Central Perk: Mish's Global Economic Trend Analysis

sâmbătă, 25 iunie 2011

Mish's Global Economic Trend Analysis

Public Unions Reject Sweetheart Deal in Connecticut, 7,500 Layoffs Coming Up
Biggest Banks Must Hold 2.5 Percentage Points More Capital in Basel Accord; Many banks “Vigorously Lobby” Against Branding as Systemically Important
Expect Chaos

Public Unions Reject Sweetheart Deal in Connecticut, 7,500 Layoffs Coming Up

Posted: 25 Jun 2011 11:01 AM PDT

I am constantly in awe of the blatant stupidity of rank-and-file public union workers. In Connecticut, AFSCME and other public unions voted down a proposal negotiated over many months that contained a "no layoff" clause for 4 years in return for a pay freeze for 2 years.

That was an amazingly generous offer. The state was silly to offer it. Nonetheless, Union Deal Shot Down; Malloy Pledges To Cut Close To 7,500 State Workers

Gov. Dannel P. Malloy said Friday that he was moving "full steam ahead'' with plans to lay off 7,500 state employees, as leaders of the AFSCME union announced that their members had officially rejected a savings and concession deal that would have given them layoff protection for four years.

The administration has ruled out a renegotiation with the unions because the multi-faceted agreement took months of intense negotiations and compromises to complete. Malloy said he and his budget team intend to release layoff notices "as soon as possible" to balance the budget.

"I have a big job to do, and we're going to do it," Malloy told reporters Friday. "Listen, I don't want to be laying off 7,500 people or more. I think it's bad for the economy. I think it's bad public policy."

Reflections on Good Public Policy

Malloy was elected governor primarily on the back of votes from labor unions. That explains the sweetheart deal offer. Union stupidity explains why the deal was rejected.

A good deal for taxpayers in Connecticut would be to get rid of unions, not guarantee no layoffs for 4 years.

Malloy says "Listen, I don't want to be laying off 7,500 people or more. I think it's bad for the economy. I think it's bad public policy."

Mish says laying off 7,500 public union workers is good public policy and good for the economy. Indeed, firing 100% of them would be the ultimate in good public policy.

There is not a damn thing that public unions workers can do cheaper or better than private industry. Taxpayers foot the bill for the difference.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Biggest Banks Must Hold 2.5 Percentage Points More Capital in Basel Accord; Many banks “Vigorously Lobby” Against Branding as Systemically Important

Posted: 25 Jun 2011 09:35 AM PDT

The first big dream of every bank is to become too-big-to-fail. The second big dream is to avoid capital constraints that now go along with that designation.

Please consider Biggest Banks Must Hold 2.5 Percentage Points More Capital in Basel Accord

Global regulators said banks deemed too big to fail must hold as much as 2.5 percentage points in additional capital as part of efforts to prevent another financial crisis.

The additional capital buffers will range from 1 percentage point to 2.5 percentage points, the Basel Committee on Banking Supervision said in a statement today. From 28 to 30 banks, including as many as eight in the U.S., may face surcharges, according to a person familiar with the discussions, who declined to be identified because the negotiations are private.

Many banks are "vigorously lobbying" against being branded as systemically important, Sheila Bair, chairman of the U.S. Federal Deposit Insurance Corp. told U.S. lawmakers on June 22.

The Basel committee has said internationally active banks should hold core Tier 1 Capital of 7 percent of their risk- weighted assets, and the additional requirements are for banks it considers systemically important financial institutions, or those whose collapse would harm the global economy.
'Denying Credit'

The extra fee must be met by banks building up their core reserves, and not by issuing so-called contingent capital instruments such as CoCo bonds, the committee said today.

"You are looking at a situation here where the capital requirements for the biggest banks have gone from as low as 2 percent before the crisis now to well north of 10 percent," said Karen Shaw Petrou, managing partner of Washington-based Federal Financial Analytics Inc., a bank consulting firm. "It means the banks are going to have to constrain activities both by reducing risk and denying credit."

The Basel group said banks should have to meet the extra requirement using common equity, a measure of their core reserves which is made up mainly of ordinary shares and retained earnings. So-called contingent convertible bonds, or CoCos, which convert into ordinary shares when a bank's reserves fall below a certain level, won't be eligible, the committee said, adding that national regulators are free to include them in any separate requirements they impose.

The Basel committee will release more details on the capital buffers "around the end of July," the group said in its statement. That document won't name banks that could face a surcharge, said a person familiar with the discussions.

While the largest surcharge that banks will initially face will be 2.5 percentage points, this number would rise to 3.5 percentage points if lenders facing the highest buffers increase in size, the Basel committee said. The 3.5 percentage point fee would act as a "disincentive for banks facing the highest charge to increase materially their global systemic importance," it said.

Banks' systemic importance will be assessed by measuring their size, interconnectedness with other financial institutions, the difficulty for another institution to take over the role they play in the market, complexity and global activity, the Basel group said.

The new requirements will be introduced with other measures from Jan. 1, 2016, through Jan. 1, 2019.

Banks Already Capital Constrained

Banks are already capital constrained. That is the primary reason they are not lending. Nonetheless, this is a small but important step in the right direction, assuming it sticks.

Too-big-to-fail is the same thing as too-big. Moreover, banks should be banks, not trading vehicles.

Bank of America has billions of dollars worth of exposure writing credit default swaps on Greek debt. That trade was a big winner in 2010, but seems to be blowing up in Bank of America's face right now.

Please see Emergency Session Fails; Market Calls Trichet's Bluff; French Banks Under Downgrade Review; ECB Divorced From Reality; What is US Exposure to EU Mess? for details.

Writing credit default swaps may or may not be lucrative, but banks have no business doing it.

Bank of America and Citigroup should be busted apart. Goldman Sachs should not be a bank or a bank holding company at all. So why is Goldman a bank holding company? Because it suits the Fed's manipulative purposes, that's why.

Of course, the proper thing to do is kill fractional reserve banking totally, but any steps in that direction are welcome.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Expect Chaos

Posted: 25 Jun 2011 08:36 AM PDT

I remain amused by the complete silliness of statements coming from ECB officials. At best ECB proclamations are laughable, at worst they are completely counterproductive.

With that introduction, please consider ECB's Mersch says Greek default would bring "chaos"

European Central Bank Governing Council member Yves Mersch said on Saturday a Greek sovereign debt default would lead to chaos, adding it was up to the parliament to deliver on its austerity promises.

Banks and policymakers moved closer to a deal on Friday to help Athens secure funds ahead of a parliamentary vote on austerity next week that Greek Prime Minister George Papandreou must win to avert default.

If the vote next week is lost, international lenders are unlikely to release a 12 billion euros funding tranche, meaning the government will run out of cash within days.

"Now it's up to the Greek parliament. I observe," he told reporters on the sidelines of the Bank for International Settlements annual meeting in Basel.

"The next step will be to observe whether there will be delivery."

When he asked about what would happen if Greece defaulted, Mersch said: "Chaos."

Greece Default Irrelevant

Here is a succinct summation of the current state of Euro-Zone affairs.

Greece will default, but at this point it is irrelevant.
The situation in Spain, Ireland, Portugal, and Italy is now so dire that it is does not matter whether or not Greece defaults.
Expect chaos

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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