MacroScope

Safe for the 1 percent: FDIC often insures much more than $250,000

That the U.S. Federal Deposit Insurance Corporation (FDIC) insures deposits in people’s bank accounts up to $250,000 is fairly common knowledge. What is less known is that this $250,000 cap is, in many cases, a fiction, because companies and savvy, wealthy depositors can circumvent it, or avoid it altogether.

Two examples of this “the-sky-is-the-limit” insurance are so-called TAG accounts and CDAR accounts. TAG (Transaction Account Guarantee) accounts held about $1.5 trillion as of March 31, according to the FDIC’s latest quarterly banking profile. The accounts pay no interest, so their popularity is derived from their uncapped FDIC insurance which reassures companies who need to keep large amounts of cash at hand to finance inventories and payrolls that their deposits are safe even if something goes wrong at the bank.

The FDIC is funded by the banks it insures. When it closes a bank, it uses money it has already set aside to protect depositors and absorb any losses associated with the failure. TAG accounts were forged in the fire of the 2008 financial crisis by the FDIC, the U.S. Treasury and Federal Reserve Board and unveiled in a joint press conference.

In 2010, The Dodd-Frank Act required all banks to join the program. Since then the FDIC extended the guarantee until Dec. 31, 2012, citing “lingering effects” of the financial crisis and the risk that letting the TAG program expire when the economy was weak could cause some community banks already under stress to lose deposits and risk failure.

One group opposed to the extension is the Investment Company Institute, which represents investment funds, including the money market funds that could see some of the money corporations keep in the TAG accounts for their short-term cash management needs migrate back to money markets. Other opposition comes from those who cite the “moral hazard” argument that might apply to any form of insurance.

‘What’s it got to do with me?’ Turning a blind eye to Libor lies

Barclays was fined a record $450 million last month by U.S. and UK authorities for manipulating the London Interbank Offered Rate, or Libor, the interest rate that underpins transactions worth trillions of dollars worldwide, between 2005 and 2009.  More than a dozen banks are expected to be drawn into the scandal, which is being probed by authorities in North America, Europe and Japan.

Below is the fascinating account of a former bank staff who worked alongside money market traders on just how it all went down:

Going back a step … and in many industries still today, there is this truly working concept which is my word is my bond. And that’s how the City used to function before, a long time ago, and in many things, up until very recently.

‘Our financial oligarchy’: Louis Brandeis slams too big to fail – in 1913

Chris Reese contributed to this post

In an article entitled “Our financial oligarchy,” published in Harper’s magazine in December 1913, Louis Brandeis, who three years later would be appointed to the Supreme Court, delivered a scathing critique of the banking sector that bears an uncanny resemblance to the charges against Wall Street today.

As the Libor scandal continues to widen, confidence in an already tarnished financial sector has been eroding further, having already taken a beating in the wake of the 2008-2009 financial crisis and the massive Wall Street bailouts that followed. Five years later, banks are still seen as risky as their post-crisis actions not only fail to restore their reputations but actually push them deeper into disrepair.

Against that backdrop, Brandeis’ description of the rapid growth of investment banks and the expansion of their power in ways that make them behave like economically inefficient oligopolies sounds downright prophetic.

Could the Fed follow the Bank of England into ‘funding for lending’?

Federal Reserve Chairman Ben Bernanke “might have something up his sleeve next week” when he delivers his semi-annual monetary policy report to Congress: he could hint at a “funding for lending” program similar to what the Bank of England announced last month, according to one long-time Fed watcher.

If the Fed wants to ease again, the first lever they pull might not be more quantitative easing where the Fed buys government bonds to help keep interest rates low in the hope that low rates will foster lending and economic growth, says  Decision Economics economist Cary Leahey.

Bernanke is scheduled to testify before the Senate Banking Committee on Tuesday and in front of the House Financial Services Committee on Wednesday.

Interview: Richmond Fed’s Lacker on Libor, ‘soggy’ growth and the limits of monetary policy

There appears to have been a significant slowdown in the second quarter. In particular we saw the pace of job creation slowed to a pace of 75,000 per month in the second quarter down from 226,000 in the first quarter and there are also concerns about slowing growth globally, beyond Europe but also in the emerging world and China, which was highlighted in the minutes (to the June meeting) this week. So, where do you think we’re headed? Are we just going to remain in a soft kind of pace? Are there upside risks to growth? Are there downside risks to growth?

Growth has definitely softened. The data are unmistakably weaker in the second quarter than we had hoped they would be. I think everyone recognized the first quarter and the end of last year were a little bit stronger than we might be able to sustain in the middle of the year but it’s definitely come in softer than I’d expected.

At the beginning of the year, it seemed as if Europe wouldn’t maybe weaken as much as we thought but lately the weakening from Europe has been coming online. In the U.S., I think we’re in a situation where we’re going to fluctuate from between the level where we are now to a level that’s more like we saw six or eight months ago. We’re going to have soggy patches, we’re going to have stronger spurts. If you look back over the last three years that’s the record you see. I don’t see a reason for that to change markedly.

