An ADI Will Fail


Ironic, oxymoronic and …

News that Yahoo! is laying off a large part of its workforce shouldn’t come as a surprise. Their website for financial news ( recently featured the following:

Featured Article

Followed by:

Community Sentiment

Ok, so maybe it was message board morons who got their story wrong. (Bailouts usually come before bankruptcy is declared, so the news is bad for GAP, not good.)

But that’s a metaphor for what’s going on in the economy. You just don’t know what news is bad and what news is good. Companies struggling could mean more bailouts. ompanies doing well could mean special taxes. Unemployment rising could mean more money printing. Unemployment falling could mean inflation.

Avoiding tax increases means a rising budget deficit. The solution to too big to fail is to force mergers and acquisitions. Attempting to deal with too much debt, the world has taken on more. Free trade agreements have turned out to be barriers to trade. Bank competition policies benefit the big four.

It seems like all the noteworthy action of the past few years has been ironic, oxymoronic or plain moronic. Politicians must feel like their two armed economists have put on boxing gloves.

Let’s start with the news that free trade agreements are barriers to trade. Sounds strange. But it’s just a prime example of the unavoidable contradiction in having government action associated with the free market. They are diametric opposites. So, when you have government actively promoting free trade, you actually get “reduced trade by introducing complex rules…” It shouldn’t take a year long study by the Productivity Commission to figure that out. Free trade is the absence of governments and their “agreements”.

But some people just have to learn things from experience. Like the US government. It is intent on running its own finances into the ground (or stratosphere, if you prefer). And it’s really starting to cost them. Even a deer with no eyes and no legs can see that deficits aren’t sustainable. Moodys had no eye deer leading up to 2007, but is rattling its sabre now. Yes, the beratings agency has stepped up to the plate and declared the Aaa rating of US Treasury debt is at risk if the President gets his tax and unemployment benefit package to become law. (It since has.)

Moody’s statements could be mere attention seeking from the formerly revered bond ratings agency. Or it could be a political move against the new legal requirements being put on ratings agencies by the government. Either way, having the world’s “risk-free” asset downgraded would be quite an eye opener. Fund manager Jim Leaviss has an entire list of nations he says will be losing their AAA ratings. France is next and the US will follow after 2011.

Closer to home

So far, Australia hasn’t made the headlines like its distant cousins in the US and Europe. Well, not for the bad reasons anyway. But thinking that the Land of Oz will be spared an economic rout is wishful thinking. After all, we also strayed from the yellow brick road known as the gold standard.

Yes, if you take part in the boom, you must take part in the bust. One sector to struggle, according to Jonathan Mott from UBS, will be the banks: “Eventually an ADI (authorised deposit-taking institution) in Australia will fail. It is inevitable at some stage. This will happen.” The reason is affordability of housing. That probably means Mr Mott expects a housing crash.

Enter the latest doomed government policy. Actually, an entire collection of them.

It turns out that the Aussie banking industry’s costs do not run parallel to the RBA’s targeted cash rate (the one you hear about on the news). NAB’s CEO confused everyone with his explanation, but it seems to imply that when the RBA raises rates, banks do to. And when overseas borrowing costs rise, banks raise their rates too. Win-win is the business model. You just pick and choose the most beneficial rate for you… if you’re a banker.

Because the RBA was one of the first central banks to raise rates after 2008, banks here followed them up. That gave the perception that Aussie banks mirror the RBA’s rate. Now that foreign borrowings are getting expensive, the rates continue rising beyond the RBA’s.

Of course, such “super profits” don’t go unnoticed. So the government has set out to introduce more competition. The resulting legislation was described as “a major win for the major banks” by a Credit Suisse broker. Oops.

Not deterred by their failure, politicians’ sentiment is now turning towards taxing the banks in a similar scheme to the one that proved so popular previously. Super Profits Tax 2 could be in the making. The bank shares are getting slapped around by the market, which no longer knows if profits are a good or bad thing.

Another story to add to the Australian banking confusion is the introduction of covered bonds. These could lower the cost of capital for banks by 40%. Sounds good, but what are they? Have a look at Dan Denning’s Monday article for an explanation. The point being that this is not good for depositors. Especially if Leaviss is right about the failure of an ADI. Then again, there is deposit insurance now too. And the definition of “banks” is being widened, which is a crucial change in terms of regulatory and policy implications.

This whole banking thing is getting very complicated. Some government policies are fighting banks, some are rigging the game in their favour, and nobody is quite sure which does which.

Bungling bonuses

What does it look like when governments stand up to big bonus bankers? Funny and scary at the same time.

John Foy, formerly from Allied Irish Bank, won a case against his employer, which attempted to suspend his 2008 performance bonus. “However, [the bank] reconsidered its position following a letter from the Irish finance minister Brian Lenihan.” That’s right, the Irish government can now not only decide how much people get paid, but do so retrospectively.


Here is a rather odd thought for you: What if the Federal Reserve goes bankrupt? It sounds rather stupid, but think the process through. Tyler Durden at calculated the Federal Reserve’s loss in one day to be $8 billion due to falling bond prices. (The losses were unrealised.)

