This guest commentary was written by Christopher Whalen. It was originally posted on The Institutional Risk Analyst.
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"History is more or less bunk. It is tradition. We don’t want tradition. We want to live in the present. The only history that is worth a tinker’s dam is the history we make today." Henry Ford |
Last week we noted that a lot of providers of cash to the agency repo markets are unwilling to transition term financing from LIBOR to the secured overnight funding rate or "SOFR."
The notion that central bankers were mistaken in deciding to kill LIBOR without a functioning replacement at hand seems to resonate with market participants. Will Chairman Jerome Powell take note?
A reader of The Institutional Risk Analyst asks if our new premium service “will cover the evolving payments landscape and its impact to banking.” Yep. Just about every week. Keep those cards and letters coming.
There are many dimensions to the world of payments, some which are banal other that are vitally important. As with much of finance, it is the optionality represented by the participants in the network rather than a static interchange fee that holds the biggest potential returns. But somehow the Buy Side manager gets twisted into a knot over this line item.
Take Wells Fargo & Co (WFC), a top four money center bank with just shy of $2 trillion in total assets on balance sheet and trillions more in assets serviced for others and custody float. In the most recent form Y-9C for June 2020, WFC reported $1.4 billion in bank card and credit card interchange fees.
The interchange fee number is reported with “other noninterest income” along with changes in the fair value of securities and the like. Important? Yes. Significant in the grand scheme of things? No, not compared with $21 billion in net interest income or $14.5 billion in total non-interest income.
Our comment last week on LIBOR also generated some interesting references from readers. “Before getting into the why of the dollar’s stubbornly high exchange value in the face of so much ‘money printing,’ we need to first go back and undertake a decent enough review of the guts maybe even the central focus of the global (euro)dollar system,” writes Jeffrey Snider of Alhambra Partners.
So a US bank sells Treasury bonds and Ginnie Mae MBS to the Federal Reserve, gets cash. The US bank then borrows risk-free collateral from offshore bank, gives cash in return. US bank then does collateral transformation repo, junk + cash for risk-free collateral, thereby increasing system leverage. What have we achieved?
Ever wonder why the Financial Stability Oversight Council (FSOC) never looks at obvious hot spots like transformation repo? Maybe the FSOC ought ponder the transformation repo arb with CLOs? Hmm? But we digress.
Speaking of what’s important in the world of payments, a lot of analysts worry about the secular decline in the rate of economic activity as measured by money turnover or velocity.
Bunk (and several other things) says Lee Adler of Wall Street Examiner, who reminds us that the worries of mainstream economists regarding the “velocity” of money and other supposed measures of economic throughput are a lot of analytical nonsense.
“Velocity is the ratio of GDP to M,” argues Lee with his usual passion. “As the St. Louis Fed says: ‘The velocity of money can be calculated as the ratio of nominal gross domestic product (GDP) to the money supply (V=PQ/M).’ So V is the growth rate of the economy relative to M. If the Fed conjures and injects enough M into M to double it, by definition V is cut in half.”
He continues: “There's nothing to be read into that about the economy. It is simply a fact of the equation for calculating V. In this case, total deposits increased almost dollar for dollar with the amount Likewise, the public didn't actively increase savings. It stopped spending for a month or two when it couldn't spend because of the lockdown. That didn't last long. July spending is back to trend.” Chart c/o Wall Street Examiner.
“When the Fed purchased a couple trillion in Treasuries and MBS, the M showed up in the accounts of dealers and investors. Spending was and is maxed out. Only the investor class has savings. Everybody else spends everything and they get their income from their labor and government transfer payments.
So GDP can never increase enough to keep up with M when the central bank surges M. Where all that excess M showed up of course was in the upward pressure on the prices of financial assets.” Ditto.
Further to the getting paid category, we thank Fred Feldkamp for checking in from the Upper Peninsula to remind us about the 100th anniversary of Dodge v. Ford, when shareholder Horace Dodge sued Henry Ford over the payment of equity dividends by Ford Motor Co.
The Michigan Supreme Court famously held that a business corporation is organized for the profit of its shareholders, and the directors must operate it in service to that end.
“Despite the fact that Dodge v. Ford is rarely cited in judicial opinions, the case continues to spark controversy in legal scholarship,” writes Michael Vargas in Business Lawyer. “There is little justification for this scholarly attention because the factual basis is little more than a caricature of Henry Ford, and subsequent developments in corporate law have all but eviscerated the precedential value of the case. Rather, the legacy of Dodge v. Ford may simply be that it serves as a convenient talisman, standing for the one sentence anyone actually cares about and rolled out with each new battle in the war between shareholder profit maximization and corporate social responsibility.”
ABOUT CHRISTOPHER WHALEN
Christopher Whalen is the author of the book Ford Men and chairman of Whalen Global Advisors. Over the past three decades, he has worked for financial firms including Bear, Stearns & Co., Prudential Securities, Tangent Capital Partners and Carrington.
This piece does not necessarily reflect the opinion of Hedgeye.
