Category Archives: Banking

Wells Fargo Announces 10% Staff Cuts As CEO Struggles To Impress Analysts

As hopes for a steeper yield curve have lifted bank stocks, Wells Fargo CEO Tim Sloan is apparently trying to bolster Wells’ lagging share price as the numerous scandals that have tarnished the banks credibility and triggered fines, criminal probes and an unprecedented Fed sanction have continued to take their toll.

Per Bloomberg, Sloan is planning to trim its workforce by between 5% and 10% over the next three years with the explicit goal of propping up the company’s shares. While the cuts could provide the bank with necessary cover to purge bad apples from its employee ranks, they have also been broadly expected since the bank reported one of its worst-ever mortgage numbers as the division struggles under the yoke of Fed sanctions and with a housing market that is already beginning to roll over.

https://www.zerohedge.com/sites/default/files/inline-images/2018.09.21wells.JPG?itok=zyfrT_cDWells Fargo CEO Tim Sloan

In recognition of Wells’ collapse in mortgage lending, Sloan announced last month that the bank would lay off more than 600 employees from its mortgage division after losing the mantle of America’s top mortgage lender to non-bank fintech phenom Quicken Loans. Also, the fact that the housing market is beginning to roll over isn’t helping bolster the bank’s assets.

Sloan, who made the announcement to employees at a town-hall meeting on Thursday, has reduced headcount as he cleans up the bank and streamlines operations. The San Francisco-based lender is struggling to grow under the weight of a Federal Reserve assets cap. It had 265,000 employees as of June 30, according to a regulatory filing.

“It says something about the revenue environment for them,” Charles Peabody, an analyst at Portales Partners, said in an interview. “If they’re not in the midst of recognizing that revenues are in trouble, they’re anticipating it.”

Sloan has already promised $4 billion in cost cutbacks by the end of next year. The cuts announced Thursday have already been incorporated into the bank’s year-end expense targets for 2018, 2019 and 2020, according to the company.

“We are continuing to transform Wells Fargo to deliver what customers want – including innovative, customer-friendly products and services – and evolving our business model to meet those needs in a more streamlined and efficient manner,” Sloan said in a statement.

Wells shares have climbed 23% since Sloan took the reins in October 2016. However, it continues to lag the KBW Ban Index by 53%.

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Meanwhile, analysts’ continued pessimism has sparked rumors that the bank’s board is seeking to oust Sloan. Earlier this year, reports circulated that they had approached Gary Cohn about taking over.

Analysts cut their estimates for Wells Fargo earnings again and again after the Fed punished the bank with an unprecedented cap on growing assets. The analysts began this year predicting a record $24 billion annual profit, and now the average estimate is for less than $21 billion, the weakest since 2012. Speculation that the bank wants a new CEO spilled into public this week when the New York Post said the board had approached former Goldman Sachs Group Inc. executive Gary Cohn. Cohn, who earlier this year finished a stint as a White House adviser, denied the report, as did Wells Fargo Chair Betsy Duke, who said Sloan “has the unanimous support of the board, and this support has never wavered.”

But with the bank unable to meaningfully expand its assets thanks to the Fed’s sanctions, Sloan has few alternatives aside from trimming head count and costs if he wants to impress the analysts. Expect more heads to roll in the near future.

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Source: ZeroHedge

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End Of Cheap Debt: Fall & Rise Of Interest Rates

Perhaps the greatest single trend impacting the next decade

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Total debt (public + private) in America is currently at a staggering $67 trillion.

That number has been rising fast over the past 47 years, following the US dollar’s transformation into a fully-fiat currency in August of 1971.

Perhaps this wouldn’t be such a big concern were America’s income, measured by GDP, growing at a similar rate. But it’s not.

Growth in debt has far outpaced GDP, as evidenced by this chart:

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In 1971, the US debt-to-GDP ratio was 1.48x. That’s roughly the same multiple it had averaged over the prior century.

But today? That ratio has spiked to to 3.47x, more than doubling over just 4 decades.

There are many troubling conclusions to draw from this, but here’s a simple way to look at it: It’s taking more and more debt to eke out a unit of GDP growth.

Put in other words: the US economic engine is seizing up, requiring increasingly more effort to function.

At some point — quite possibly some point soon — the economy will no longer be able to grow because all of its output must be used to service the ballooning debt load rather than future investment.

Accelerating this point of reckoning are two major recent trends: rising interest rates and the end of global QE.

Why? Because much of the recent explosion in debt has been fueled by central bank policy:

  • Interest rates have been on a steady decline since the 1980s, making debt increasingly cheaper to issue and to service.
  • Since 2008, central banks have been voracious buyers of debt. Countries/companies have been able to borrow $trillions, enabled (both directly and indirectly) by these “buyers of last resort”.

But both of those trends are ending, fast.

Interest rates have been rising off of their all-time rock-bottom lows over the past two years. While still low by historic standards, the rise is certainly material enough already to make the US’ $70 trillion in total debt more expensive to service, putting an even greater weight on America’s already-burdened economy.

And all indicators point to even higher rates ahead; with the Federal Reserve expected to increase the federal funds rate another 50% by 2020:

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These higher rates make the US debt overhang even more expensive to service, while also forcing valuations downwards for major asset classes like bonds, housing and equities (the prices of which are derived in part by interest rates, as explained here).

These higher expected rates also co-incide with the cessation of global quantitative easing (QE). The world’s major central banks have announced that they will cease making purchases by 2020:

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Without these indiscriminate buyers-of-last-resort, debt issuers will need to offer higher rates to entice the next marginal buyer. How much higher will rates need to rise as a result? It’s pretty easy to make the argument for “a lot”.

