When the UK Previously Looked to a Canadian to Run the Bank of England

Just a quick historical note on the somewhat stunning news that Mark Carney, the current head of the Bank of Canada (and a Canadian citizen), has been asked and has accepted the job of running the Bank of England.

Graham Towers and Montagu Norman 

I say 'somewhat' because students of history may know that as Montagu Norman's 24 year reign at the Old Lady of Threadneedle Street was winding down the then head of the Bank of Canada, Graham Towers (also a Canadian citizen), was considered as a leading candidate to replace Norman.

Norman and Towers worked closely together during World War II to support the price of sterling during the Battle for Britain, and much of the UK's gold (as well as France's) was sent to Canada to protect it in the event of a Nazi amphibious invasion of Britain. However, for reasons possibly lost to posterity Towers was either never offered or accepted the job.

Analogies about how England's national football coach is often  foreigner and how the Carney choice really isn't all that different are of course flooding the media airwaves right now. Perhaps the economic, patriotic, and security considerations that come with heading the national football club and central bank aren't really as far apart as one might think?

An issue which isn't under much doubt is that Mark Carney, like Graham Towers in his day, is simply a very good candidate for the job.

Looking ahead, the one thing that is certain is that Mr. Carney will have very big shoes to fill. Even with the financial crisis and the challenges faced by the City of London over the past several years, there can be little doubt that Sir Mervyn King has proven to be one of the finest central bankers of his age. Sir Mervyn recently gave an excellent lecture at the LSE on inflation targeting, which can be viewed here.

Another point is that the Carney choice further confirms London's status as the most welcoming of the major financial centers to foreigners and capital alike. Take that New York!

Why is the U.S. Government Still Hiding Financial Crisis Documents?

Here here to former Lazard partner turned Wall St. author/historian William Cohan and his fighting the good fight to obtain public documents from the U.S. government related to financial firms such as Goldman Sachs.

Too Crooked to Fail

With the vampire squid having been dealt perhaps the long awaited, but much need mortal PR blow this week, the Rolling Stone's Matt Taibbi has transitioned his sights on Too Bigger to Fail Bank of America:

At least Bank of America got its name right. The ultimate To Big to Fail bank really is America, a hypergluttonous ward of the state whose limitless fraud and criminal conspiracies we'll all be paying for until the end of time. Did you hear about the plot to rig global interest rates? The $137 million fine for bilking needy schools and cities? The ingenious plan to suck multiple fees out of the unemployment checks of jobless workers? Take your eyes off them for 10 seconds and guaranteed, they'll be into some shit again: This bank is like the world's worst-behaved teenager, taking your car and running over kittens and fire hydrants on the way to Vegas for the weekend, maxing out your credit cards in the three days you spend at your aunt's funeral. They're out of control, yet they'll never do time or go out of business, because the government remains creepily committed to their survival, like overindulgent parents who refuse to believe their 40-year-old live-at-home son could possibly be responsible for those dead hookers in the backyard.

The rest here.

Recommended links & Photo of the Week

Coming soon to a Eurozone bank near you?

1. Beware of falling masonry (Economist) Good tactical overview of the eurozone crisis and some of the options being considered. See also 'Banks Build Contingency for Breakup of the Euro' (NYT)

2. Latvian bank Krajbanka set to be wound up (AFP) Above bank run image is of Krajbanka.

3. The Rise and Fall of Bitcoin (Wired) Contrary to the title I don't think this is the last we've heard of Bitcoin, or other virtual currencies, but an interesting and informative read nonetheless.

4. Prepare for riots in euro collapse, UK Foreign Office warns (Telegraph)

5. Why Not Break-Up Citigroup? (Simon Johnson) Citibank has blown-up and required a bailout three times in the last three decades, or once on average every ten years.

6. How could Reebok sell trainers for $1? (BBC) Contrary to popular believe it's not all glum news here at TPC. I was able to see the remarkable Nobel Peace Prize winner Professor Muhammad Yunus speak this week (video below). His bank, Grameen, is doing amazing things and gets a BHAG nod.

7. MF’s Missing Money Makes You Wonder About Goldman (Jonathan Weil)

World's Most Dangerous Banks and Their Host Countries

Below is the Financial Stability Board's list (by host country) of systemically important financial institutions (SIFIs), alternatively known as the 29 banks which are simply Too Big to Fail.

