Posts Tagged Banks


In a recent post, I warned against Donald Trump taking control of the Federal Reserve Board, our central bank, and then directing it toward his own politically biased agenda.  The link for that post is:  Since then, one Fed Governor resigned unexpectedly, thus giving Trump a couple of seats to fill, and then he can nominate his own Chairman, as of February 2018.

The manner in which Donald Trump and his Regime manages the economy, will indeed, have major effects on our Society, in general. Income-inequality, divisiveness and widespread frustration with the government, can have a major effect on Who and What America becomes!


The Role of the Federal Reserve Board, our central bank, is to foster economic conditions that achieve both stable prices and maximum sustainable employment.  The optimum is referred to as the Goldilocks Economy, similar to the mid-to-late 1990s:  “Not too hot, not too cold, but just right.”  The Fed’s goal, in effect, is to manage for Balance.

Republicans in Congress have always wanted to have greater control over the Fed, which would, in effect, politicize it.  If the economy were destined to fluctuate between the policies of one party, and then shift to the other party’s goals, the general results would surely be disastrous for the overall Health of the Economy.

Donald Trump has already announced that he will replace Fed Chair Janet Yellen, when her Chairmanship expires.  With less than one month in office, Trump has already been trying to browbeat the Fed not to raise rates.  There is a reason why democracies insist on their central banks remaining apolitical: wrong moves, especially on purpose, in either direction, or if postponed, may lead to an even more horrendous economic situation.

An interest rate increase, or cut, are usually made after careful economic analysis, based on comprehensive reports, collected from the twelve regional federal reserve banks.  Those reports provide the rationale for monetary policy.  Arbitrarily cutting the “Funds Rate”, or failing to increase it when appropriate, might result in an overheated economy—and high inflation—on the up-side. Improper moves in the other direction, could result in deflation—price implosion—and a similarly dysfunctional economy.

When the Fed’s monetary policy committee raised rates in December, to a range of 0.50%-to-0.75%, it estimated that a 0.25% rate hike was necessary to keep the economy from accelerating.  Balancing the economy assumes that minor adjustments are best, rather than waiting for the economy to either over-inflate on the up-side, or to deflate or the down-side.

Now that Steven Mnuchin has been sworn-in as Secretary of the Treasury, Donald Trump might just turn his attention more toward the Fed nominations.  The key question here, is whether Secretary Mnuchin will work smoothly with the Fed, or merely follow Donald Trump’s incongruous agenda.  Hopefully, he will cooperate with the Fed, and focus on maintaining a stable economy, for all America!

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Among the various financial woes that led America to the edge of the Financial Abyss, nothing hits home more directly than the Housing Crisis.  If not your home, then your neighbor’s!   To better understand that, let’s take a trip to the Sausage Factory.  The raw meat goes in one end, and reengineered sausages come out the other.

Interest rates had been declining since 2006; however, the Fed lowered them to barely above zero in 2008.  Consumers took advantage of low loan rates, especially for home mortgages.  Banks began to hire commissioned salesmen to pump-up profits during the housing boom.  Also,  by packaging mortgages, regardless of credit quality, the risk would be sold-off in what are called mortgage “pools”.

Banks sold huge pools of mortgages (up to hundreds of millions of dollars worth) to Fannie Mae and Freddie Mac, the government-sponsored agencies, and received their money back.  Fannie and Freddie, while caring little about credit quality themselves, just slapped their guarantees on the pools, and sold them to investment banks.  The banks, in turn, sold Mortgage-Backed Securities—bonds really—using the underlying stream of mortgage payments as collateral.

At this point in the sausage-making process, the secret ingredient was needed, “credit ratings”.  Moody’s, S & P and Fitch are the major rating services, and their ratings assure marketability, with the coveted “AAA” enabling the highest prices.  Since the rating fees are paid by the investment banks, the profit motive, no doubt, influenced the ratings.  The top rating was almost automatic, lest the banks shop the competition for the highest credit rating.