We’ve been talking quite a bit recently about the implications of hitting America’s “Peak Debt” threshold with David Stockman in preparation for our upcoming seminar with him next week. He’s extremely concerned. Here’s what he has to say on the matter (4m:42s):

He also fears that we have the exact wrong expertise in place inside our financial markets to deal with the coming crisis, as there’s an entire generation of Wall Streeters who have never seen rates as high as they are today. More than that, there’s virtually no one left in today’s financial industry with actual experience operating within a rising interest rate environment (2m:09s):

James Howard Kunstler, another co-presenter at next week’s seminar, is similarly worried that the current state of the financial system is so fragile that a “convulsion” (i.e., a painful downdraft that violently reprices assets) is inevitable at this point (5m:46s):

Source: by Adam Taggart via PeakProsperity.com

Disaster Is Inevitable When America’s Stock Market Bubble Bursts – Smart Money Is Focused On Trade

(Forbes) Despite the volatility and brief correction earlier this year, the U.S. stock market is back to making record highs in the past couple weeks. To many observers, this market now seems downright bulletproof as it keeps going higher and higher as it has for nearly a decade in direct defiance of the naysayers’ warnings. Unfortunately, this unusual market strength is not evidence of a strong, organic economy, but of an extremely unhealthy, artificial bubble economy that will end in a crisis that will be even worse than we experienced in 2008. In this report, I will show a wide variety of charts that prove how unsustainable the current bull market is.

Since the Great Recession low in March 2009, the S&P 500 stock index has gained over 300%, taking it nearly 80% higher than its 2007 peak:

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The small cap Russell 2000 index and the tech-heavy Nasdaq Composite Index are up even more than the S&P 500 since 2009 – nearly 400% and 500% respectively:

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The reason for America’s stock market and economic bubbles is quite simple: ultra-cheap credit/ultra-low interest rates. As I explained in a Forbes piece last week, ultra-low interest rates help to create bubbles in the following ways:

  • Investors can borrow cheaply to speculate in assets (ex: cheap mortgages for property speculation and low margin costs for trading stocks)
  • By making it cheaper to borrow to conduct share buybacks, dividend increases, and mergers & acquisitions
  • By discouraging the holding of cash in the bank versus speculating in riskier asset markets
  • By encouraging higher rates of inflation, which helps to support assets like stocks and real estate
  • By encouraging more borrowing by consumers, businesses, and governments

The chart below shows how U.S. interest rates (the Fed Funds Rate, 10-Year Treasury yields, and Aaa corporate bond yields) have remained at record low levels for a record period of time since the Great Recession:

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U.S. monetary policy has been incredibly loose since the Great Recession, which can be seen in the chart of real interest rates (the Fed Funds Rate minus the inflation rate). The mid-2000s housing bubble and the current “Everything Bubble” both formed during periods of negative real interest rates. (Note: “Everything Bubble” is a term that I’ve coined to describe a dangerous bubble that has been inflating in a wide variety of countries, industries, and assets – please visit my website to learn more.)

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The Taylor Rule is a model created by economist John Taylor to help estimate the best level for central bank-set interest rates such as the Fed Funds Rate. If the Fed Funds Rate is much lower than the Taylor Rule model (this signifies loose monetary conditions), there is a high risk of inflation and the formation of bubbles. If the Fed Funds Rate is much higher than the Taylor Rule model, however, there is a risk that tight monetary policy will stifle the economy.

Comparing the Fed Funds Rate to the Taylor Rule model is helpful for visually gauging how loose or tight U.S. monetary conditions are:

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Subtracting the Taylor Rule model from the Fed Funds Rate quantifies how loose (when the difference is negative), tight (when the difference is positive), or neutral U.S. monetary policy is:

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Low interest rates/low bond yields have enabled a corporate borrowing spree in which total outstanding non-financial U.S. corporate debt surged by over $2.5 trillion, or 40% from its peak in 2008. The recent borrowing boom caused total outstanding U.S. corporate debt to rise to over 45% of GDP, which is even worse than the level reached during the past several credit cycles. (Read my recent U.S. corporate debt bubble report to learn more).

U.S. corporations have been using much of their borrowed capital to buy back their own stock, increase dividends, and fund mergers and acquisitions – activities that are known for boosting stock prices and executive bonuses. Unfortunately, U.S. corporations have been focusing on these activities that reward shareholders in the short-term, while neglecting longer-term business investments – hubristic behavior that is typical during a bubble. The chart below shows how share buybacks and dividends paid increased dramatically since 2009:

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Another Federal Reserve policy (aside from the ultra-low Fed Funds Rate) has helped to inflate the U.S. stock market bubble since 2009: quantitative easing or QE. When executing QE policy, the Federal Reserve creates new money “out of thin air” (in digital form) and uses it to buy Treasury bonds or other assets, which pumps liquidity into the financial system. QE helps to push bond prices higher and bond yields/interest rates lower throughout the economy. QE has another indirect effect: it causes stock prices to surge (because low rates boost stocks), as the chart below shows:

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As touched upon earlier, low interest rates encourage stock speculators to borrow money from their brokers in the form of margin loans. These speculators then ride the bull market higher while letting the leverage from the margin loans boost their returns. This strategy can be highly profitable – until the market turns and amplifies their losses, that is.

