Wall St. banks $1 trillion market cap feast on backs of college students

Since the Great Recession of 2008-09 the total amount of consumer borrowing overall has dropped 1%, according to figures from the New York Federal Reserve Bank.

Mortgages and home equity lines of credit, the two debt instruments that allowed Americans to use their homes as an ATM after the Internet bubble popped in 2000, have seen 8% and 33% drop respectively, mostly due to regulation, not the banks regulating themselves.

So where did the banks go to make up for these losses. The went to the unregulated arena of student loans and “Ninja” auto borrowing.

Banks have seen a 105% rise in student loans totals since 2008, as the narrative of the time was to stay in school since no one was hiring anyway. This data means that the banks piled into education loans with more than doubling the amount lent prior to the Great Recession.

Now, we see record numbers of defaults and loans more than 60 days late from this cohort of master-degree touting 20-somethings who still can’t find meaningful work. More than 25% of these loans are currently in default, according to the latest Fed data.

Unlike the subprime mortgages of the 2000s, these loans have no assets backing them, except the blood, sweat and tears of the students and their families perhaps. These “noteholders” cannot receive forgiveness on the loan even in a bankruptcy, since Wall Street took that option away years ago.

So, existing student loans are now total $1.4 trillion according to the Federal Reserve in DC or $1.3 trillion for the New York Fed and growing as a new batch of incoming freshman find out where they will be attending school in September. These first-year students will be paying 2-4 percent more than last year’s incoming class, because there is plenty of liquidity in the market for new loans.

When these first-year accepted students open their financial aid package, their families will notice that part of the aid package includes loans. This is how universities and colleges grease the wheels for Wall Street banks.

In my book a loan is not financial aid, it’s a debt that has to be repaid, but the schools use them in their aid packages to reduce the initial sticker shock.

Now on the back of this news, I see where the market cap of Wall Street’s largest commercial banks recently exceeded $1 trillion for the fist time ever.

JPMorgan up 29% since the election, Wells Fargo +27%, Bank of America 44%, and Citigroup +19%, have all enjoyed the Trump bump and its expectation of business growth or at the very least a reduction in regulations governing their actions.

Investors believe Dodd/Frank and the Consumer Financial Protection Bureau may be going away or being at the very least deeply defanged through funding cutbacks. So what could go wrong here?

Tomorrow, I’ll look at the subprime auto loans and how repo men with tow trucks are creating the next bubble to pop.

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Dodd/Frank goes the way of the dodo

Despite campaigning to the contrary, President Trump is scheduled to sign an executive order on Friday to roll back banking and advisory provisions adopted after the financial crisis.

The president will begin dismantling the 2010 Dodd/Frank rules, which put too much restraints on the Wall Street banking industry says White House National Economic Council Director Gary Cohn told the Wall Street Journal.

Trump told voters on the campaign that Wall Street did nothing to help them during the crisis and were tone-deaf to their plight as they foreclosed on their homes. The signing today could lead to more of the same as capital controls and fiduciary responsibilities are cut back.

Cohen, the former vice chair of Goldman Sachs, said of the measure, “It has nothing to do with Goldman Sachs. It has nothing to do with JPMorgan. It has nothing to do with Citigroup. It has nothing to do with Bank of America. It has to do with being a player in a global market where we should, could and will have a dominant position as long as we don’t regulate ourselves out of that.”

In what is expected to be a separate executive order, the President will instruct the Labor Department not to enact an upcoming rule requiring financial advisers to avoid conflicts and to work in the best interests of the client.

This rule, scheduled to go in effect in April, would prohibit financial advisers from putting clients in their company’s products for a retirement fund if there were better alternatives in the market.

This rule would have had profound effects on the $3 trillion of retirement assets currently under management in the U.S. The Trump administration said the rule would limit choice for the consumer.

Cohen, who is the ranking financial chief in the White House since the Senate has yet to confirm Treasury chief Steve Mnuchin, also told the Journal: “I’m not sitting here saying we want to go back to the good old days.”

“We have the best, most highly capitalized banks in the world, and we should use that to our competitive advantage,” he added. “But on the flip side, we also have the most highly regulated, overburdened banks in the world,” Cohn said.

Deutsche is walking dead, but may not fall

When the markets question the viability of a financial institution, then that firm is toast.

The capital markets were the ultimate forum for picking winners and losers, that was until 2008, when the term “Too Big To Fail” came into vogue.

Once a firm is tagged with the TBTF label, markets no long can become efficient and take the financial institution out through bankruptcy or merger.

This is where you see Deutsche Bank today. In the past before TBTF, Deutsche would be in a liquidity squeeze as markets question the viability of the firm ( see Lehman).

However, there has to be an explicit backing by the German government in order for Deutsche to still have its doors open.

Yes we get headlines that Deutsche’s borrowing costs are going up, that other firms are poaching Deutsche’s bankers and that its derivative book has been reduced to 43 trillion euros from 75 trillion euros.

But let’s work the notional value of a 50 trillion euro book, which conservatively could be 5 trillion euro in exposure. Deutsche’s current book value would have trouble covering the $14 billion Justice Department fine for mortgage security fraud charges. So how can the bank cover a 1% move on 5 trillion euro?

If the market could clean out a troubled firm (see Citigroup), then we would not have had to go through the last eight years of economic malaise. But that’s not to be, as governments and central banks — not the markets — pick winners and losers.

So if the Merkel government has given the markets a thumbs up in backing up Deutsche, which is the only explanation, then we can welcome back the zombie banks in Europe.

