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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

Category: Banking
June 13, 2013 at 10:23 AM

What’s going on with the markets

Japan’s Nikkei has entered bear territory. Other Asian markets have suffered sell-offs, too. The Dow Jones Industrial Average swooned Tuesday and is staging only a cautious recovery today. The Wall Street Journal’s estimable David M. Wessel wrote, “The tectonic plates of the world economy are shifting, moving the yield on the 10-year Treasury to the highest level in more than a year and shaking financial markets from Tokyo to Mumbai and Johannesburg to São Paulo.” Is the world returning to something like normal, where America grows again, China does a soft landing to slower growth and the Japanese economy can finally find its footing?

Or is it a harbinger of more volatility in financial markets—perhaps the result of a misreading of the Federal Reserve’s policy intentions by the markets or a premature move by the Fed to cut back on easy money—that yields an unwelcome increase in market interest rates before the U.S. economy achieves what Fed Chairman Ben Bernanke once called ‘escape velocity’?

The question of what the Federal Reserve will do is rightfully a preoccupation. Can it make the pivot to slightly tighter money without tanking the markets? And can emerging markets continue to thrive on the “hot dollar” trade now that Treasuries are becoming more appealing? A couple of charts explain what is not happening.

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Comments | More in Banking, China economy and business, Federal Reserve, Inflation, Interest rates | Topics: Japan

May 29, 2013 at 10:29 AM

The economy this summer

Laying down some markers to watch now that Memorial Day has passed and summer is almost upon us:

Will the recovery hold and expand? Housing prices are finally making a solid move upward. Consumer confidence is at a five-year high. They’re also taking on more debt again. This morning’s correction notwithstanding, stock prices are surging. Banks recorded their best profits on record. Some of the worst outcomes haven’t happened — a double-dip, eurozone contagion and war on the Korean peninsula. All this translates into a widening of the very slow recovery. On July 31st, the government will release its second-quarter gross domestic product report. Unfortunately this will contain revisions that make the economy seem to be growing faster than it is. The best metric of the strength of the recovery will continue to be unemployment. Eleven million Americans are still without jobs and although corporate profits are at a record, hiring has been fairly weak.

Will the stock market keep rocking? Stocks have been a good investment, especially in companies that came through the recession with healthy balance sheets. And where else could investors put their money with the pitiful returns from fixed-income? The big question is how long the run can last. You’ll find predictions across the spectrum. Average investors are just bystanders in this drama. With high-speed trading and huge institutions driving the action, even small macro warnings might trigger at least a modest correction. The big enchilada will be…

What does the Federal Reserve do? The Fed’s QE-eternity bond purchases and expansion of the money base have been a huge factor in the bull run. How Fed Chairman Ben Bernanke would respond to a real recovery has been for years a hypothetical question. Now it’s becoming smash-mouth real, as in the way today’s rise in Treasury yields has tanked the market. Even though he coined the metaphor, Alan Greenspan was never willing to take away the punch bowl as the party was getting going. Will Bernanke? And if so, how will the Fed’s pivot be handled — and received by the markets. Like much since 2007, this is unknown territory.

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Comments | More in Aerospace/Boeing, Banking, Boeing, Federal Reserve, Jobs/Unemployment

May 21, 2013 at 11:00 AM

JPMorgan Chase’s Dimon wins, again

JPMorgan Chase Chairman and CEO Jamie Dimon  (Mark Wilson/Getty Images)

JPMorgan Chase Chairman and CEO Jamie Dimon (Mark Wilson/Getty Images)

It should be no surprise that Jamie Dimon won his bid to keep both the chairman and chief executive titles at JPMorgan Chase. The company and lead director Lee Raymond, himself a retired chairman and CEO of Exxon, lobbied shareholders hard. Dimon implied he might resign if he lost the chairman’s job. Scholars at the Stanford Graduate School of Business, looking at 20 years of data, put out a report claiming that splitting the two roles had little effect on stock price or future performance. Considering that relatively few major U.S. corporations separate the jobs — a practice corporate governance experts advise for proper checks on management power — this survey may be limited, but no matter. Most of all, JPM shares have been on a steady climb for the past year.

In the end, it wasn’t even close, even though Institutional Shareholder Services Inc. and Glass Lewis & Co., influential advisory firms to institutional investors, supported stripping Dimon of the chairman’s job and unseating directors on the risk committee. The resolution itself received 32 percent support from shareholders who voted, down from 40 percent for a similar resolution in 2012. Dimon himself received 98 percent of the vote for the board. And for all the sturm und drang leading up to today’s annual meeting in Tampa, the resolution was non-binding. The bank was not required to implement it.