There is a general tendency for speculators to use margin most aggressively just before the market’s peak, and the current bull market/bubble appears to be no exception. During the dot-com bubble and housing bubble stock market cycles, margin debt peaked at roughly 2.75% of GDP. In the current stock market bubble, however, margin debt is nearly at 3% of GDP, which is quite concerning. The heavy use of margin at the end of a long bull market exacerbates the eventual downturn because traders are forced to sell their shares to avoid or satisfy margin calls.

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In the latter days of a bull market or bubble, retail investors are typically the most aggressively positioned in stocks. Sadly, these small investors tend to be wrong at the most important market turning points. Retail investors currently have the highest allocation to stocks (blue line) and the lowest cash holdings (orange line) since the Dot-com bubble, which is a worrisome sign. These same investors were the most cautious in 2002/2003 and 2009, which was the start of two powerful bull markets.

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The chart below shows the CBOE Volatility Index (VIX), which is considered to be a “fear gauge” of U.S. stock investors. The VIX stayed very low during the housing bubble era and it has been acting similarly for the past eight years as the “Everything Bubble” inflated. During both bubbles, the VIX stayed low because the Fed backstopped the financial markets and economy with its aggressive monetary policies (this is known as the “Fed Put“).

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The next chart shows the St. Louis Fed Financial Stress Index, which is a barometer for the level of stress in the U.S. financial system. It goes without saying that less stress is better, but only to a point – when the index remains at extremely low levels due to the backstopping of the financial markets by the Fed, it can be indicative of the formation of a dangerous bubble. Ironically, when that bubble bursts, financial stress spikes. Periods of very low financial stress foreshadow periods of very high financial stress – the calm before the financial storm, basically. The Financial Stress Index remained at extremely low levels during the housing bubble era and is following the same pattern during the “Everything Bubble.”

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High-yield (or “junk”) bond spreads are another barometer of investor fear or complacency. When high-yield bond spreads stay at very low levels in a central bank-manipulated environment like ours, it often indicates that a dangerous bubble is forming (it indicates complacency). The high-yield spread was unusually low during the dot-com bubble and housing bubble, and is following the same pattern during the current “Everything Bubble.”

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In a bubble, the stock market becomes overpriced relative to its underlying fundamentals such as earnings, revenues, assets, book value, etc. The current bubble cycle is no different: the U.S. stock market is as overvalued as it was at major generational peaks. According to the cyclically-adjusted price-to-earnings ratio (a smoothed price-to-earnings ratio), the U.S. stock market is more overvalued than it was in 1929, right before the stock market crash and Great Depression:

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Tobin’s Q ratio (the total U.S. stock market value divided by the total replacement cost of assets) is another broad market valuation measure that confirms that the stock market is overvalued like it was at prior generational peaks:

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The fact that the S&P 500’s dividend yield is at such low levels is more evidence that the market is overvalued (high market valuations lead to low dividend yields and vice versa). Though dividend payout ratios have been declining over time in addition, that is certainly not the only reason why dividend yields are so low, contrary to popular belief. Extremely high market valuations are the other rarely discussed reason why yields are so low.

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The chart below shows U.S. after tax corporate profits as a percentage of the gross national product (GNP), which is a measure of how profitable American corporations are. Thanks to ultra-cheap credit, asset bubbles, and financial engineering, U.S. corporations have been much more profitable since the early-2000s than they have been for most of the 20th century (9% vs. the 6.6% average since 1947).

Unfortunately, U.S. corporate profitability is likely to revert to the mean because unusually high corporate profit margins are typically unsustainable, as economist Milton Friedman explained. The eventual mean reversion of U.S. corporate profitability will hurt the earnings of public corporations, which is very worrisome considering how overpriced stocks are relative to earnings.

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During stock market bubbles, the overall market tends to be led by a smaller group of high-performing “story stocks” that capture the investing public’s attention, make early investors rich, and light the fires of greed and envy in practically everyone else. During the late-1990s dot-com bubble, the “story stocks” were tech stocks like Amazon.com, Intel, Cisco, eBay, etc. During the housing bubble era, it was home builder stocks like Hovanian, D.R. Horton, Lennar, mortgage lenders, and alternative energy companies like First Solar, to name a few examples.

In the current stock market bubble, the market is being led by a group of stocks nicknamed FAANG, which is an acronym for Facebook, Apple, Amazon, Netflix, and Google (now known as Alphabet Inc.). The chart below compares the performance of the FAANG stocks to the S&P 500 during the bull market that began in March 2009. Though the S&P 500 has risen over 300%, the FAANGs put the broad market index to shame: Apple is up over 1,000%, Amazon has surged more than 2,000%, and Netflix has rocketed over 6,000%.

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After so many years of strong and consistent performance, many investors now view the FAANGs as “can’t lose” stocks that will keep going “up, up, up!” as a function of time. Unfortunately, this is a dangerous line of thinking that has ruined countless investors in prior bubbles. Today’s FAANG phenomenon is very similar to the Nifty Fifty group of high-performing blue-chip stocks during the 1960s and early-1970s bull market. The Nifty Fifty were seen as “one decision” stocks (the only decision necessary was to buy) because investors thought they would keep rising virtually forever.

Investors tend to become most bullish and heavily invested in leading stocks such as the FAANGs or Nifty Fifty right before the market cycle turns. When the leading stocks finally fall during a bear market, they usually fall very hard, as Nifty Fifty investors experienced in the 1973-1974 bear market. The eventual unwinding of the FAANG stock boom/bubble is going to burn many investors, including institutional investors who have gorged on these stocks in recent years. 

