First Impressions

Today’s lead story is a commentary from former FDIC chair Sheila Bair, which appeared in the Financial Times. The piece offers sort of a “good news/bad news” account of the state of systemic regulation. On the one hand, two U.S. regulatory authorities, the Federal Reserve and the FDIC, admitted recently that at least 11 of the largest financial institutions do not have sufficient wind-down contingency plans in place.

These so-called “living wills” were mandated by Dodd-Frank, but are still not fully implemented. Furthermore, this week’s move by the Bank of Portugal to bail out depositors and senior bondholders of Banco Espirito Santo have further driven home the reality that the world’s central banks have no interest in allowing big banks to fail.

In other words, five years and thousands of pages of regulation after the financial crisis have not brought us any closer to solving the “too big to fail” problem.

P.S.: I have become quite a fan of Ms. Bair’s work, both during and since the crisis. If you get a chance, I encourage you to read “Bull by the Horns,” her narrative of the events surrounding the crisis. Back then, she was critical of Fed Chairman Bernanke and then-head of the New York Fed Tim Geithner. Her reward was to be frozen out of the key backroom meetings that moved the toxic debt from the holders, who willingly accepted the risk when they purchased the debt, to the Federal Reserve.

Quote of the Day

The message on bailouts is a muddle. Will banks again be rescued by taxpayers or not? Keeping this prospect alive will only encourage recklessness.

Sheila Bair, in the FT commentary ‘No more bank bailouts’ cannot be an empty slogan

Lead Stories

‘No more bank bailouts’ cannot be an empty slogan
Sheila Bair – Financial Times
Sometimes it is hard to state the obvious. Your spouse’s middle-aged bulge. Your boss’s bad breath. You are aware of it but you are afraid to say it, fearing the awkwardness that will result if you speak up. So it was this week, when two US regulatory authorities announced that they were not convinced by contingency plans put forward by 11 big banks, which are supposed to demonstrate that the institutions in question could go into bankruptcy without disrupting the broader financial system.

Junk-Bond Exodus Accelerates
Katy Burne And Al Yoon – WSJ
Investors pulled a record $7.1 billion from junk-bond funds in the week ended Wednesday, fund tracker Lipper said, the latest sign of investor anxiety following a long rally. Many investors have been pulling back from the market amid concerns that the bonds are overvalued and that a strengthening U.S. economy could prompt the Federal Reserve to raise interest rates sooner than the market currently expects.

***DA: Will junk bonds be the canary in the coal mine this time around? Last time it was subprime.

Bank bondholders ignore risk of losses
Christopher Thompson – Financial Times
In the comedy classic Duck Soup Groucho Marx warned that if a man looks and talks like an idiot, then don’t be fooled – “he really is an idiot”. If bond markets are any yardstick then Banco Espírito Santo creditors are equally unlikely to be hoodwinked by the Portuguese bank’s restructuring which, while not technically a “bail-in”, nevertheless leaves junior bondholders on the hook for losses.

Managers warn fixed income ‘tourists’ could spark disaster for bond funds
Julia Rampen – Investment Week
Some of the country’s top bond fund managers are increasing liquidity in their portfolios over fears a ‘shadow banking’ bond market bubble buoyed by ‘tourist’ investors may burst.

***DA: Tourists are usually the prey of pickpockets.

US treasury yields drop to 12-month lows on Iraq crisis
Dan Jones – Investment Week
US treasury yields have fallen to their lowest level since last summer as concerns over Iraq and Ukraine spur a fresh flight to safety.

***DA: Risk off.

African Eurobonds ‘not lucrative’
Kanika Saigal – Euromoney Magazine
Bankers are hoping the avalanche of low-fee African sovereign Eurobond deals will provide a gateway to more-remunerative business, says Helmut Engelbrecht, head of investment banking in Africa for Standard Bank.

Argentina Sues U.S. in International Court of Justice Over Debt Dispute
Ken Parks – WSJ
Argentina has asked the International Court of Justice to hear a lawsuit it wants to bring against the U.S. in a high-stakes legal battle between the South American nation and some of its creditors over unpaid debts.

