Last night on Wall Street we saw a full frontal attack not only on the shares of the giant German bank Deutsche but also on its hybrid and debt securities.
Some 10 hedge funds that clear derivatives trades with Deutsche Bank have cut their exposure by withdrawing some excess cash, and cutting positions held at the bank.
We all know what actions like that can potentially mean to a bank and the banking system. We have seen it before.
Accordingly, the world is sailing perilously close to another banking crisis. We need cool heads and decisive actions.
And in this environment if our parliamentarians are not very careful they will put the Australian banking system into the eye of the looming storm.
Frankly at any other time I would be a strong supporter of the proposed parliamentary interrogation of our top four bank CEOs. For a long time our banks have done a poor job of explaining themselves. They now have a chance to do it.
Had the inquiry been a month or even a week ago all it would have been was a domestic issue.
But when Commonwealth Bank CEO Ian Narev takes the stand on Tuesday to be followed by the other big banks on Wednesday and Thursday it could easily turn into a global event in a bank jittery world.
When earlier this week I highlighted the deep problems of Deutsche I received a call from an old friend with excellent connections to the global banking scene telling me that not only was I totally correct but I may have understated the risks. About 38 hours later Wall Street got the message and Deutsche Bank was brutally attacked. The shares fell 6.7 per cent and are down 10 per cent for the week and 62 per cent in just over 11 months.
Remember that over the last two or three years Australian banks have gone into the world debt markets and borrowed heavily to help fund our housing boom. In the years leading up to the global financial crisis they did the same thing but that time around they undertook the borrowing on a short-term basis and our banking system was put in jeopardy when the crisis erupted.
This time they have again enjoyed the lower interest rates abroad but they borrowed longer term and with different maturities. We will therefore not have the same problems. But if the world debt markets tighten our banks will need to look to local depositors. In this fear climate any remarks that indicate high Australian banking risk will be multiplied 10 fold.
And to underline what is taking place last week former UK Chancellor of the Exchequer Norman Lamont told the Institute of Directors conference that German banks could be a danger to Europe: “The biggest threat, I think, to Europe is the banking crisis. I think Italian banks are in a very serious situation; I think German banks are probably in a very serious situation, too.”
The shorters understood his message and intensified their Deutsche attack and, according to press reports, eight other European banks are now under attack, including Credit Suisse. My contact in the world-banking arena expects a British bank to be attacked.
As I have explained to readers Deutsche Bank appears to have been concealing deep problems for years. But it is fascinating that it was the US --- where the global financial crisis was triggered --- was the country that is forcing Deutsche to fight for its life.
The US Justice Department wants Deutsche to pay a $US14 billion legal settlement to close out mortgage-securities probes. That $US14bn demand is around the market capitalisation of Deutsche Bank. The bank has little hope of paying such an amount or anything like it.
Deutsche bank will almost certainly sell its asset management and perhaps other operations and may need to raise capital, with some form of backing from the German government.
For the record the bank made this statement:
“Our trading clients are amongst the world’s most sophisticated investors.
“We are confident that the vast majority of them have a full understanding of our stable financial position, the current macroeconomic environment, the litigation process in the US and the progress we are making with our strategy.”
That statement may be accurate but when markets turn against a bank words don’t have much impact.
Footnote: I hope the parliamentarians quiz Ian Narev as to why CBA raised local deposit interest rates when the Reserve Bank reduced official rates, but has since lowered some but not all of them. That issue will not cause world ripples.
The ‘monetary morphine’ pumped into the economy to stave off depressions has inadvertently created leverage growth eerily similar to that seen in 2007, according to TCW’s Tad Rivelle.
Rivelle, who is chief investment officer for fixed income at the US asset manager and oversees $150 billion in assets, made the comments in a market update called ‘Twilight of the central bankers’.
He said the ‘fixation’ on credit growth has led to a system-wide expansion in leverage ratios and this credit inflation has caused resources to be diverted away from its best uses and towards those who least need it.
‘The result? Leverage goes up faster than the income available to service it. As such, the credit-fuelled expansion inevitably comes to a bad end. We’ve lived this story before: indeed, while every cycle is distinctly different, they all end up suffering from the same central banker induced maladies.’
Rivelle said there are considerable similarities in terms of where the market is today compared with where it was in 2007. ‘It’s back to the future – again. Leverage has returned, most notably in the corporate sector where debt metrics have not just round-tripped but indeed are now in excess of the levels experienced before the Great Recession.’
The fact the Federal Reserve continues to highlight the ‘data dependency’ of its moves, Rivelle said this reveals its policy as a ‘put on financial prices’.
‘But can the Fed, Canute-like, hold back the future tides of de-leveraging? No, though we expect that they, like their comrades in arms at the ECB and BOJ, will keep trying. Indeed, negative rates can be best understood as merely the latest attempt to forestall the failures of policies past.