How The Stock Market Bubble Will Pop

To keep it simple, the current U.S. stock market bubble will pop due to the ending of the conditions that created it in the first place: cheap credit/loose monetary conditions. The Federal Reserve inflated the stock market bubble via its record low Fed Funds Rate and quantitative easing programs, and the central bank is now raising interest rates and reversing its QE programs by shrinking its balance sheet. What the Fed giveth, the Fed taketh away.

The Fed claims to be able to engineer a “soft landing,” but that virtually never happens in reality. It’s even less likely to happen in this current bubble cycle because of how long it has gone on and how distorted the financial markets and economy have become due to ultra-cheap credit conditions.

I’m from the same school of thought as billionaire fund manager Jeff Gundlach, who believes that the Fed will keep hiking interest rates until “something breaks.” In the last economic cycle from roughly 2002 to 2007, it was the subprime mortgage industry that broke first, and in the current cycle, I believe that corporate bonds are likely to break first, which would then spill over into the U.S. stock market (please read my corporate debt bubble report in Forbes to learn more).

The Fed Funds Rate chart below shows how the last two recessions and bubble bursts occurred after rate hike cycles; a repeat performance is likely once rates are hiked high enough. Because of the record debt burden in the U.S., interest rates do not have to rise nearly as high as in prior cycles to cause a recession or financial crisis this time around. In addition to raising interest rates, the Fed is now conducting its quantitative tightening (QT) policy that shrinks its balance sheet by $40 billion per month, which will eventually contribute to the popping of the stock market bubble.

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The 10-Year/2-Year U.S. Treasury bond spread is a helpful tool for determining how close a recession likely is. This spread is an extremely accurate indicator, having warned about every U.S. recession in the past half-century, including the Great Recession. When the spread is between 0% and 1%, it is in the “recession warning zone” because it signifies that the economic cycle is maturing and that a recession is likely just a few years away. When the spread drops below 0% (this is known as an inverted yield curve), a recession is likely to occur within the next year or so. 

As the chart below shows, the 10-Year/2-Year U.S. Treasury bond spread is already deep into the “Warning Zone” and heading toward the “Recession Zone” at an alarming rate – not exactly a comforting thought considering how overvalued and inflated the U.S. stock market is, not to mention how indebted the U.S. economy is.

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Although I err conservative/libertarian politically, I do not believe that President Trump can prevent the ultimate popping of the U.S. stock market bubble and “Everything Bubble.” One of the reasons why is that this bubble is truly global and the U.S. President has no control over the economies of China, Australia, Canada, etc. The popping of a massive global bubble outside of the U.S. is enough to create a bear market and recession within the U.S.

Also, as the charts in this report show, our stock market bubble was inflating years before Trump became president. I believe that this bubble was slated to crash to regardless of who became president – it could have been Hillary Clinton, Bernie Sanders, or Marco Rubio. Even Donald Trump called the stock market a “big, fat, ugly bubble” right before the election. Concerningly, even though the stock market bubble is approximately 30% larger than when Trump warned about it, Trump is no longer calling it a “bubble,” and is actually praising it each time it hits another record.

Many optimists expect President Trump’s tax reform plan to result in a powerful boom that creates millions of new jobs and supercharges economic growth, which would help the stock market grow into its lofty valuations. Unfortunately, this thinking is not grounded in reality or math. As my boss Lance Roberts explained, “there will be no economic boom” (Part 1Part 2) because our economy is too debt-laden to grow the way it did back in the 1980s during the Reagan Boom or at other times during the 20th century.

As shown in this report, the U.S. stock market is currently trading at extremely precarious levels and it won’t take much to topple the whole house of cards. Once again, the Federal Reserve, which was responsible for creating the disastrous Dot-com bubble and housing bubble, has inflated yet another extremely dangerous bubble in its attempt to force the economy to grow after the Great Recession. History has proven time and time again that market meddling by central banks leads to massive market distortions and eventual crises. As a society, we have not learned the lessons that we were supposed to learn from 1999 and 2008, therefore we are doomed to repeat them.

The purpose of this report is to warn society of the path that we are on and the risks that we are facing. I am not necessarily calling the market’s top right here and right now. I am fully aware that this stock market bubble can continue inflating to even more extreme heights before it pops. I warn about bubbles as an activist, but I approach tactical investing in a slightly different manner (because shorting or selling too early leads to under performance, etc.). As a professional investor, I believe in following the market’s trend instead of fighting it – even if I’m skeptical of the underlying forces that are driving it. Of course, when that trend fundamentally changes, that’s when I believe in shifting to an even more cautious and conservative stance for our clients and myself.

Source: by Jesse Colombo | Forbes

Learn about Trumps latest moves on trade negotiations with Canada and Mexico…

Wells Fargo Tumbles After DOJ Review Found Widespread “Document Altering”

Another day, another scandal involving Warren Buffett’s favorite bank.

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According to the WSJ, the DOJ is now probing whether employees committed fraud in Wells Fargo’s wholesale banking unit after revelations that employees improperly altered customer information. This follows a prior WSJ report that some employees in the unit added information on customer documents, such as Social Security numbers and dates of birth, without their consent.

Meanwhile, the bank’s own review discovered in recent months that in its wholesale banking group the problems were more widespread than previously thought: problems with altered documents initially centered in the part of the wholesale banking business called the business banking group, which focuses on companies with annual sales of $5 million to $20 million. Wells Fargo has found similar problems in its commercial banking division, which primarily serves middle-market companies, and its corporate trust services group, which helps with the administration of securities issued by companies and governments, one of the people said.