Twelve different countries are home to these 29 banks. Half of those countries host just one Too Big to Fail institution, and the other half host anywhere from two (Germany and Switzerland) to the U.S.'s eight.

Continue reading the full article at SeekingAlpha here.

Video: Simon Johnson Rips Too Big to Fail at Bretton Woods

Video: Merle Hazard's Feelin' Lousy music video

Why Isn't Wall Street in Jail?

Good question!

Weekend reading from Matt Taibbi in Rolling Stone here on why so few prosecutions have been brought by the Obama administration against 'main stream' Wall Street. This has left over-the-top ponzi crook Bernie Madoff as the only high-profile financial villain serving time in the pokey.

Johny Depp in Blow

Speaking of Madoff, fellow ponzi-schemer 'Sir' Allen Stanford was recently moved into Madoff's digs at Butner prison. Will the two get a chance to compare notes?

Docudrama filmmakers: there may be a fun movie here. I'm imagining a screenplay set in part at Butner, perhaps featuring Stanford and Madoff as cellmates, with flashbacks to their pre-arrest glory days ala the stylized cocaine caper, Blow.

Wall St. & Obama's $1 Billion Presidential Re-Election Fundraising Goal

News came last month of the unprecedented amount of money President Obama will seek to raise for his 2012 reelection campaign.

And now with Obama's recent appointments of officials drawn from 'Too Big to Fail' institutions like Bill Daley of JP Morgan Chase and Gene Sperling of Goldman Sachs to key posts in his administration, we can see where Obama expects to raise that $1 billion.

Wall Street is home to perhaps the biggest pile of campaign contributions. As Inside Job Director Charles Ferguson explains, while Obama's decision to give in to Wall Street is depressing it's entirely rationale in terms of his re-election fundraising goals.

In fact it's a pretty safe bet that both Democrats and Republicans will be aggressively courting Wall Street and the now 'Too Bigger to Fail' banks for massive 2012 presidential campaign contributions.

And I'm sure there will be no strings attached to any such contributions, right Lloyd and Jamie?

Maverick Fed Governor Hoenig: Too 'Bigger' to Fail Alive and Growing

The maverick of the Federal Reserve, Governor Thomas Hoenig, states the following in his NY Times op-ed:

There is an old saying: lend a business $1,000 and you own it; lend it $1 million and it owns you. This latest crisis confirms that the economic influence of the largest financial institutions is so great that their chief executives cannot manage them, nor can their regulators provide adequate oversight.

Last summer, Congress passed a law to reform our financial system. It offers the promise that in the future there will be no taxpayer-financed bailouts of investors or creditors. However, after this round of bailouts, the five largest financial institutions are 20 percent larger than they were before the crisis. They control $8.6 trillion in financial assets — the equivalent of nearly 60 percent of gross domestic product. Like it or not, these firms remain too big to fail.

Too 'Bigger' to Fail

At risk of causing my high school grammar teacher to roll in her grave, I've started calling what Hoenig describes above as 'Too Bigger to Fail'. The below chart helps illustrate the 'Too Bigger to Fail' concept.

The grey circles represent banks which failed and then were merged with the 'bigger fish' in the banking pond. By eating smaller fish the big fish grows, and that's precisely what's happend at the world's already Too Big to Fail megabanks (hence the new name Too 'Bigger' to Fail).

Regulators — not just in the U.S. but across the globe — activated their Too 'Bigger' to Fail strategy with the hope that the crisis would be solved by spreading toxic assets across a larger, and in theory healthier set of balance sheets. The same toxic assets still exist, but it was hoped that the bigger banks could better cope with the toxic asset losses.

Too 'Bigger' to Fail has one further element: megabanks would have time to lick their wounds and heal by a) generating increased profits due to fewer competitors (the small fish that were eaten), and b) through bank profit and banker bonus friendly programs like unlimited zero interest central bank lending to mega banks and QE2.

Ultimately, any hope for a solution to the Too 'Bigger' to Fail problem depends on whether sufficient political will and leadership can be mustered. Can it?