The last step along the sausage factory production process was the banks’ slicing and dicing area.   Most investors didn’t want to invest over a 30 year term, and to be paid from a fluctuating cash flow.  So, the banks grouped the first year’s cash flow from the entire mortgage pool, and used that to collateralize one-year mortgage-backed securities.  That process was repeated for each of the successive one-year cash flows

Everything was humming along smoothly:  interest rates remained low; home buyers were signing their names to anything; housing “flippers” were even boosting the home prices higher; mortgage originators were hauling-in the huge profits; Fannie and Freddie collected their fees; ditto for the rating agencies; investment bank stock prices spiked; and the investors were pleased with their returns.  And then, suddenly, the gravy train stopped!

Housing prices started falling; homeowners defaulted; the excessive supply of bonds outpaced the demand, and everyone along the way had no one to pass the mortgages on to.  The originating banks, Fannie and Freddie, and the investment banks all had trouble financing the mortgages that were in their possession when the bubble broke!  Remember that this was not the only toxic asset effecting our economy, and most specifically, the lack of liquidity was systemic throughout the banking system.

That meant that the banks could neither extend credit to each other, nor to businesses or individuals.  Consumer spending nose-dived, lay-offs increased and foreclosures continued to surge.  Fannie and Freddie had to be taken-over by the Treasury, AIG Insurance Co. was a basket case, GM and Chrysler had to be bailed-out, and so on…

President Obama signed the Dodd-Frank Act into law in July of 2010.  That legislation was designed to rein-in the banks, and to ensure that a similar systemic banking crisis doesn’t occur again.  Donald Trump, however, wants to repeal Dodd-Frank, which might take us back to those days, of not just a housing bubble, but a systemic Banking Crisis, as well.  So tell me, now that we’ve seen what might potentially lurk, in and around, Donald Trump’s Sausage Factory, do we really want to go back there again?

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Today, the Federal Open Market Committee raised the “Fed Funds” rate, by 0.25%, to a range of 0.50%-to-0.75%.  The Fed does not actually set the rates, per se; rather the Fund’s rate is merely a target range in which our central bank suggests financial institutions lend money to one another—generally on an overnight, or very short-term basis.  In this manner, it more or less, nudges rates, which are sometimes reflected throughout the maturity range (three months to 30 years), but sometimes not.

Besides the Federal Reserve Board, which is an arm of the Federal Government in Washington, there are also twelve regional Federal Reserve Banks.  Each of them are privately owned, have their own Boards of Directors, and regulates the banks in their respective Districts.  As you will see in the linked “Rube Goldberg” article, from the New York Times, the Federal Reserve Bank (FRB) of New York actually implements the monetary policies that the FOMC makes. The light-hearted link is as follows:

The Times article was initially published after the FOMC meeting last December, which was the last time that the Fed raised the Funds Rate.  Today’s rate hike was widely expected, since Chairwoman Janet Yellen had recently mentioned its likelihood, at today’s meeting.  The reason that the stock Market immediately plummeted, however, was the inclusion in Mrs. Yellen’s usual after-meeting statement, which suggested that the Fed would probably raise rates three times in 2017.  But, pending changes in various economic metrics, those increases may or may not actuality happen.

Generally, a rate increase signals the Fed’s belief that the economy is improving, while a decrease suggests weakness.  The financial markets, however, tend to be quite fickle.  After 39 years of following the bond market quite closely, I look at the Funds Rate, and recall it being mostly in the four-to-five percent range.  During the early ‘80s, the Fed Funds rate reached a historical high of 20%, as noted in the linked The Balance article: So, even if the rate did increase three times, assumedly to a range of 1.25% to 1.50%, that wouldn’t be overwhelming; but, let’s see what happens.

As I’ve suggested many times in this blog:  financial markets have trouble dealing with Uncertainty; and everything should be taken into context. One other reminder would be:  Don’t try to get ahead—anticipate without reason—of the market!

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In several of my recent posts, I have described various concerns that I have, with how Donald Trump might effect our National Economy, among many other things.  And so far, for a President-Elect who has neither an in-depth understanding of the various policy issues, nor the curiosity to learn them in detail, Trump appears to be in over his head.  Rather than appoint experienced advisors to Cabinet Posts and other key positions, at least so far, he has nominated inexperienced ideologues, whose only redeeming value is that they share his often ignorant points of view.