According to the Journal, employees altered the customer documents as Wells Fargo was rushing to meet a deadline to comply with a 2015 consent order from the Office of the Comptroller of the Currency.

The regulator had ordered the bank to beef up its anti-money-laundering controls, including its processes for ensuring that there are proper identification documents and that the bank has the ability to see client activities across a common database.

When the OCC issued the consent order, Wells Fargo had more than 100,000 customer accounts it needed to verify, the Journal previously reported. Wells Fargo in May formally asked the OCC for an extension beyond the initial June 30, 2018, deadline.

As a result, over the past year, the bank has been reaching out to thousands of clients requesting updated documentation on information such as relevant client addresses or dates of birth. Banks must have certain information, known as “know your customer” regulatory requirements, in order to keep banking their clients.

In other words, there was fraud everywhere, and then there was fraud to cover up the fraud..

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As the WSJ adds, the Justice Department is trying to learn if there is a pattern of unethical and potentially fraudulent employee behavior tied to management pressure. The employees in the wholesale banking unit, the side of the bank that deals with corporate customers, mishandled the documents last year and earlier this year.

The latest probe adds to the problems at Wells Fargo, whose reputation has been crushed since a sales scandal in its consumer bank imploded two years ago.

It also underscores how bad behavior has emerged throughout the bank and has continued even after the 2016 blow-up over sales practices. The bank’s problems have cascaded since then, with issues related to lofty sales goals and improper customer charges emerging across all of its major business units, prompting a range of other federal and state investigations.

The news of the latest probe sent Wells stock tumbling as investors wonder just how “low can Fargo go.”

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Source: ZeroHedge

Why Does Wells Fargo Still Exist?

(HuffPost) Wells Fargo executives know that everyone hates them. In the last two years, the bank has launched three separate marketing campaigns hoping to clean up its public image, only to see each effort thwarted by fresh, catastrophic scandals ― like wrongly repossessing 27,000 cars and foreclosing on 400 families for no reason.

The bank’s latest quarterly filing with the Securities and Exchange Commission dedicates more than 2,000 words to “Additional Efforts To Rebuild Trust,” listing “automobile lending,” “mortgage interest rate lock extensions,” “consumer deposit account freezing/closing,” “certain activities within wealth and investment management,” “foreign exchange business,” “fiduciary and custody account fee calculations,” “mortgage loan modifications,” and “add-on products” as areas where the company may have been improperly seizing large sums of money that belong to other people. That section is followed by over 4,250 words on major legal liabilities the bank is currently facing.

Wells Fargo is even scamming rich people now, according to recent Yahoo Finance reporting, by intentionally steering high-net-worth clients into unnecessary products with high fees.

To any reasonable person, Wells Fargo is a rolling disaster ― a ripoff, wrapped in a swindle, inside a bank. And yet to a Wall Street investor, Wells Fargo looks like a pretty good bet. The bank has reported a combined $39.1 billion in profit since the final quarter of 2016. The Federal Reserve recently approved a 10 percent increase in the quarterly dividend the bank pays to its shareholders, allowing those profits to be converted into straight cash for its owners.

Wells Fargo’s very existence, not to mention its continued profitability, is an indictment of two decades of embarrassing regulatory oversight from four separate administrations. Ever since the 2008 financial crisis, the top minds in global finance have wondered whether the biggest U.S. banks are strong enough to withstand the next crash. But Wells Fargo reveals a different problem: a chronically dysfunctional, predatory bank that is perfectly profitable. It’s not only “too big to fail,” but too big to fix.

“We tend to think of these big firms as stocks and portfolios, but there are deep systemic cultures that develop over time and are really hard to change,” said University of Georgia law professor Mehrsa Baradaran. “Wells Fargo is one of those firms that has a toxic culture.”

Wells Fargo is a rolling disaster ― a ripoff, wrapped in a swindle, inside a bank. And yet to a Wall Street investor, Wells Fargo looks like a pretty good bet.

If Wells Fargo were liquidated right now, its shareholders would reap about $211 billion, according to the bank’s latest official accounting. But the company’s stock is currently valued at around $281 billion ― indicating that the stock market believes there is something special about Wells Fargo that adds $70 billion in value to all the crap the company actually owns.

The stock market is wrong all the time, but it’s useful to consider why investors think Wells Fargo is so valuable. Since we know the bank is managed very badly ― federal agencies have sanctioned it for misconduct 43 different times in the years following the 2008 financial crisis ― it is hard to conclude that Wall Street’s enthusiasm has much to do with the skill of Wells Fargo’s management.

Instead, the bank’s magic $70 billion is an expression of its political power, derived from its sheer size. Regulators might focus on fixing individual problems when they arise, but the bank, insulated for decades from serious penalties like prosecution or dissolution, has no pressing incentive to head them off.

“Consequences matter,” said Vermont Law School professor Jennifer Taub. “Until law enforcement holds gilded grifters accountable, they will continue to operate companies … unlawfully.”

Most histories of the 2008 financial crisis focus on elements of the mess that were new, complex or strange ― the explosive growth in exotic products like subprime mortgages and credit default swaps, the spread of risk through new channels of “interconnectivity.” But much of the crisis was the result of something much simpler: There were just way, way too many bank mergers at the turn of the millennium. Several of them became the bank we call Wells Fargo today.

Back in 1996, Wells Fargo was a California-only operation with about $50 billion in assets that wanted to grow. It made a bid for the similarly-sized First Interstate Bank and ended up acquiring the firm in a hostile takeover. The result was an almost immediate debacle. As The Wall Street Journal recounted in 1997:

Wells Fargo lost customers’ deposits, bounced good checks, incorrectly withdrew money from some accounts and added funds to others. Angry customer complaints went unanswered at understaffed branches and telephone support centers.