If rates continue to rise and bond prices continue to plunge, whether out of economic growth or inflation, the Fed is in a pickle. If the Fed realises its losses in an attempt to reverse its inflationary policies of the past, it will amount to one hell of a loss. And the Fed is supposed to fund itself, so as not to be subject to Congress’s budgetary restraints.

To deal with such a situation, the Fed could of course print more money. But that leads to more inflation. Which exacerbates the initial problem.

Unemployment and Employment

As Christmas cheer fills your homes, don’t forget to think of those less fortunate. The Americans. More specifically, the un and underemployed Americans.

Here are the figures of the number of employed Americans over time:

2007 – 146.0m

2008 – 145.5m

2009 – 139.9m

2010 – 138.9m

Did you pick up on the trend?

Seriously Constitutional

Can the government force you to buy something? It can tax you, so why not? That’s probably what the gaff proned Nancy Pelosi, speaker of the US house of Reps, thought when she answered this question: “Madam Speaker, where specifically does the Constitution grant Congress the authority to enact an individual health insurance mandate?”

Pelosi: “Are you serious? Are you serious?” “Yes, yes I am.”

So now a judge has shown the constitution is serious too and declared the key part of the legislation as unconstitutional. The implication of this is a little bit problematic. Health insurers can’t turn people down based on pre-existing conditions, but people don’t have to have healthcare. So now people will simply get healthcare the day they get sick. And the insurance companies the bill was intended to help (ahem) are now in a spot of bother.

Of course, two judges have previously held the provision to be fine, so the Supreme Court is expected to confirm it too.


The acceptable version of inflation for classrooms contends that all prices rise simultaneously, so that inflation doesn’t harm anyone. As ridiculous as this sounds, many still believe it. The Austrian School of Economics has long contended that inflation spreads through an economy like a ripple in a pond. And it begins where it would logically begin – where the money flows to when the Fed prints it. Of course, those who receive that money get to spend it at the full purchasing power, while those who receive it last experience the adjusted higher prices.

Wikipedia lists the following as primary dealers, which means they receive the Fed’s freshly created money first.

  • Goldman, Sachs & Co.
  • Bank of America Securities LLC
  • J. P. Morgan Securities Inc.
  • Morgan Stanley & Co. Incorporated
  • Citigroup Global Markets Inc.
  • Barclays Capital Inc.
  • Credit Suisse Securities (USA) LLC
  • Deutsche Bank Securities Inc.
  • HSBC Securities (USA) Inc.
  • RBS Securities Inc.
  • UBS Securities LLC.
  • & more

Oh, sorry, a bit of a glitch. That is the list of banks who received Treasury bailouts and/or assistance from the Federal Reserve.

No, wait, it is the right list. It just includes the very same banks. What a coincidence!

Yes, it’s the bonus binging, self destructive, too fat to fail bankers who get the money at unadjusted prices. And the last to receive the new money are of course the poor. As mentioned, by this time, prices have risen.

Now bankers can pay themselves what they like and it’s the shareholder’s and customer’s responsibility to hold them accountable. But a hidden transfer of wealth that is inherent in the system is morally wrong. And it’s a very powerful one.

The bankers not only avoid higher prices, they also get to invest the funds they borrow at prices that will increase as an inherent cause of the money being created. To put it simply, they are the casino and not a gambler in it, as they would have you believe.

The central bank is the institution that rigs the game.

But, not content with their institutionalised advantage, banks use their subsidised clout to manipulate markets as well. The conspiracy theory about JP Morgan and the silver market has turned out to be based on several truths. You can read about the fallout here and here.

End the Fed

A point we missed last week: The one and only politician we want to see staying a politician has been appointed to head the Domestic Monetary Policy Subcommittee, which means he will be overseeing the Federal Reserve.

It was best described by Darryl Schoon of “Ron Paul’s appointment to oversee the Federal Reserve is tantamount to King George III appointing George Washington to oversee England’s colonial affairs in 1775.”


Anyway, a big congratulations from us here in Australia. We look forward to watching Dr. Paul tear into Bernanke in the more frequent hearings he plans to hold. If you don’t know much about Dr. Paul, simply search for him on Google, Youtube or click here.

Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.

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2 Comments on "An ADI Will Fail"

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5 years 10 months ago
Westpac almost went under a few years ago.. Westpac and CBA are both more heavily exposed to the property market than ANZ and NAB.. Even if one of the big 4 were to go under I think the government would intervene on their behalf. On another note “copy/paste” from the INVESTORS are wasting little time shrugging off a lacklustre year and are quickly turning their attention to the fortunes of 2011. But even in a dull market there are profits to be made – providing you know where to look. Despite share market indices going sideways this year, in… Read more »
5 years 10 months ago

“one of those who like to rant about ‘ASX” went down 54% blah blah blah”

I love it:)

Why don’t they cut to the case and label “those” as Wealth Deniers or Prosperity Skeptics?

Then push ahead with the headlines



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