First Impressions

How big is “too big” regarding global banking institutions? We were discussing this very question as the article by Simon Johnson of the New York Times hit the inbox today. The size question was not allowed to be answered by regulators for the first few years after the financial crisis, as the game plan had been to recapitalize banks and put them on solid footing to forestall systemic fears. Now, however, with the financial sector pulled back from the abyss, and with a new slew of regulators taking over, it is time to revisit the issue.

I think we can all agree on the institutions that are too big. But then what? Are we really headed for a new wave of Teddy Roosevelt-styled trustbusting? That is not likely in this political environment. What may happen, though, is a “death by 1000 cuts” approach, where the the economies of scale disappear due to regulatory and financial disincentives to size, and some banks diminish simply because it is in their best interest to do so. We are already seeing this in rules on systemically important financial institutions (SIFIs) and upcoming Basel III requirements.

Of course, if we have another banking crisis before the collective memories of the last crisis have fully faded, a Standard Oil-type breakup would not be out of the question.

Quote of the Day

“To the extent that a growing systemic footprint increases perceptions of at least some residual too-big-to-fail quality in such a firm, notwithstanding the panoply of measures in Dodd-Frank and regulations, there may be funding advantages for the firm, which reinforces the impulse to grow. There is, then, a case to be made for specifying an upper bound.”

Daniel K. Tarullo, member of the Board of Governors of the Federal Reserve, in a 2012 speech reported in the article, “The Fed Shifts Ground on Big Banks”.

Lead Stories

The Fed Shifts Ground on Big Banks
SIMON JOHNSON – NYTimes.com
Over the past half-decade the Bernanke Fed was primarily concerned with staving off disaster and then getting an economic recovery going. Ms. Yellen’s Fed obviously inherits the continuation of the latter task, but it also needs to complete crucial financial-sector reforms — and, perhaps most important, to decide on its attitude toward large banks. On this critical issue, there are signs of a potential shift in thinking at the top.
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Gross Says Focus on Shorter Maturities as Inflation Trumps Jobs
Liz Capo McCormick – Bloomberg
Pacific Investment Management Co.’s Bill Gross said investors should focus on shorter-maturity debt as the slow pace of U.S. inflation signals the Federal Reserve’s benchmark rate will remain at almost zero until at least 2016.
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***DA: Yes. The Fed showed its hand when it added the inflation metric last month.

China ETFs launch in London
Chris Flood – FT.com
Exchange traded fund providers are lining up to participate in the liberalisation of China’s capital markets and the UK government’s efforts to strengthen financial ties with Beijing.
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***DA: Pick me! Pick me!

People’s Bank of China keeps pressure on money markets
Simon Rabinovitch in Shanghai – FT.com
Last week, hours before 2013 came to an end, the People’s Bank of China delivered an unwelcome surprise to some of the country’s biggest banks. Despite frazzled nerves after a liquidity squeeze just one week earlier, the central bank told them it wanted to conduct a bond repurchase operation, a move that would take cash out of their hands for a few days.
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***DA: Feels like a tinderbox in the making these days.

Draghi Raids Bankers in Rush to Hire 1,000 for Supervisor
Nicholas Comfort – Bloomberg
The European Central Bank is jostling for staff with Europe’s banks including HSBC Holdings Plc (HSBA) and Deutsche Bank AG (DBK) as it rushes to hire 1,000 people to start supervising the euro area’s lenders by a November deadline.
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***DA: Mother always told me to become a regulatory compliance officer, but I wouldn’t listen.

Austerity drive cuts into Chinese inflation
Simon Rabinovitch in Shanghai – FT.com
Chinese inflation slowed in December, as the government’s campaign to rein in lavish spending by officials made an unexpectedly big impact on the wider economy.
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***DA: Oh, did we say “spend less?” We meant to say “spend more!”

Back to the future with commercial paper
Tracy Alloway | FT Alphaville
Commercial paper has a long and varied history. Initially a form of promissory notes sold by companies, the short-term debt became (in)famous after banks co-opted the stuff in the run-up to the financial crisis — selling hundreds of billions of dollars worth of the paper as a way of raising cheap short-term financing.
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***DA: Our recent commentary “Canary in the Paper Mine” is worth a read.

U.S. Regulators Said to Weigh Volcker Exemption for TruPS CDOs
Jesse Hamilton and Yalman Onaran – Bloomberg
U.S. financial regulators are trying to determine how they can let some smaller banks keep certain collateralized debt obligations that lenders said they’d have to divest under Volcker Rule trading restrictions, according to two people with knowledge of the discussions.
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A shot in the arm for longevity swaps
Mark Cobley – Financial News
As life expectancy continues to rise, 2013 was the busiest year on record for longevity swaps, with six deals covering almost £9 billion of pension liabilities.
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Central Banks

Fed wanted cautious approach to QE3 taper: minutes
Reuters
As the U.S. Federal Reserve’s top officials debated their decision to scale back a massive bond-buying stimulus program last month, they were keen to steer a delicate path and to make it clear that future decisions were not set in stone.
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***DA: Some would say “cautious approach to a reckless policy.”