By 1998, Wells Fargo was in so much trouble it was acquired by a Minneapolis-based bank called Norwest, which assumed the California bank’s name. The stagecoach logo was good, and by taking on the faltering bank’s brand, Norwest could claim a legacy going back to 1852 ― a nice marketing asset. The following year, the combined bank went on an acquisition bender before Wells Fargo and Norwest had even finished integrating their systems, picking up 13 smaller firms in Texas, Pennsylvania, Wyoming, New York, Colorado and Minnesota. Suddenly the bank had $212 billion in assets ― four times the size of the California namesake firm that had botched its big merger three years earlier.

Norwest had been managed by hard-charging CEO Dick Kovacevich, who urged his employees to “cross-sell” as many financial products to its customers as possible. In 1997, before the bank had set its sights on Wells, Kovacevich pushed ahead with an initiative he called ”Going for Gr-Eight,” in which every client would end up with at least eight different Norwest products: a bank account, credit card, insurance, mortgage ― whatever, just get to eight, whether this actually meets a customer’s needs or not. When Kovacevich stepped down in 2007, his deputy, John Stumpf, took over and tweaked the line, living by the motto, ”eight is great.” This may help explain why we later found the bank embroiled in a scandal over several million fake accounts.

But in the meantime, the bank kept growing, buying back big blocks of its own stock and paying out huge dividends to its shareholders. In the two years after the Norwest merger, Wells Fargo announced the acquisition of 41 separate companies. By 2003, the list of takeovers included 22 banks, 17 insurance brokerages, 12 consumer finance companies, 10 “specialized” lenders, four securities brokers, three trust companies, three commercial real estate firms and a mass of loan portfolios and servicing contracts. By 2008, Wells Fargo had had $521 billion in total assets ― 10 times its size a dozen years earlier ― and was raking in over $8 billion a year in profits.

None of this would have been possible without some help from the government. Until 1994, it was illegal for banks to expand across state lines, and when the Clinton administration repealed the Glass-Steagall Act in 1999, they were also permitted to merge with insurance companies and investment banks. Advocates of deregulation argued it would help make banks more stable; if one line of business faltered, the bank would have alternate revenue streams to keep it afloat. The idea that one toxic line of business might poison others ― or that dozens of different fiefdoms would prove impossible for management to corral ― did not seem important. Wells Fargo kept expanding.

But it never really got its basic business in order. There were signs that something was going terribly awry beneath the bank’s profitable veneer. In 2005, a securities regulator fined Wells Fargo $3 million for ripping off its mutual fund clients. In 2007, it paid $12.8 million to settle a lawsuit alleging the bank had stiffed its employees for overtime pay. In January 2008, eight months before the failure of Lehman Brothers, the City of Baltimore filed a civil rights lawsuit against Wells Fargo alleging that the bank had been steering borrowers of color into predatory subprime mortgages. A year later, the state of Illinois filed a similar lawsuit

“At one point Wells Fargo developed this culture of sell the product, customer be damned,” said Baradaran. “And they are not going to change that model because they are making plenty of money despite, maybe even because of, these violations.”

The crash revealed that Wells Fargo had been up to the same nasty business that the rest of the banking industry had been ― selling toxic mortgages and toxic securities, misleading investors and the federal government alike. The bank was still paying out settlements for pre-crash abuse as late as 2016.

Wells Fargo survived the recession with a series of gifts from the federal government ― the Congressional bailout and a lot of help from the Fed. But it also picked up the remains of another massive, faltering bank: Wachovia, in the fall of 2008.

Wachovia was itself another big bank merger horror story. It had acquired Golden West in 2006, a lender that specialized in non-traditional mortgages. Golden West was far from perfect, but it had been careful enough with its customers to survive the savings and loan crisis of the late 1980s and early 1990s. Its signature products, however, were tailor-made for foreclosures if home prices declined. They allowed people to pay low rates early in the life of the loan, with payments ratcheting higher as the years passed. If a borrower couldn’t afford the higher payment and didn’t have the equity to refinance, they were doomed. When Wachovia pumped these loans through its existing bank network, the result was a mortgage meltdown that destroyed the bank.

The Wachovia deal transformed Wells Fargo into a $1.2 trillion behemoth. And through sheer salesmanship willpower, the combined institution expanded by another 50 percent over the next six years. By the time the fake account scandal broke, the company had nearly $1.9 trillion in assets. In 20 years, it had grown by roughly 3,700 percent.

“We tend to think of these big firms as stocks and portfolios, but there are deep systemic cultures that develop over time and are really hard to change. Wells Fargo is one of those firms that has a toxic culture. University of Georgia law professor Mehrsa Baradaran.

The truth is, Wells Fargo has never been able to manage its bulk ― not in 1996, not in 2006, not today. The market is meting out some punishment for its recent misconduct, or Wells Fargo wouldn’t be launching so many advertising campaigns. But much of the company’s consumer business doesn’t actually face consumers ― Wells Fargo just buys up loans and contracts from other firms and processes them, collecting a fee for its service. Plenty of Wells Fargo’s customers don’t really have a say in whether they want to work with the bank or not. Regulatory fines generate headlines ― most notably a $1 billion sanction for that mass automobile repossession screw-up ― but are too small to serve as much more than a cost of doing business.

“Over the past two years, we have made significant progress. We have completed many comprehensive third-party reviews, made fundamental changes to retail sales practices, and received final approval on a class-action settlement concerning retail sales practices,” said Wells Fargo spokeswoman Cynthia Sugiyama.