Small is Beautiful

The U.S. based megabanks -- Chase, Citibank, Bank of America, Wells Fargo, Goldman Sachs, and Morgan Stanley -- will not voluntarily shrink themselves out of a sense of patriotic duty. Hopefully this week's news of the Fed's foreign bank lending of perhaps as much as $1 trillion at nearly 0% interest rates to banks like UBS (Switzerland), Deutsche Bank (Germany), Barclays (U.K.) and BNP Paribas (France) puts to rest any lingering doubt of whether the megabanking establishment is loyal to any one nation's flag.

Turning to our current political leadership, unfortunately Inside Job Director Charles Ferguson may be right in his assessment that the Obama administration is unwilling to step up to the plate and drive the necessary stake through the heart of Too Big to Fail once and for all.

If our politicians can't fix the problem, what hope remains? Thankfully an arguably even more effective solution to Too Bigger to Fail exists completely outside of the Washington D.C. political black hole.

Lost Customers: The Only Language Megabanks Understand

Most of us are bank customers, which makes putting an end to Too 'Bigger' to Fail quite simple: all we have to do is take our banking business somewhere else.

For those customers at one of the above Too 'Bigger' to Fail banks, move your account to a smaller bank. Also never use an ATM at a Too 'Bigger' to Fail bank. Plenty of smaller banks now offer free ATM fee reimbursement, so this won't saddle you with extra fees. While moving your account will require a little extra work it's a relatively simple process. If enough of us pull together and do this it will go a long way towards solving the problem.

And for anyone who works at one of the aforementioned megabanks and has read this far, you can perhaps make one of the biggest contribution of all by seeking out another employer, or career. I did.

Democratic capitalism has many shortcomings. But one of the beautiful things about the marketplace in this particular instance is that it can successfully achieve what D.C. can't and Wall Street won't — cutting the Too 'Bigger' to Fail banks down to an appropriate size.

Disclosure: No positions; I bank primarily with the recently divested from BofA (NYSE: BAC) and IPO'd First Republic Bank (NYSE: FRC) and USAA Savings Bank (private).

Video: Why Printing Money is referred to as 'Quantitative Easing'

David Brooks and Dick "Buy Lehman" Bove Perpetuate TARP Profitability Myth

David Brooks

Some myths just won't die. And if repeated often enough they can become legend.

Banking analyst and regular CNBC talking head Dick Bove is doing his part to keep the TARP was 'profitable' myth afloat. Joining this cause is NY Times columnist David Brooks, who on a recent episode of Charlie Rose made it abundantly clear that accounting is not his forte. Like Bove, Brooks mistakenly believes that TARP is 'profitable'.

To my knowledge Brooks, who based on appearances could easily be mistaken for an accountant, is no financial expert. So perhaps he can be forgiven for sending his proselytizing mouth into terra incognita. Bove, on the other hand, should definitely know better.

As discussed previously here, here, and here, the only way to claim that TARP is profitable is by viewing it in isolation of the entire government bailout, which in addition to TARP includes GSE conservatorship, Fed asset purchases, etc. Bailing out Fannie and Freddie alone could wind up costing taxpayers trillions, thereby swamping any gains seen by TARP.

The results of TARP are intimately connected and influenced by the other government bailout programs. Claiming that the relatively small TARP bailout sliver is profitable is intellectually dishonest and emblematic of the accounting shenanigans which continue to distort the balance sheet picture of our financial system and government.

Is there a political motivation behind the repeated claims of TARP profitability? Establishing this perception would certainly make the the banking sector look better in the eyes of taxpayers. It would also cast a more favorable light on the massive government intervention initiated by 'Government Sachs' and Treasury Secretary Hank Paulson and then furthered by the Obama administration.

Unfortunately this notion of TARP profitability seems to have gained a toehold in the mass media. As such we can expect to see future government bailouts justified on myopic, misleading accounting.

Has Federal Reserve Secrecy Become Untenable?

The most interesting aspect of the Fed's new 'quantitative easing' announcement (aka QE2 ) was not its $600,000,000,000 price tag.

Nor Fed Chairman Ben Bernanke's op-ed in the Washington Post which stated that a key benefit of QE2 is higher stock prices.