Right now, 19 days following the Presidential Election, Trump has not nominated any of the Big Three—State, Defense or Treasury Secretaries.  Rumor has it that anyone with valid credentials is afraid to go near him. Perhaps that’s the cause for delay!  But, I certainly wouldn’t mind even a former deputy to a Colin Powell, Robert Gates or Henry Paulson; but, so far, we are still wondering who lurks behind Door #3!

My concern is because the Financial System touches literally every part of the Government: employees throughout it need to be paid and receive benefits; an adequate amount of supplies need to be maintained; buildings and equipment should be updated and maintained; there is research to fund; teachers must be constantly focused on teaching the job skills of the future, etc.  If any of the other departments closed, the nation would probably move backward, but it would still be moving.  The Economy, however, is the Nation’s lifeblood, and it flows through the Financial System.

In September of 2008, President George W. Bush advised the Nation that we were looking down into a “Financial Abyss”, and that he had directed Treasury Secretary Henry Paulson to immediately transfer tens of billions of dollars to the eleven largest banks.  That was just weeks before the Presidential Election and, shortly afterward, in-coming President Barack Obama announced that Timothy Geithner, President of the Federal Reserve Bank of New York would replace Paulson as Treasury Secretary, and (then) Chairman Bernanke would remain at the Fed, as usual.  The transition went quite smoothly.

Soon after President Obama took office in January, he asked Congress to fund a large Stimulus Package—to pump money into rebuilding our Nation’s Infrastructure, thus creating jobs and jump starting the economy.  Although it was approved, Congress significantly reduced the amount funded.  

That Financial Stimulus, did initiate a Recovery; however, a majority of economists have suggested that it would have been more robust, if it had been fully funded. Trump’s recently announced “Infrastructure” Plan, perhaps which might be the harbinger of things to come, is literally an outpouring scam!

Donald Trump has already vowed to repeal the Dodd-Frank Act, which was intended to prevent a financial crisis, similar to one in 2008.  That promise, plus the protectionist tariffs, which  he also intends to pursue, could very well lead the Nation back to the edge of that Abyss.  That’s exactly where his ignorant ideological “leadership” could take us.

Given Donald Trump’s apparent preference for inexperienced loyalists, who share his views, I am most definitely concerned about Who he will nominate as Treasury Secretary.  Will he provide the that Secretary with sufficient leeway to join with current Chairman Janet Yellen, at the Fed, to keep America on the right path of Financial Stability.  Trump sorely needs a Secretary who will stand up to him, offer opposing views and be capable of managing the large bureaucracy. I hope that Donald Trump does the right thing?

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FULL DISCLOSURE:  I do not provide specific investment advice on this blog; however, I did sell all of my Apple stock last Monday.  Now, I did this for my personal reasons, and I certainly am not suggesting that you should consider selling the stock, as well.  Apple is still a great and admirable corporation, and I might even buy some back in the future.  I believe, however, that the manner in which I approached that decision might be of interest to some readers.


I came to my conclusion, to re-shuffle my portfolio, oddly enough, while lying on a hospital gurney, waiting for a very simple procedure.  At the time, I realized that I wanted to have a bit more liquidity until I knew more about who would be on Trump’s Financial Team, and what his final agenda might be.  At least, he would still have to go through Congress, once he takes Office, and prior to making any devious moves.

In September of 2008, President George W. Bush told the nation that we were looking into a financial abyss.  The markets were a little skittish, as they always are during a Presidential hand-over; but, the anxiety was quite a bit worse due to the  financial crisis.  

Luckily, the transition from Bush’s Team to in-coming President Barack Obama’s went smoothly.  The next Treasury Secretary, Timothy Geithner, was merely moving over from the Fed-New York.  So,  everyone involved were experienced hands, and known quantities–both domestically and globally!

My concern this time around stems from Trump’s lack of policy knowledge, his unpredictability, and many of his ideological views that just do not stand-up to the “smell-test!”  His vow to impose tariffs on imports from Mexico and China would result in counter-tariffs on our exports to those countries.  Additionally, such Protectionism could lead to higher prices, an economy weakened by reduced consumer spending, and significantly higher unemployment.  In fact, that outcome would certainly work counter to Trump’s promise to bring the jobs back!