On top of the stock price and the clubby group-think of boards and institutional investors, Dimon still has his aura. He ably led the bank through the worst financial crash since the Great Depression. He extended its national retail franchise by purchasing the good part of Washington Mutual during the crisis. Perhaps as important, he has tremendous influence in Washington and has probably been the most effective individual in keeping the Dodd-Frank “re-regulation” weak, championing the big banks and gutting an effort that would have put tighter controls on derivatives. Against all this, the $2 billion London Whale trading loss is not much when assayed by the big institutions that vote most of the bank’s shares. In addition, the board whacked Dimon’s compensation as penance, the head of the division responsible for the loss was forced out and some $100 million in compensation to the traders was clawed back. This is more accountability than many big companies provide.

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Comments | More in Banking, JPMorgan Chase, Washington Mutual

May 17, 2013 at 10:28 AM

Poll: Your big economic worries

The Dow is over 15,000, corporations are sitting on record amounts of cash, M&A activity is picking up, the deficit problem is on track to being solvedinflation is nearly non-existent and the U.S. economy is performing better than that of almost all other industrialized nations. Metropolitan Seattle, with 5.5 percent unemployment, is getting close to what economists would consider full employment. On the other hand, millions remain unemployed, wages are stagnant and inequality is the highest we’ve seen since the 1920s and perhaps even at a historic record. It’s a recovery, but one very different from those seen in the post World War II era.

Consider that a recession comes along around every seven years or so. Also, the banking industry is as dangerous as ever, and so politically powerful that it was most recently able to push back meaningful regulation of derivatives. Federal austerity is holding back a more robust recovery. Recession in the eurozone, a slowdown in China and political tensions in east Asia are among many concerns. What has you most worried?

Read on for the best links of the week and the haiku:

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Comments | More in Aerospace/Boeing, Amazon.com, Banking, Boeing, Deficit, Eurozone, Global economy, Great reset, Jobs/Unemployment

May 6, 2013 at 10:38 AM

Dimon in the headlights as shareholders decide his fate

Jamie Dimon, chairman and chief executive of JPMorgan Chase and acquirer of Washington Mutual, may no longer be “America’s least-hated big banker” — admittedly a low bar. Last year, he presided over the “London Whale” trading fiasco, a bet gone wrong that cost the bank $6.2 billion. Investigation of the disaster further tarnished the bank’s once glowing reputation. Both the Federal Reserve and the Office of the Comptroller of the Currency censured JPM for poor oversight of its trading (read gambling) and also for lax controls against potential money laundering. A U.S. Senate subcommittee said the bank misled investors.

Now, Dimon is facing a proposal that the chairman and chief executive officer jobs be separated, and three JPM directors not be re-elected when the firm holds its annual meeting May 21st. Institutional Shareholder Services, an investment advisory firm, has backed the initiative. ISS cited “material failures of stewardship and risk oversight.” The three directors targeted are David Cote, James Crown and Ellen Flutter, all on the board’s risk policy committee.

Not to worry. Even Warren Buffett has ridden to Dimon’s defense, telling CNBC that Dimon should keep both jobs. In his annual letter to shareholders, which came out last month, Dimon wrote that the Whale “was extremely embarrassing, opened us up to severe criticism, damaged our reputation and resulted in litigation and investigations that are still ongoing.” He promised to do what it takes to make JPM “the safest and soundest bank on the planet.” But earlier this year he threatened to leave if he loses both jobs, and that worries the Wall Street conventional wisdom, which holds that Dimon is indispensable. Also, note how a similar effort to separate the two jobs turned out at Boeing. At least JPM’s board forced Jamie to take a one-year pay whack to show some accountability.

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Comments | More in Banking, JPMorgan Chase, Washington Mutual

April 4, 2013 at 9:51 AM

The MF fraud: As bad as you thought

Why is Jon Corzine still at large?

Corzine, the former New Jersey senator and governor, former chief executive of Goldman Sachs, led MF Global, a futures broker and bond dealer that collapsed in 2011. MF Global investors lost as much as $2.1 billion. At the time MF ran into trouble, Corzine was eligible for as much as a $12.1 millon golden parachute. However, Steven Goldberg, a spokesman for Corzine, told me this afternoon that Corzine didn’t take any compensation when he stepped down. He also said Corzine has been unemployed since then, spending time with his family and doing philanthropic work.

Vanity Fair produced an exhaustive look at the collapse last year. Now a report to the bankruptcy trustee by Former FBI director Louis Freeh confirms what anyone paying attention already knew. According to Reuters, Freeh’s 124-page report states, “The risky business strategy engineered and executed by Corzine and other officers and their failure to improve the company’s inadequate systems and procedures so that the company could accommodate that business strategy contributed to the company’s collapse.” As is the habit of the likes of Corzine, he was not using the investments of MF Global to fund productive enterprises and create jobs and innovations, but betting to profit from the misery of others, on European sovereign debt.