Among the changes the company says it has enacted are increased pay for entry-level employees, expanded public disclosures and an overhaul for the way it rewards performance of its retail bankers, focusing on “customer experience” rather than numerical sales targets.

Earlier this year, outgoing Fed Chair Janet Yellen took the strongest action against the bank to date, forcing it to replace four of its 12 board members. But no whittling at the edges is going to change Wells Fargo. Though Stumpf was forced out of office in the uproar over the fake accounts, his replacement, Timothy Sloan, is a co-designer of this monster. He made $60.4 million serving in various executive capacities for the bank between 2011 and 2016, according to SEC filings, and certainly doesn’t seem interested in radically overhauling an extraordinarily lucrative business.

Wells Fargo may not even be the worst big bank out there. Citigroup, another merger monstrosity, is so poorly pieced together that today, Wall Street investors don’t even believe the bank is worth its liquidation price. JPMorgan Chase has notched 52 fines and settlements since the crash. Goldman Sachs has 16, three of them this year.

In a revealing interview with New York Magazine earlier this month, former FDIC Chair Sheila Bair said she wished regulators had broken up a bank after the crisis, probably Citigroup. Forcing at least one institution to pay the ultimate corporate price would have put pressure on other major firms to clean up their acts.

Both the Bush and Obama administrations rejected Bair’s plan. And so today, the American banking system ― rescued by taxpayers a decade ago to protect the economy ― has transformed into a very large, very profitable criminal syndicate.

Source: by Zach Carter | Huffpost

China’s Building-Boom Hits A Wall As Shadow-Banking System Collapses

Beijing wants to shore up growth without inundating the economy with cheap credit.

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But, as WSJ’s Walter Russell Mead pointed out previously, it’s not easy…

Chinese leaders know that their country suffers from massive over-investment in construction and manufacturing, that its real-estate market is a bubble that makes the Dutch tulip frenzy look restrained, that both conventional debt and debt in the shadow-banking system are too large and growing too rapidly.

But even as the Communist Party centralizes power and clamps down on dissent, it dithers when it comes to the costly and difficult work of shifting China’s economic development onto a sustainable track.

Chinese authorities have tried to tackle some of these problems, but often retreat when reforms start to bite and powerful interests push back.

To see how hard that will be, The Wall Street Journal’s Nathaniel Taplin takes a look at China’s roads and railways.

China is the 800-pound gorilla of global infrastructure. Its building prowess has permeated popular culture, as in the disaster movie “2012” where China constructs giant ships to help humankind escape rising seas.

Recently, however, China’s infrastructure build has all but ground to a halt.

Here’s why…

The central government last year started to crack down on unregulated, opaque – so-called ‘shadow-bank’ borrowing – alarmed at its vast scale, and potential for corruption.

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For five straight months, the shadow banking system has contracted under this pressure, sucking the malinvestment lifeblood out of economic growth and construction booms as Chinese local governments, which account for the bulk of such investment, set up as so-called local-government financing vehicles (off balance sheet), or LGFVs, and have seen an unprecedented net $19 billion outflow in recent months.

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As WSJ’s Talpin notes, these days Beijing prefers that local governments borrow on-the-books, through the now legal municipal bond market. The problem is that lower-rated and smaller cities are mostly shut out, even though they do most actual capital spending. As a result, investment has kept slowing even though China’s net muni bond issuance in July was three times higher than it was in March. Infrastructure investment excluding power and heat was up just 5.7% in the first seven months of 2018 compared with a year earlier, down from 19% growth in 2017.

Eventually, all the cash big cities and provinces are raising through muni bonds will start filtering down. Meanwhile, the investment drought will likely worsen, raising pressure on Beijing to ease credit conditions further – making the incipient rally in the yuan hard to sustain.

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That also means China’s debt-to-GDP ratio, which fell marginally in 2017, could start rising again next year.

Simply put, as with water and wine, China’s leaders haven’t figured out how to crack down on local governments’ dubious infrastructure spending during good times without severely damaging growth – or how to loosen the reins during bad times without creating lots more bad debt.

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Unless they can square that circle, it bodes ill for the nation’s long-term prospects.

Source: ZeroHedge

Banks Are Becoming Obsolete in China — Could the U.S. Be Next?

https://www.truthdig.com/wp-content/uploads/2018/08/foodnotlosses.jpgAlipay in the U.K.: Alibaba’s proprietary payment platform, Alipay, has shown up in advertisements overseas, such as this one in London’s Tottenham Court subway station. (Ged Carroll / Flickr)(CC BY 2.0)

The U.S. credit card system siphons off excessive amounts of money from merchants. In a typical $100 credit card purchase, only $97.25 goes to the seller. The rest goes to banks and processors. But who can compete with Visa and MasterCard?

It seems China’s new mobile payment ecosystems can. According to a May 2018 article in Bloomberg titled “Why China’s Payment Apps Give U.S. Bankers Nightmares”:

The future of consumer payments may not be designed in New York or London but in China. There, money flows mainly through a pair of digital ecosystems that blend social media, commerce and banking—all run by two of the world’s most valuable companies. That contrasts with the U.S., where numerous firms feast on fees from handling and processing payments. Western bankers and credit-card executives who travel to China keep returning with the same anxiety: Payments can happen cheaply and easily without them.

The nightmare for the U.S. financial industry is that a major technology company—whether one from China or a U.S. giant such as Amazon or Facebook—might replicate the success of the Chinese mobile payment systems, cutting banks out.