As the world’s largest corporation (by market capitalization), and one that assembles its iPhones in China, Apple would certainly be at the top of Donald Trump’s list of companies to harass.  I also sold a much smaller amount of First Solar since his preference to ignore the value of new technology will probably harm the overall Renewable Energy Industry.

As I liquidated Apple, I shifted some of the proceeds into Sector SPDRs, which are ETFs that invest in just the corporate components of one particular sector (i.e,. Energy, Health Care, Telecom, Utilities, etc.) within the S & P 500 Index.  ETFs trade like stock; however, when an investor buys even a narrowly-defined sector, they get the strong companies, along with the weak.  I have linked the inter-active web site, which enables the reader to check the performance of a particular sector at various time-frames.  The link is as follows:

For instance, I believe that the Energy SPDR, which is composed mostly of oil, gas and coal companies would benefit by having less competition from renewables, under Trump.  Health Care, with Trump’s threat to repeal “Obamacare”, is one to watch, since we do not know what, if anything, will replace it.  Telecom might prosper from the elimination of “Net Neutrality”; but, Utilities would be harmed if his protectionist trade policies result in higher inflation, and rising interest rates.

I tend to consider myself to be a Macro-Investor. There are so many extraneous factors that impact the financial markets, which many investment professionals either ignore or simply do not understand.  But the markets can be effected by trade policy, global political alliances, health care pandemics, and cultural discrimination, among other things.  In essence, financial markets do not exist in a vacuum.

NOTE:  If you have any questions about this post, just leave a Comment below.

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In late 2008, President George W. Bush, Secretary of the Treasury Hank Paulson, and Federal Reserve Chairman Ben Bernanke, met with the CEOs of the nation’s largest banks.  Bush stated that the nation was looking down into a Financial Abyss.  At that meeting, he announced that he had instructed Treasury to immediately transfer tens of billions of dollars to each of those banks and, later, the Fed Chairman suggested that there was plenty of more money where that came from.

Over the next six months, the stock market continued to plunge, and unemployment continued to climb, after Lehman Brothers fell into bankruptcy.  As cash liquidity and available credit vanished, businesses closed, and the housing market hit rock bottom as foreclosures surged.  Unemployed workers just could not stay current on their mortgage payments, and they reduced their consumer spending, as well.  

As a financial advisor during that time, I can attest to the fear and anxiety that many consumers, not just homeowners, felt during the so-called “Great Depression.”  The teamwork and creative hard work that the Fed and Treasury put in, during both the Bush and Obama Administrations, is still not adequately appreciated.  The common question was, and still is: Why Wall Street and not Main Street?

There are several parts to the answer:  the Fed and Treasury already had, at least, some of the necessary tools on hand to bail-out the banking system; while new programs to aid consumers, especially homeowners, and expand the social safety net, would need the approval of a dysfunctional Congress.  As such, the quickest response was a matter of financial logistics.  Main Street–think the Economy–absolutely needs a functioning Banking System.  Many financial analysts, at the time, referred to the economy as the “patient”, and they figuratively followed it’s virtual progress:  into ER: through Triage: OR: Post-Op: and beyond.

In that context, consider liquid money and the availability of credit as being vital to the proper functioning of the economy, similar to the flow of blood and oxygen within a human’s overall system.  And the credibility—both the capability and the willingness—of the government to build a firewall around the banking system, represents the hope for the patient’s survival.  That’s why the government threw lots and lots of money at the banks, beginning in October of 2008.

The Treasury and Fed did try to devise new programs to assist consumers directly:  extending unemployment compensation; food stamps; short-term loans; mortgage assistance; but, over time, they realized that they were merely using tools with low probability of short-term success.  Enhancing the liquidity within the banking system; however, and forcing banks to make credit available, had a much better chance of expanding the job market, and thereby resuscitating the economy.

Bailing-out GM and Chrysler, which are not even banks, demonstrated a great opportunity to jump-start the economy, on a top-down, rather than individual, basis.  By keeping those two corporate giants solvent, the government not only kept auto workers in the labor force; but, also those of:  the parts suppliers; steel companies; auto dealerships; auto insurers and finance companies, and a multitude of other American workers.  People who are employed pay taxes, buy homes and cars; patronize the retail stores, etc.  And consumer spending, in turn, just creates even more jobs, and so on!