Carney Guidance Threshold Strained as BOE Holds Policy
Emma Charlton and Scott Hamilton – Bloomberg
Bank of England Governor Mark Carney’s forward-guidance policy may be buckling under the strength of the U.K. economy.
The fastest growth since 2010 means unemployment could fall to the 7 percent threshold as soon as June, forcing officials to at least consider raising rates sooner than Carney might like, according to Goldman Sachs Group Inc.
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Fed Officials Saw Waning Gains From Bond Buying, Minutes Show
Joshua Zumbrun and Craig Torres – Bloomberg
Federal Reserve officials saw declining economic gains from the central bank’s asset purchases and voiced concern about future risks to financial stability during their last meeting, when they started tapering bond buying.
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How the Doves Won the Day at the Riksbank
Charles Duxbury – MoneyBeat – WSJ
The Riksbank’s December meeting minutes out this week were short on surprises but did contain the odd interesting hint that the first rate cut in a year might have caused some board members a sleepless night or two.
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Currencies

FX volumes on Thomson Reuters fall 11.5 pct in Dec to new low
Reuters
Daily spot foreign exchange trading volumes on Thomson Reuters dealing platforms fell 11.5 percent in December to the lowest level since the company started tracking the data four years ago, figures showed on Wednesday.
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Five Lessons From Bitcoin
EDWARD HADAS – NYTimes.com
Bitcoin is not over yet. But the pseudo-currency is close enough to collapse to merit an early retrospective.
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Bitcoin Exchanges Scramble in China
WSJ.com
Bitcoin exchanges in China are trying to maneuver around tight rules imposed by the central bank, even as the virtual currency faces a new challenge now that Alibaba Group Holding Ltd.’s giant online shopping site has banned the sale of bitcoin and related items.
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Emerging Markets Suffer as Dollar Rises
Tommy Stubbington – WSJ.com
The South African rand sank to a fresh five-year low Thursday, as a rise in the dollar fueled by strong U.S. jobs data kept emerging market currencies under pressure.
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Indexes & Index Products

Bank of America Compiling Index for CoCo Bond Performance
John Glover – Bloomberg
Bank of America Merrill Lynch has become the first major index publisher to track the performance of new-style CoCo bonds, a signal the asset class is entering the mainstream.
The Contingent Capital Index is one of the more than 5,000 gauges Bank of America Merrill Lynch publishes tracking debt markets.
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Record outflows from commodity ETPs in 2013 as investors dump gold
Reuters
Commodity exchange traded products (ETPs) suffered their worst year on record in 2013 as investors dumped their gold holdings and joined the equity rally, data from BlackRock showed.
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Index trackers and their effect on gold and silver futures
Alasdair Macleod – Resource Investor
There are two main indexes tracked by commodity tracker funds: The S&P-Goldman Sachs Commodities Index and the Dow Jones UBS Commodities Index. According to S&P Indices (which manages both), total assets estimated at $155 billion track these two indexes, of which $75 billion tracks the former, and the balance of $80 billion the latter. Both indexes are rebalanced in the first two weeks of January starting last Wednesday, and according to an S&P press release, this will lead $1.1 billion extra being invested in gold contracts.
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Everyone Says Buy Index Funds, But How Do You Pick The Right Index?
John Jacobs – Forbes
Stepping up to the plate to take your first swing at ETF investing has never been simpler and more cost effective, but as eager investors approach these products, are they really understanding the differences in portfolio composition? Index formulation methodology could likely have a much greater impact on bottom-line performance than fee structure over time.
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Gold

Gold Prices Are Falling, But Demand For Gold Is Growing
Meagan Clark – International Business Times
Gold prices are falling, and yet investors and collectors can’t seem to buy enough of the precious metal.
Gold prices fell to a six-month low heading into 2014 (standing at $1,228.60 per ounce Wednesday morning). On Wednesday, just two days after the debut of a British gold bullion coin, the Royal Mint announced that the Sovereign 2014 is out of stock, but it expects to stock the coin again by the end of the month.
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Bank of America Merrill Lynch slashes gold call to $1,150 and warns it could get uglier
Barbara Kollmeyer – MarketWatch
In one of the first, if not the first, calls on gold this year, Bank of America Merrill Lynch slashed its average 2014 forecast for the shiny stuff by 11% to $1,150 an ounce on Thursday, with a warning it could get even uglier.
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Gold Closed-End Funds Discount Offers Cheaper Way To Buy Gold
Kitco News (via Forbes)
Gold prices may be beaten down, but some investors are looking at closed-end funds as a way to buy the metal at a greater bargain.
Closed-end funds operate a little differently from mutual funds and exchange-traded funds. Mutual funds and ETFs are considered “open-end funds” as they can create additional shares. Their price also closely tracks the net asset value of whatever is in the fund.
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Selling Canada’s government assets: There’s gold in them thar vaults
The Economist
THE first gold coins minted in Canada barely saw the light of day before they were withdrawn from circulation in 1914, in order to boost the government’s gold holdings at the start of the first world war. The coins sat in official vaults for almost a century before they were rediscovered in 2012, declared a “national treasure” and promptly put up for sale.
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Miscellaneous

Israel Said to Hire Goldman, Barclays to Lead Euro Bond Sale
Sharon Wrobel and Veronica Navarro Espinosa – Bloomberg
Israel is considering selling its first euro-denominated bonds since 2010, following Poland, Slovakia and Ireland in taking advantage of historically low yields as the Federal Reserve begins tapering stimulus.
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Fitch China Analyst Chu, Who Warned on Debt, Leaving Agency
Bloomberg
Charlene Chu, a Beijing-based analyst at Fitch Ratings who said China could face a debt crisis after lending reached double the size of its economy, is leaving the company after almost eight years.
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