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Comments | More in Banking, Corporate crime, MF Global, Wall Street

March 21, 2013 at 10:14 AM

Bernanke: No exit strategy, yet

The Federal Reserve Board released a statement Tuesday from its policy-making Federal Open Market Committee promising to keep interest rates low — they’re essentially at zero — through 2015. The policy will continue after the Fed’s bond-buying program winds down. The reason: High unemployment persists. Washington state outside of metro Seattle is Exhibit A. Inflation remains low, so, for now, the central bank has plenty of running room. During the FOMC’s two-day meeting, Chairman Ben Bernanke said, “We are seeing improvement. One thing we would need is to see this is not temporary improvement.” But the Fed will pursue easy money at least until unemployment has fallen to 6.5 percent from today’s 7.7 percent.

Based on recent history, a point should come when the Fed can pivot and start raising interest rates. But these are no ordinary times. The Fed’s low rates have juiced the stock market and given the big banks plenty of money at rock-bottom rates to gamble with. The benefits have been slower to come to smaller businesses and average borrowers, many of the latter still ruined from the financial panic and still over-leveraged. With a slow-growth economy combined with a variety of job-suppressing forces, including robots, and lack of federal stimulus, will unemployment in the 7 percent range be the new normal?

Things will get interesting if growth accelerates and inflation picks up — but joblessness remains high. Then the Fed will be torn between its twin mandates to keep employment high and inflation low. What then?

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Comments | More in Banking, Federal Reserve

March 18, 2013 at 10:29 AM

‘In our face’ capitalism

The newest hire in the mail room of Boeing’s headquarters could have done as good a job as Jim McNerney last year, as the radical outsourcing he oversaw and encouraged led to the grounding of the 787 Dreamliner. Even so, Boeing’s lapdog board gave McNerney a 20 percent raise, to $27.5 million. At least Jamie Dimon, CEO of JPMorgan Chase had his pay cut in half, to a pauperish $11.5 million for the “London Whale” trading debacle. But a new Senate report shows how Dimon, supposedly America’s smartest and most prudent banker — the guy who bought Washington Mutual for chump change — is presiding over a financial system every bit as dangerous as the one that brought on the Great Recession.

Gretchen Morgenson of the New York Times writes:

Its pages of e-mails, testimony, telephone transcripts and analysis show that traders in the bank’s chief investment office hid money-losing derivatives positions, if only temporarily; that risk limits created by the bank to protect itself were exceeded routinely; that risk models were changed to minimize losses; that bank executives misled investors and the public; and that regulations are only as good as the regulators enforcing them.

Why do Dimon or McNerney still have jobs? Because the cult of the imperial CEO is alive and well, despite the executive malpractice and outright fraud that brought on the 2000 recession (Enron, HealthSouth, Tyco, etc. etc.) as well as the financial crash of 2008. They do whatever they want. Politicians quail before their contribution-bearing lobbyists. Boards are worthless. The message to average Americans who lost jobs, net worth and economic mobility: In your face.

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Comments | More in Aerospace/Boeing, Banking, Corporate crime, Corporate governance, Executive compensation, JPMorgan Chase, Washington Mutual

March 12, 2013 at 10:37 AM

Who is Mary Jo White?

Barack Obama, Mary Jo White

President Obama announced in January that he was nominating Mary Joe White to lead the Security and Exchange Commission. (Photo by Carolyn Kaster/AP)

If your blood pressure is already up from the story in today’s newspaper detailing how the Federal Deposit Insurance Corp., facing $92.5 billion in losses from failed banks, “has typically preferred to settle for a fraction of the losses while helping the banks avoid bad press,” better schedule an appointment with the doctor. Mary Jo White, President Obama’s selection to lead the Securities and Exchange Commission, supposed protector of shareholders and markets, is expected to be confirmed by the Senate despite “tough questions” in a hearing today.

White is a classic example of the revolving door between government and Wall Street. She was a federal prosecutor during the Clinton administration and then went to work for Debevoise & Plimpton, a prestigious New York law firm. It was instrumental in defending the Too Big to Fail Banks after they helped bring on the near collapse of the world financial system and the Great Recession, ultimately being rescued by your tax dollars. White acted as a lawyer for former Bank of America Chief Executive Ken Lewis, JPMorgan Chase, Deloitte & Touche, and former Goldman Sachs director Rajat Gupta, who was sent to prison for conspiracy and securities fraud. Other clients of the firm include Morgan Stanley, UBS, General Electric, HCA and Siemens.

The list of cases she would have to recuse herself from is potentially long. The social circle in which she has moved for a decade — and no doubt wishes to return to — is not conducive for curiosity or holding the powerful to account. Indeed, her husband, John White, is a partner at Cravath, Swaine & Moore,  another powerful Wall Street law firm representing clients facing SEC scrutiny. John White also sits on the advisory council of the Financial Accounting Standards Board, which in 2009 allowed the big banks to value their assorted hustles however they wished.

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