Argentina bonds, stocks firm on possible deal to exit default
Richard Lough and Jorge Otaola – Reuters
Argentine bond prices and stocks firmed on Thursday, with news that international banks may be close to a deal to buy debt from holdout creditors that would resolve its debt crisis.

Central Banks

Analysts Pick Through Draghi’s Words While Draghi Packs For Holidays
Chiara Albanese – MoneyBeat – WSJ
As widely expected by investors and analysts, the European Central Bank left interest rates unchanged Thursday. During the low-key press conference following the rate decision, ECB President Mario Draghi touched upon weakening inflation, geopolitical risks and the path of the euro.

5 Takeaways From Mario Draghi’s News Conference
The European Central Bank left interest rates unchanged on Thursday but ECB President Mario Draghi still had plenty to say at the news conference.

***DA: The problem I have with Draghi is I never know when he is being truthful vs. being a cheerleader.

BOJ offers bleaker exports view, but Kuroda stays upbeat
Leika Kihara – Reuters
The Bank of Japan offered a bleaker view on exports and output a week before data is expected show the biggest contraction in economic activity since the global financial crisis, heightening concerns a rebound may be delayed and increase pressure for further monetary easing.

***DA: Speaking of cheerleaders.

RBA Lowers Growth, Inflation Forecasts; Says Rates on Hold
Michael Heath – Bloomberg
The Reserve Bank of Australia cut growth and inflation forecasts amid a steeper drop in mining investment and reiterated interest rates will remain on hold.

Brazil Central Bank Not Contemplating Rate Cut, Hamilton Says
Matthew Malinowski – Bloomberg
Brazil’s central bank is not considering a reduction in its key interest rate as annual inflation has remained high, said the bank’s director for economic policy, Carlos Hamilton.


South Korea yuan bank deposits rise to record $16.2 bln in July
Deposits of Chinese yuan rose in July by the biggest amount on record to $16.2 billion as foreign banks in South Korea ran campaigns to entice investors into yuan deposits, central bank data showed on Friday.

BitBeat: Phone-Based ATM App Foresees Multiple Mini Bitcoin Exchanges
MoneyBeat – WSJ
Call it the pocket ATM. Physical bitcoin ATMs are often described as a promising “on- and off-ramp” solution for linking bitcoin’s low-cost, borderless transaction capability with the traditional currencies in which most people still operate.

Indexes & Index Products

New ProShares ETFs focus on credit of junk bond issuers
Ashley Lau – Reuters
Investors looking to bet on the credit of issuers in the high-yield bond market can do so now with the launch of two exchange-traded funds, the first of their kind, backed by credit default swaps.

Vanguard’s European ETP push pays off with top 10 debut
Sarah Krouse in New York – Financial News
US-based Vanguard Asset Management is now one of the top 10 managers of money in exchange-traded products in Europe, where it began a targeted effort to grow market share two years ago.

BlackRock ETP Landscape: Non-US Equity Drives Flows


Gold Rises to 3-Week High as Iraq Crisis Spurs Buying
Maria Kolesnikova and Glenys Sim – Bloomberg
Gold advanced to a three-week high as unrest in the Middle East spurred demand for a haven.

Head of precious metals trading departs BNP Paribas
Giles Turner – Financial News
The head of precious metals trading at BNP Paribas is leaving the French bank, one of the few which has resisted restructuring its commodities unit.

Federal Court Orders Florida Resident Lawrence Scott Spain and His Florida Company, Palm Beach Capital LLC, to Pay More than $520,000 in Restitution for Engaging in Illegal, Off-Exchange Precious Metals Transactions
The U.S. Commodity Futures Trading Commission (CFTC) today announced that on August 4, 2014, Judge Beth Bloom of the U.S. District Court for the Southern District of Florida entered a Consent Order for Permanent Injunction against Florida resident Lawrence Scott Spain and his company, Palm Beach Capital LLC (PBC) (the Defendants), for engaging in illegal, off-exchange precious metals transactions.

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