A weekend like no other after the collapse

On Monday I wrote here about the upcoming bank holiday, which ushers in a new Great Depression. It starts on a Friday after the markets close early due to excessive selling.

By Saturday morning the President is back on the airwaves telling the American people he has requested all governors to call up the National Guard to deploy in cities where rioting and looting took place overnight. Insurance industry estimates — later on — put the losses in the first hours at $2.4 trillion in goods lost and $4.5 trillion in property losses.

What food stores are open for cash-only have shelves emptied by 10 am Saturday. TV news is showing the devastation from the overnight melees in Chicago, Detroit, Brooklyn, The Bronx and central Los Angeles.

Calls go out from Capitol Hill to evoke curfews to help law enforcement deal with the chaos. In the US police staffing is predicated on 99.9% of the population being law abiding, when that number drops to 98% they are overwhelmed. Social scientists — later on — put the number of lawlessness at 35%, meaning only 65% of the population were not engaging in illegal activities.

President Obama addresses the nation again at 2pm, by this time those Americans watching the news were seeing death and destruction on a global scale as riots spread across Europe and eastern Asia. Even Japan and China — culturally much different from the west — are seeing societal breakdowns.

As an aside interestingly, the Arab states have no problems since their societies did not believe in a credit based economy. The oil producers will feel the pain, but it’s not anything they haven’t felt since the middle of 2015 with cratering oil prices, besides now they have cover because of the western infidels crashing the market.

As the President speaks, news footage of water cannons, sound trucks and other US Army anti-riot gear are amassed in and around the White House and Capitol Hill.

In his address he lays out — in simple terms — how the globe got to this point, but does not mention solutions. He says banks and global markets will be closed from the next week as central bankers gather in a secret location to scheme a solution.

(Only with hindsight will we see that the festering balance sheets of the largest bailed out banks from 2009 — Deutsche Bank, Citigroup, HSBC, Societe Generale and others were the cause for this collapse. These and other zombie banks with crippled balance sheets needed to ramp up risk to keep the doors open and ATMs working. Regulators knew the case and turned a blind eye to the activities.)

Obama then plants the seeds for class warfare by telling the American people that the banks in their quest for profits, invested money in very risky investments with plenty of leverage and that these bets went bad forcing the financial calamity we see now. He fails to mention that Washington, London and Beijing were all in on the ruse.

“This is a very dangerous time, because the American people have been betrayed by those who worship the dollar more than life itself,” the President said.

Immediately after that bankers across the country began burning their trading vests and gym bags all with logos from JPMorgan, Goldman Sachs and others.

(We’ll let historians figure out who is to blame financial regulators or the banks themselves.)

Commentators call the president’s remarks revisionist and callous, saying Obama was trying to keep the pitchforks and torches away from the White House.

As Sunday morning broke, talk of a revolution began filling the airwaves, not the online alternative media, but mainstream news programs. The theme of the news cycle were American towns closing to visitors to protect citizens and limited resources.

The modern-day “just in time” delivery system for groceries, meant that many stores did not have but a 2-day supply of food items and since both safety and credit were in short supply the shelves would remain empty for the foreseeable future.

Some of the presidential candidates suspend their campaigns to get back to Washington DC. Donald trump and Hillary Clinton do not since they say this is their job to inform the American people on how they would fix the problem.

The President comes back on TV at noon saying he just came back from church (later discovered to be a lie) and “That I prayed for the American people.” Going on further to say, “My military advisers have suggested — in very strong terms — that I go to Camp David to be protected. I know there is great pain, but will shall overcome and I stand with the American people in their hour of need.”

He then went on to say that all essential needs will be met, which is taken to mean that government credits will be available for food stamps, unemployment benefits and other government handouts. It’s taken as a sign by commentators as a way to quell the civil unrest in the inner cities.

Utilities will continue to provide services to the best of their ability, Obama says. Hospitals, police and fire departments will be staffed with emergency responders.

At 7pm the President appears on “60 Minutes” from Camp David to tell the citizens they should go to work on Monday morning to see what they can do to get society back to the norm.

“I don’t know if your job is still there, but what I do know is, if you don’t show up that business may have to close,” Obama said.

The President continued with the claptrap about what it means to be an American and that we are the beacon yada yada yada.

Unfortunately a majority of Americans didn’t have a job to go to even if they wanted to and the President did not have the nerve to bring up that subject.

America was 48 hours into the “new normal” and patience was wearing thin. Not once has the public heard about a solution or even an inkling or a plan to get things back to normal.

Next what does Monday morning bring.

ECB to ramp up easing, for hard landing

The equity markets are rallying over the presumption that the ECB and Mario Draghi will step up on Wednesday and provide more easing.

However, the ECB is already doing $60B a month in easing, with negative interest rates. So of course the answer is issue more debt

Draghi was quoted at the World Economic Forum in Davos as saying the ECB  will do “whatever it takes,” to keep the bubble inflated (my words). Despite most of Europe being in a bear market.

Chinese and Japanese financial chiefs have also acted already with currency manipulation to buoy their markets.

It appears that global leaders will continue to load up on debt and play in the currency markets, instead of looking at some hard-line financial reforms to right what’s wrong in their economies.

The Italian banking system is teetering under a mountain of bad debt hitting the books. Officials are looking to set up a bad bank to house the rotten paper ala Citigroup.

So the ECB may ramp up liquidity to what $75B a month. Therefore cheapening the euro against the dollar, sending oil and other commodities to new decades lows.

What could go wrong?