‘But, is anyone helped by establishing negative “hurdle” rates to incentivise “investment?” If a commitment of capital requires a negative opportunity cost, then whatever activity that might be launched will assuredly be productivity destroying.
‘Negative rates have all the economic “logic” of destroying the village so as to rebuild it. It is monetary madness and while it might hold back the flood for a time, it fairly well guarantees that when the flood comes, it will be worse than it would otherwise.’
Rivelle said the Federal Reserve is, in fact, creating new problems as part of its efforts to address existing ones. Therefore, he said, it was best advised to invest in assets which he deemed ‘bendable’ but won’t break when the market unwinds.
Malcolm Turnbull has blasted state Labor governments for imposing “ideological” renewable energy targets, describing the South Australian blackout as a “wake-up call” to focus on energy security.
The Prime Minister accepted fierce winds and lightning strikes were the “immediate cause” of the statewide power failure, but there was “no doubt” that the “extremely aggressive” shift to renewables had strained the electricity network.
“I regret to say that a number of the state Labor governments have over the years set priorities and renewable targets that are extremely aggressive, extremely unrealistic, and have paid little or no attention to energy security,” Mr Turnbull told reporters in Launceston.
“Energy security should always be the key priority. If you are stuck in an elevator, if the lights won’t go on, if your fridge is thawing out … because the power is gone, you are not going to be concerned about the particular source of that power. Whether it is hydro, wind, solar, coal or gas, you want to know that the energy is secure.
“Let’s take this storm in South Australia … as a real wake-up call. Let’s end the ideology and focus on clear renewable targets.”
However, Bill Shorten said it was “poor form” for the Coalition to make political points about renewables while the crisis was ongoing in South Australia.
“This is a super-storm, 80,000 lightning strikes. That didn’t happen because of the renewable energy target; that’s the weather,” the Opposition Leader said.
“Our fellow Australians are struggling through a massive storm and the clean-up and you’ve got the government in Canberra trying to play cheap politics. Really, this country decides better.”
Mr Turnbull said he wanted Energy Minister Josh Frydenberg to open negotiations about achieving a single, national renewable energy target ahead of a summit of state and territory leaders.
“We have emission reduction targets we have agreed to in Paris. They are substantial. I have been thanked by world leaders, President Obama no less, for the contribution that we’ve made,” he said.
“We should focus on those and stop the political gamesmanship between the states. We’ve got to recognise that energy security is the key priority and targeting lower emissions is very important but it must be consistent with energy security.”
The entire state is without power after being lashed with severe storms. (Video courtesy ABC News 24)
Traffic lights were rendered inoperational, choking roads in the CBD. Building fire alarms blared across the city, according to local media reports, and residents rushed to supermarkets to stock up on candles and matches.
By 7.30pm local time, power had been restored to some Adelaide suburbs including Gilberton, Hallett Cove and Kensington. It had been reported earlier that much of the state could be without power until 4.15am on Thursday.
More than 18,000 State Emergency Services volunteers were on the ground across the state responding to hundreds of calls for help, with reinforcements on their way from Western Australia.
Premier Jay Weatherill said the storm took down three transmission lines and nine towers in the Port Augusta region, forcing the electricity connection between South Australia and Victoria - known as an "interconnector" - to be shut down.
Wind turbines, which make up an estimated 40 per cent of the state's power generation, were unable to operate as winds were too high, South Australian senator Nick Xenophon said.
Mr Weatherill told media it was the "usual protocol" to isolate South Australia from the National Electricity Market in a situation where there is a "large frequency drop".
He said the state's "backup baseload generation" was beginning to restore power, however that was a gradual process.
The operators of SA's high-voltage power network, ElectraNet, were in an emergency meeting on Wednesday afternoon to determine a solution.
National energy and resources minister Josh Frydenberg said high-voltage transmission towers were blown over in the state's north as lightning struck a power station, creating a "perfect storm".
"The combination of these events, and indeed other events, have led to a frequency surge, an electricity surge, across the interconnector," he said.
He proposed bringing together the nation's energy ministers as soon as possible in a Council of Australian Governments meeting to determine what happened and ensure it was not repeated.
Adelaide Airport was able to run on back-up power after a brief blackout, but travellers were told to expect delays.
About 5.30pm, residents were told to conserve power to their mobile phone battery and prepare for extended outages. Residents were also told to switch off all heating, cooking and other appliances that were in use when the power went out.
Two severe storm fronts swept across SA on Wednesday, the first hitting Adelaide around lunchtime and the second about 3.30pm. The power went out across the state about 3.45pm, when there was heavy rain, lightning and thunder over the capital.
