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    How bad must it be when banks don’t want your money

    How bad must it be when banks don’t want your money

    This is a very curious development, via The Wall Street Journal:

    Bank of New York Mellon Corp. on Thursday took the extraordinary step of telling
    large clients it will charge them to hold cash.

    The unusual move means some U.S. depositors will have to pay to keep big chunks of money in a bank, marking a stark new phase of the long-running global financial crisis.

    The shift is also emblematic of the strains plaguing the U.S. economy. Fearful corporations and investors have been socking away cash in their bank accounts rather than put it into even the safest investments….

    The letter said Bank of New York finds its deposits “suddenly and substantially increasing” as investors are in a mass “de-risk” mode. The bank said the decision was driven by the fact that it cannot invest much of the new deposits because clients have the ability to move the funds out at any moment.

    The ultra-low interest rates set by the Federal Reserve in an effort to stimulate the anemic recovery have also neutered banks’ ability to reap profits from investing their deposits.

    What means it, says you?

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    Subotai Bahadur | August 5, 2011 at 2:40 pm

    It is interesting both as a marker of how bad our economy is, and as to what incentives it is creating. The stock and bond markets have not been real markets for at least 3 years. Between the activities over the last 3-4 years of the Working Group on Financial Markets [created by Executive Order 12631, operating out of Maiden Lane next to Wall Street], the Federal Reserve intervening in the bond markets through QE1, QE2, and coming-soon-to-an-economy-near-you QE3, and the use of HFT computer algorithms that freeze out all but the largest and politically best connected institutional investors; it is an act of either faith or folly to invest.

    This has been apparent for years as I said. I offer two additional indications. Look back the statistics on mutual fund flows. Their liquidity levels have been plummeting as all but large institutional investors pull out. Part of that is people needing the cash to live day to day, part is people not trusting the market. Try to be a trader dealing with his own account during one of the increasingly frequent “flash crashes” when the HFT algorithms get crosswise. If you are not a HFT trader, you cannot usually and reliably get in to the markets to save yourself.

    Another statistic to watch is insider trades. Corporate officers ARE allowed to trade in their own stocks, just not on the basis of information the public does not have. The trades have to be reported to the SEC, and if you dig, they are available. Much of the trading is corporate officers exercising and selling the stock option portions of their compensation. Nothing wrong with that. The ratio of “insider” stock sales to stock purchases used to be less than 100 [10^2] to one before things went south a few years ago. For the last few years that ratio of sales to purchases of their own stocks has been getting worse. The last time I looked a few months ago it was in the 10 ^4 to one range. Corporate officers are reading the signs and getting out of the market in their own companies. You can find this information at “zerohedge dot com”. Note that other than being a reader, I have no connection with the site. Note further, that comments are by a strictly limited registration only, it is mostly brokers and traders, and they are a crude, foul-mouthed lot.

    With no safe way to invest or park money and stay in the market other than the rigged game of T-bills, physical commodities [always risky with high and growing regime risk], and banks; cutting off banks as anything but a way to slowly have your money seized means that that the incentive to stay in US markets is being cut to a very low level. With increased taxation baked into the economy on top of that, the key concept is “capital flight”. Corporate and personal assets moved out of the country have a chance of at least a break even investment, and of being outside the reach of one form of seizure or another by the US government. There is, of course, regime risk in other countries, and that has to be allowed for.

    If I ran an institution/corporation involved in international trade and finance [*], moving money around the world to run the business is part of the normal order of things required for transactions. I would be shifting my financial weight and moving and keeping assets overseas as much as possible, and really be leery about moving them back. Or I would be pulling the Rhett Butler gambit, and stockpiling physical commodities overseas, paying the storage and security costs and hoping appreciation covered them and then some. But doing business in the US has become far less attractive for those who have other options in the last few weeks.

    Right now it is one large, connected bank doing this. I assume that they will lose deposits for a while to other banks who do not charge the fee. That will last until economics or political influence allows all banks to charge that fee. And once it becomes universal, it will increase rapidly due to the effective oligopoly pricing; making capital flight more attractive.

    This is not going to end well.

    [*- which concept is fantasy, I be po’ and unable to invest, and am not a trader, financial advisor, or broker. My conjectures are worth, at most, what you are paying for them.]

    Subotai Bahadur


     
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    Alan Kellogg | August 5, 2011 at 2:56 pm

    There was a time when banks charged as much as 15% to hold your money for you, sounds to me like banks are going back to those days. We’re reverting to medieval monetary policy.


     
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    WarEagle82 | August 5, 2011 at 3:09 pm

    The flip side is that depositors would have to be nuts to make long-term investments at rates approaching 0%.

    One thing we can bet on is that interest rates can only go up.

    What depositor wants a 10 year CD at 0.25% interest?

    Of course, the solution to this is a government mandate that you can’t withdraw money from your accounts for 18 months after you deposit it. Expect to hear the Administration propose that any time now. After all, it is not your money and you have too much of it anyway…


     
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    Ma Kettle | August 5, 2011 at 5:31 pm

    Some might think it means that others are rich racist pigs waiting for the Obama Administration to exit the White House until they release their money and safely reinvested in our economy, where they hope to be free from the burden of over regulation and being taxed out of the marketplace.

    And the rest of us pray that it’s true, except for the rich racist pig part, because to us it’s called ‘Capitalism’.


     
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    Viator | August 5, 2011 at 9:38 pm

    US MM Funds – The dumbest money of all

    “The 4+% drop in stocks today was a sideshow for what is happening in the funding markets. The important news came from BNY Mellon. (Zero Hedge link for details). BONY is now charging to take deposits! We also have Tbills with negative yields. The only conclusion? Money has a negative value. If that is the case then money funds will break the buck. I think we’re pretty close to the edge with this.

    If you accept the premise that Zero Return must also equal Zero Risk then what is the solution to the current crisis in the funding markets? Simple. Charge more for money. If the return is raised, the appetite for risk will rise from zero. Problem solved.

    The one thing that is absolutely not going to happen is an increase in basic interest rates. For there to be a balance that attracts short term funding and stabilizes things in the capital markets I believe the Fed Funds rate would have to be about 1.5%.

    Not only is that not going to happen we might even get the reverse. The Fed could easily attempt to buy some market peace by issuing a statement that the policy of zero interest rates would be extended for a minimum period of one year. I consider this to be a “high probability” to happen in the next 30 days.

    My conclusion is that the Fed is going to do exactly the opposite of what is needed. Their action will precipitate a new round of instability. Funding sources that are now under stress are only short date financing. One week to one month is where the problems lie today. But the Fed’s action could very well push out the instability to impact longer maturities like 3 and 6 months. Should that happen, the lights will go off pretty quickly.

    Bernanke’s no dope. He must see what is happening in front of his eyes. He must understand that ZIRP is at the heart of the problem. But he is pregnant with ZIRP and his “baby” is going to term.”

    Zero Hedge, Krasting


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