According to John Engen, writing in American Banker in May 2018, “China processed a whopping $12.8 trillion in mobile payments” in the first ten months of 2017. Today even China’s street merchants don’t want cash. Payment for everything is handled with a phone and a QR code (a type of barcode). More than 90 percent of Chinese mobile payments are run through Alipay and WeChat Pay, rival platforms backed by the country’s two largest internet conglomerates, Alibaba and Tencent Holdings. Alibaba is the Amazon of China, while Tencent Holdings is the owner of WeChat, a messaging and social media app with more than a billion users.

Alibaba created Alipay in 2004 to let millions of potential customers who lacked credit and debit cards shop on its giant online marketplace. Alipay is free for smaller users of its platform. As total monthly transactions rise, so does the charge; but even at its maximum, it’s less than half what PayPal charges: around 1.2 percent. Tencent Holdings similarly introduced its payments function in 2005 in order to keep users inside its messaging system longer. The American equivalent would be Amazon and Facebook serving as the major conduits for U.S. payments.

WeChat and Alibaba have grown into full-blown digital ecosystems—around-the-clock hubs for managing the details of daily life. WeChat users can schedule doctor appointments, order food, hail rides and much more through “mini-apps” on the core app. Alipay calls itself a “global lifestyle super-app” and has similar functions.

Both have flourished by making mobile payments cheap and easy to use. Consumers can pay for everything with their mobile apps and can make person-to-person payments. Everyone has a unique QR code and transfers are free. Users don’t need to sign into a bank or payments app when transacting. They simply press the “pay” button on the ecosystem’s main app and their unique QR code appears for the merchant to scan. Engen writes:

A growing number of retailers, including McDonald’s and Starbucks, have self-scanning devices near the cash register to read QR codes. The process takes seconds, moving customers along so quickly that anyone using cash gets eye-rolls for slowing things down.

Merchants that lack a point-of-sale device can simply post a piece of paper with their QR code near the register for customers to point their phones’ cameras at and execute payments in reverse.

A system built on QR codes might not be as secure as the near-field communication technology used by ApplePay and other apps in the U.S. market. But it’s cheaper for merchants, who don’t have to buy a piece of technology to accept a payment.

The mobile payment systems are a boon to merchants and their customers, but local bankers complain that they are slowly being driven out of business. Alipay and WeChat have become a duopoly that is impossible to fight. Engen writes that banks are often reduced to “dumb pipes”—silent funders whose accounts are used to top up customers’ digital wallets. The bank bears the compliance and other account-related expenses, and it does not get the fees and branding opportunities typical of cards and other bank-run options. The bank is seen as a place to deposit money and link it to WeChat or Alipay. Bankers are being “disintermediated”—cut out of the loop as middlemen.

If Amazon, Facebook or one of their Chinese counterparts duplicated the success of China’s mobile ecosystems in the U.S., they could take $43 billion in merchant fees from credit card companies, processors and banks, along with about $3 billion in bank fees for checking accounts. In addition, there is the potential loss of money market deposits, which are also migrating to the mobile ecosystem duopoly in China. In 2017, Alipay’s affiliate Yu’e Bao surpassed JPMorgan Chase’s Government Money Market Fund as the world’s largest money market fund, with more than $200 billion in assets. Engen quotes one financial services leader who observes, “The speed of migration to their wealth-management and money-market funds has been tremendous. That’s bad news for traditional banks, where deposits are the foundation of the business.”

An Amazon-style mobile ecosystem could challenge not only the payments system but the lending business of banks. Amazon is already making small-business loans, finding ways to cut into banks’ swipe-fee revenue and competing against prepaid card issuers; and it evidently has broader ambitions. Checking accounts, small business credit cards and even mortgages appear to be in the company’s sights.

In an October 2017 article titled “The Future of Banks Is Probably Not Banks,” tech innovator Andy O’Sullivan observed that Amazon has a relatively new service called “Amazon Cash,” where consumers can use a barcode to load cash into their Amazon accounts through physical retailers. The service is intended for consumers who don’t have bank cards, but O’Sullivan notes that it raises some interesting possibilities. Amazon could do a deal with retailers to allow consumers to use their Amazon accounts in stores, or it could offer credit to buy particular items. No bank would be involved, just a tech giant that already has a relationship with the consumer, offering him or her additional services. Phone payment systems are already training customers to go without bank cards, which means edging out banks.

Taking those concepts even further, Amazon (or eBay or Craigslist) could set up a digital credit system that bypassed bank-created money altogether. Users could sell goods and services online for credits, which they could then spend online for other goods and services. The credits of this online ecosystem would constitute its own user-generated currency. Credits could trade in a digital credit clearing system similar to the digital community currencies used worldwide, systems in which “money” is effectively generated by users themselves.

Like community currencies, an Amazon-style credit clearing system would be independent of both banks and government; but Amazon itself is a private for-profit megalithic system. Like its Wall Street counterparts, it has a shady reputation, having been variously charged with worker exploitation, unfair trade practices, environmental degradation and extracting outsize profits from trades. However, both President Trump in the center and Sen. Elizabeth Warren on the left are now threatening to turn Amazon, Facebook and other tech giants into public utilities.

This opens some interesting theoretical possibilities. We could one day have a national nonprofit digital ecosystem operated as a cooperative, a public utility in which profits are returned to the users in the form of reduced prices. Users could create their own money by “monetizing” their own credit, in a community currency system in which the “community” is the nation—or even the world.

Source: by Ellen Brown | TruthDig