The town of Cleve, on the central Eyre Peninsula, was among the hardest hit. Other towns including Gawler, Kapunda, Clare and Balaklava were also hammered by the storm, which dumped large hail over the region.
It was a tale of two debates. And for each candidate, it was both the best and worst of debates.
For the first half-hour, Donald Trump wiped the floor with Hillary Clinton. It looked as though the New York property mogul would win not only the debate but the presidency itself there in Hofstra, New York, in one debate.
He spoke in the powerful, plain language of everyman.
Clinton began with characteristic politician waffle about building the right kind of economy.
Trump’s appeal was visceral and direct: “We have to stop our jobs being stolen from us and our companies leaving us.”
There is, of course, a lie at the heart of Trump’s appeal. Free trade has been good for the American economy. A dynamic economy destroys old jobs and creates new ones all the time. In so far as old jobs have been lost, this is much more because of technological change than trade.
Nonetheless, Trump’s message on trade is powerful and straightforward: America is being taken for a chump. In a very bad sign for Australia, Trump demonised the Trans-Pacific Partnership deal and witheringly and accurately accused Clinton of flip-flopping on the issue.
Trump truthfully said Clinton had described the TPP as “the gold standard of trade agreements”, a remark she made, as it happens, on a visit to Australia when she was secretary of state.
Clinton dishonestly claimed she never said the TPP was “the gold standard” but merely hoped it would be. “I was against it when it was finally presented,” was her lame response.
Trump promised to cut taxes to stimulate investment, growth and jobs. Clinton promised to raise taxes on the rich and on corporations, because her priority was to produce a “fair economy”.
She will raise the minimum wage, provide paid parental leave and ensure women get equal pay to men. Trump promised to cut regulation. Polls show that US voters think Trump is better on the economy than Clinton.
As usual, there was something outrageous, with him accusing the Federal Reserve of acting politically in keeping interest rates low. This too echoes a concern of older Americans trying to live off the interest on their savings.
This whole section of the debate was won decisively by Trump.
But then, in a debate judo move of great artistry and astonishing effectiveness, Clinton turned the whole debate around. Though her brand is stolid, wooden reliability and stoic attachment to uttering the right cliche of the right zeitgeist, she began to provoke Trump with personal attacks. She certainly had a lot of material to work with and Trump allowed himself to be provoked.
First, she tackled him on the birther controversy, the insane argument Trump made for years that Barack Obama was not born in the US and therefore shouldn’t be president. Only in the past two weeks has Trump accepted Obama was born in the US.
Trump had no answer to this except to say Clinton’s campaign in 2008 began the birther controversy, a ditzy claim of no possible use to Trump. But he went on and on about the alleged friends of Clinton who had spread the birther myth and ended up accusing Clinton of having been too mean to Obama. Of all the things he might attack Clinton for, being mean to Obama was surely the most irrelevant and ridiculous.
Then Clinton accused him of having something to hide by not releasing his tax returns. For a moment, it looked like Trump might pivot back to the attack when he said: “I’ll release my tax returns if she’ll release the 33,000 emails”, which Clinton mysteriously deleted from the private server she wrongly used as secretary of state.
The email scandal is a huge vulnerability for Clinton. But Trump forgot all his attack lines and got bogged down in a ridiculous defence of his own company’s practices and his own tax behaviour.
The same pattern repeated itself later when Clinton, with ample justification, accused Trump of a history of insulting, demeaning sexist behaviour and remarks.
Trump showed an uncharacteristic flat footedness. He couldn’t pivot to the attack but got caught up in a ludicrous defence of an argument he had with Z grade entertainer Rosie O’Donnell.
These were Trump’s weakest moments, and there were plenty of them.
In what was a pretty weird debate, there was not much real policy substance. The most reassuring remark for Australia came from Clinton, who said: “We have mutual defence treaties and we will honour them.”
Trump dialled back his criticism of US allies. He wants to support them all, but the US spends an enormous amount of money defending allies and they must contribute more, or maybe they will have to defend themselves. Though he has often expressed this crudely, the idea allies are free riding on the US is undeniable. But this election won’t be won and lost on foreign policy, where Clinton has a strong lead.
Overall, I scored the debate about a draw, though CNN polls had voters saying Clinton had won. But I still think a draw is the right call, and it probably favours the challenger.
Trump did nothing to rule himself out of the presidency and he had no trouble on policy questions. Unexpectedly, it was the personal that tripped him up.
The underlying structure of the contest remains unchanged. Trump is the outsider promising change.
Clinton is the ultimate insider, the registered adult offering a responsible alternative to Trump.
Beyond that, she lacks a narrative or any compelling rationale for her candidacy. Being the registered adult and safe alternative to Trump didn’t work for any of the heavyweight Republicans who ran against him in the primaries. Whether it is enough for Clinton is the $64 million question not at all resolved by this gruesomely compelling debate.