I believe the most interesting, and perhaps significant, questions relate to the impact on the Fed's ability to maintain secrecy in wake of the unprecedented media coverage of QE2.

A Well Telegraphed Event

Regular Fed watchers of course know that an oft used Fed strategy is to communicate upcoming policy shifts through speeches and leaks to the press well in advance of the actual vote and formal policy change announcement. The Fed's thinking here is that this strategy provides time for market participants to acclimate to an upcoming policy change, thereby avoiding a sudden (and perhaps unwelcome) monetary surprise.

Anyone following the general financial press was probably aware no later than September that QE2 was going to be announced at the November Fed meeting. Media coverage of QE2, including my first writeup, began appearing as early as June.

Charles Ferguson on "Obama's Depressingly Rational Decision to Give In to Wall Street"

Academy Award nominated film director Charles Ferguson, who's documentary Inside Job about the financial crisis is currently playing in theaters, has penned an article on President Obama and Wall Street.

When will we stop indulging the fantasy that 'Too Big to Fail' banks are private enterprises?

And if you haven't already seen Ferguson's interview of former Fed Governor Fred Mishkin on his infamous "Financial Stability in Iceland" report, you can check it out here.

Michael Lewis on Hiding Banned Proprietary Trading at 'Too Big To Fail' Firms

An update from author Michael Lewis on how the Too Big To Fail firms (e.g., Goldman Sachs) are maneuvering around what clearly appears to be an ineffective ban on proprietary trading. Lewis:

"A few weeks ago we asked a simple question: Why are the same Wall Street banks that lobbied so hard to dilute the passages in the Dodd-Frank financial overhaul bill banning proprietary trading now jettisoning their proprietary trading groups, without so much as a whimper? The law directs regulators to study the prop trading ban for another 15 months before deciding how to enforce it: why is Wall Street caving now?

The many answers offered by Wall Street insiders in response boil down to a simple sentence: The banks have no intention of ceasing their prop trading. They are merely disguising the activity, by giving it some other name."

I highly recommend Lewis' recent book The Big Short which I wrote previously about here.

Goldman Sachs Says Fed's Next Money Printing Move is Imminent: "No Point in Doing Anything Less Than $1 Trillion"

Goldman Sachs chief U.S. economist Jan Hatzius yesterday said that the Fed is going to have to eventually print more money to tune of $1 trillion+.

In other words, the Fed's recently announced 'QE Lite' simply won't cut it. Hatzius figures are in line with estimates for QE 2.0 (the term that has become attached to the next massive round of Fed money printing) that I've been pointing towards for awhile.

In terms of the timing of QE 2.0, Goldman Sachs Chief Global Economist Jim O’Neill said "September might be a little bit soon, but by October I would say for sure if the data carries on being as disappointing as it’s been."

Given that market confidence is clearly deteriorating, why won't the Fed act sooner? I've recently wrote about my ideas on timing here. Ken Rogoff, the Harvard economist and author of the only economic history bestseller This Time is Different, recently appeared on Charlie Rose. He suggests that the Fed is hesitating because they're "nervous about overshooting". Aiming for 3% inflation, the Fed may miss their target badly and wind up with 30% hyperinflation. However, Rogoff states the "Fed will have to take that chance".

The U.S. dollar has held its ground so far, but concerns are rising about ongoing record budget deficits and what the government will do about the massive mortgage market problem that is Fannie and Freddie. The terrible housing figures are coming in spite of record low mortgage rates, housing prices 33% off their peak, and federal government subsidized mortgages for even Manhattan condos that require only 3.5% down payment. Perhaps most importantly, the now all but certain QE 2.0 makes the future value of the dollar anything but certain.

From an investment perspective, any move by the Fed to print more money is bullish for gold.

Today's Hooey: Claiming Bank Bailouts Are "Profitable" for Taxpayers

CNBC, Reuters, and other media outlets trumpeted Keefe, Bruyette & Woods claim that bank bailouts are profitable for the U.S. government (and hence the U.S. taxpayer).

If it weren't for the report's intellectual dishonesty this news would have made for a nice political headline and taxpayer feel good story.

The glaring problem with Keefe's Mr. Fred Cannon's "profitable" conclusion is that he arrived at it only by ignoring all the other government bailouts during the financial crisis.