Repo market big, but maybe not *that* big

Maybe the massive U.S. repo market isn’t as massive as we thought. That’s the conclusion of a study by researchers at the Federal Reserve Bank of New York that suggests transactions in the repurchase agreement (repo) market total about $5.48 trillion. The figure, though impressive, is a far cry from a previous and oft-cited $10 trillion estimate made in 2010 by two Yale professors, Gary Gorton and Andrew Metrick. The Fed researchers, acknowledging the “spotty data” that complicates such tasks, argue the previous $10-trillion estimate is based on repo activity in 2008 when the market was far larger, and is inflated by double-counting.

Repos are a key source of collateralized funding for dealers and others in financial markets, and represent a main pillar of the “shadow” banking system. The market was central to the downfalls of Lehman Brothers and Bear Stearns in the 2008 crisis, and now regulators from Fed Chairman Ben Bernanke on down are looking for a fix. Earlier this year, the New York Fed itself said it might restrict the types of collateral in so-called tri-party repos, after being dissatisfied with progress by an industry committee.

The study published by the New York Fed on Monday slices the complex market into five segments, mapping the flow of cash and securities among dealers, funds and other players. Because dealers represent about 90 percent of the tri-party market, the Fed study extrapolates that onto the broader repo market, to arrive at its estimates. Bottom lines: U.S. repo transactions total $3.04 trillion; U.S. reverse repo transactions total $2.45 trillion.

MIT’s Johnson takes anti-Dimon fight to Fed’s doorstep

Simon Johnson is on a mission. The MIT professor and former IMF economist is trying to push JP Morgan CEO Jamie Dimon to resign his seat on the board of the New York Fed, which regulates his bank. Alternatively, he would like to shame the Federal Reserve into rewriting its code of conduct so that CEOs of banks seen as too big to fail can no longer serve.

Asked about Dimon’s NY Fed seat during testimony this month, Bernanke argued that it was up to Congress to address any perceived conflicts of interest.

But Johnson says the Fed itself should be trying to counter the perception of internal conflicts. He told reporters in a conference call:

JP Morgan Houston janitor wants Jamie Dimon to walk in her shoes

Just as the proverbial shoemaker’s children can go without shoes so, apparently, can a cleaner of corporate office bathrooms not have time for a bathroom break. And with the lack of time to use one of the 24 bathrooms Adriana Vasquez must clean in a five-hour shift at the JP Morgan Chase Tower in Houston, Texas – 22 of them with multiple stalls – comes the absence of a living wage.

So on Tuesday, Vasquez had a question for JP Morgan Chief Jamie Dimon, whose bank is the prime tenant in the 60-story building where she cleans bathrooms five evenings a week.

“Why do you deny the people cleaning your buildings a living wage?” she asked Dimon after he testified about the bank’s multi-billion dollar trading loss in front of Congressional committees on financial institutions and consumer credit. Dimon said to call his office to arrange a meeting, according to the Service Employees International Union.

As financial conditions tighten, Fed may have to run to stay in place

Seemingly lost in the talk about whether or not the Federal Reserve should ease again is the idea that financial conditions have tightened and the U.S. central bank may have to offer additional stimulus if only to offset that tightening. Writes Goldman Sachs economist Jan Hatzius:

Alongside the slowdown in the real economy, financial conditions have tightened. Our revamped GS Financial Conditions Index has climbed by nearly 50 basis points since March, as credit spreads have widened, equity prices have fallen, and the U.S. dollar has appreciated.

Goldman’s new GS Financial Conditions Index is based on the firm’s simulations with a modified version of the Fed’s FRB/US Model. It includes credit spreads and housing prices and has a closer relationship with subsequent GDP growth than the previous version of the index, the firm says. A 100-basis-point shock to the GSFCI shaves 1-1/5 percent from real GDP growth over the following year. Still, it’s not quite as bad as it sounds:

Channels of contagion: How the European crisis is hurting Latin America

If anything positive can be said to have come out of the global financial crisis of 2008-2009, it may be that the theory arguing major economies could “decouple” from one another in times of stress was roundly disproved. Now that Europe is the world’s troublesome epicenter, economists are already on the lookout for how ructions there will reverberate elsewhere.

Luis Oganes and his team of Latin America economists at JP Morgan say Europe’s slowdown is already affecting the region – and may continue to do so for some time. The bank this week downgraded its forecasts for Brazilian economic growth this year to 2.1 percent from 2.9 percent, and it sees Colombia’s expansion softening as well. More broadly, it outlined some key ways in which Latin American economies stand to lose from a prolonged crisis in Europe.

Latin America has exhibited an above-unit beta to growth shocks in the U.S. and the euro area over the past decade; resilient U.S. growth until now had offset some of the pressure coming from lower Euro area growth, but U.S. activity is now weakening too.