia have continued to augment their strategic forces to the point of vast superiority where one or both consider a first strike feasible, we may see nuclear brinkmanship (or worse) in which the United States—startled from sleep and suddenly disabused of the myth of sufficiency—might have to capitulate, allowing totalitarian dictatorships to dominate the world.
Current trajectories point in exactly this direction, but in regard to such things Donald Trump hasn’t the foggiest, and, frankly, Hillary Clinton, like the president, doesn’t give a damn.
The way to avoid such a tragedy is to bring China into a nuclear control regime or answer its refusal with our own proportional increases and modernization. And to make sure that both our nuclear and conventional forces are strong, up-to-date, and survivable enough to deter the militant ambitions of the two great powers rising with daring vengeance from what they regard as the shame of their oppression.
Mr. Helprin, a senior fellow of the Claremont Institute, is the author of “Winter’s Tale,” “A Soldier of the Great War” and the forthcoming novel “Paris in the Present Tense.”
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