Following the Stock Market Crash of ’29, and the subsequent Great Depression, new legislation was enacted, creating the FDIC deposit insurance and other financial safeguards.  At the beginning of his Administration, President Barack Obama initiated the drafting of new legislation—updated for today’s much more complex financial marketplace—to reduce the potential for other dire economic melt-downs in the future.  Unfortunately, the Dodd-Frank legislation has been watered-down by the Republicans in Congress, and after six years, they still want to repeal it.  When will they ever learn?

NOTE:  For anyone who has an interest in learning more about The Great Recession, I very strongly recommend “Stress Test”, a book by Timothy Geithner.  Mr. Geithner was intimately involved, both as Secretary of the Treasury and President of the New York Fed, throughout the Financial Crisis, as well as the various currency crises in Mexico and Asia, in the 1990s. That and other books relevant to that time are on the “Recommended Books” on this blog.

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A primary cause of The Great Recession, the financial melt-down of late 2007 until early 2009, was the lax regulation of the banking industry—especially among the largest ones, both here and abroad.  Due to the depth of that recession, the Recovery, at least in the U. S., has been slow, but continuous.  Overseas, however, many nations are still struggling in their recovery efforts.

On September 15, 2008, Lehman Brothers, one of the largest investment banks in the U. S., filed for Chapter 11 protection, and that event served as the proverbial straw that broke the camel’s back.  The actual economic slide had already begun in October of the year before, when the stock market peaked and started a descent that lasted until early March of 2009.  When President Barack Obama took office, in January of 2009, he called for legislation to rein-in the banks and provide stronger regulation. First proposed in June of 2009, President Obama signed Dodd-Frank into law, on July 21, 2010.

Wells Fargo is the current symbol of egregious banking activities.  The bank had been caught opening unauthorized bank accounts and credit cards for customers, from which the bank’s retail revenue benefitted.  Whatever the reason, Wells Fargo created the environment, and paid bonuses for employees to carry-out this fraudulent scam.  But, other banks have been performing similar unauthorized activities too!

The Dodd-Frank Legislation, among many other things, created the Consumer Financial Protection Bureau.  The CFPB, which was Senator Elizabeth Warren’s brainchild, before she was a Senator, is the agency that uncovered the Wells Fargo illegal scam.  No doubt, a customer of Wells Fargo, or perhaps more than one, probably reported the scam to the agency.  The CFPB is an important consumer safeguard against all financial institutions treating their clients’ unfairly.  The web link is:

Oddly, in today’s political environment, Secretary Hillary Clinton has been accused of considering Wall Street as a “Special Interest Group”.  Let’s not forget, however, that President Barack Obama also accepted campaign contributions from the Financial Services Industry, and he still called-for banking reform, and he also signed Dodd-Frank into Law.  Currently, banks appear to have realized that greater regulation will be forthcoming; however, they are totally afraid of Donald Trump’s suggested Isolationism and Protectionism.

Former Wells Fargo CEO John Stumpf (having just resigned yesterday) recently appeared before several Congressional Committees, and the attacks on him, and the bank, were both bipartisan, and quite angry.  But, some of those Congressmen and Senators were really taking that tact for the hometown audience.  After the hearings, the Republican members will probably return to their normal ideological voting agenda.

The Republicans in Congress have been trying to reduce the impact of what Dodd-Frank is intended to do, or to repeal it all-together.  The current GOP Candidate for President has vowed to repeal Dodd-Frank, and so had mostly every other candidate in the GOP Primaries.  That pledge is also frequently mentioned by other Republicans in the Halls of Congress.

How many times have we heard Republicans talk about eliminating the Federal Reserve, repealing Dodd-Frank and doing away with all regulation, in general?   If there is another emergency, such as The Great Recession of just a few years ago—or perhaps something even worse—who or what will guarantee our bank deposits?  Who would make sure that the banking system doesn’t take un-due risks?  That banks have sufficient capital—think emergency reserves—to weather any storm?  This would be where the Fed, Dodd-Frank and the CFPB would safeguard our very way of life!

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