Market Roundup
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How much will it cost to end the “Too Big to Fail” era? Up to $1.2 TRILLION.

That’s the conclusion of global banking regulators, who just released a comprehensive plan to deal with the TBTF problem. Their plan will potentially require the world’s largest megabanks to sell hundreds of billions of dollars in debt securities over the next several years.

The debt would convert to equity in times of financial stress. That would force bank creditors and stockholders to eat losses, rather than stick taxpayers with the bill.

This plan is coming from the Financial Stability Board, a Switzerland-based group that includes regulatory representatives from the Group of 20 nations. It will apply to 30 major world banks in the U.S., the European Union, Japan, Switzerland and elsewhere.

No one’s predicting a 1930s-style bank crisis, but regulators are warning that the world’s biggest banks are in need of billions of dollars to bolster their balance sheets.

They include HSBC Holdings (HSBC), J.P. Morgan Chase (JPM), and Deutsche Bank (DB). The targeted banks will have through 2022 to restructure their balance sheets and sell debt to meet the new standards.

Emerging market and Chinese banks will get a few extra years to meet the higher threshold, though that timeline could be accelerated under certain circumstances. While the ultimate cost won’t be known until the process is complete, the high-end figure of $1.2 trillion is definitely a plausible estimate.

What does this mean for investors like you? Well, we’ve already seen liquidity in portions of the bond and derivative markets tighten up. That’s because post-crisis regulations make it more expensive and difficult for banks to hold large inventories of securities on balance sheets in order to facilitate trading. We’ve also seen many large banks announce plans to shed billions of dollars in assets, and raise billions of dollars in shareholder-diluting capital.

“Post-crisis regulations make it more expensive and difficult for banks to hold large inventories of securities on balance sheets.”

Those trends could get worse in the next couple of years. That could lead to higher loan rates when you go to borrow money, wider bid-ask spreads on orders when you look to buy certain bonds, and other hits to your wallet. The higher capital and loss-absorbing standards governments are pushing through could also serve to dampen the share prices of large banks, which have been generally underperforming anyway.

But I wouldn’t shed too many tears for these guys. After all, they brought it on themselves by blowing up the world’s credit and equity markets in 2007-09 — and sticking all of us taxpayers with the bill.

And of course, it seems like every day we learn of some new government investigation of banking shenanigans. Bloomberg is reporting today that some of the 22 primary dealers who facilitate Treasury auctions may have rigged that corner of the debt market, too. You gotta love it.

Now it’s your turn to talk about these new regulations. Will they actually help eliminate the TBTF problem? Or is it mere lip service?

What impact will this have on lending and/or trading? Will it make it tougher to get loans, more expensive to trade bonds, or otherwise hurt our bottom lines and the economy? Or are the banks just overestimating the negative side effects to avoid a fresh hit to profits? Let me know what you’re thinking over at the Money and Markets website.

Our Readers Speak

Was the October jobs report a fluke? A case of fudged numbers? Or a genuine signal of economic strength. I’m fairly skeptical on the matter, and clearly, many of you are, too.

Reader Robert K. said: “As Dent Research pointed out, a majority (58%) of October’s private-sector hires (268,000) fell under the median wage. The trend of hiring workers below the measured median wage shows continued demand in the labor market for low-wage work.

“It’s a positive development to see wage gains in the lowest-paying sectors. But we can’t just rely on increased employment in these industries to spur consumer borrowing and spending to drive the economy out of this long-running recovery. These jobs still don’t pay enough.”

Reader PMB added: “The latest jobs report is nothing — we should be seeing 500,000+ new jobs every month at least. And it should have begun years ago for a healthy recovery. All the Keynesian money printing is a complete flop and in fact has caused great damage, such as inflated asset bubbles and income inequality. No cheering here.”

Reader Kenn L. zeroed in on the sector divergences that were evident in the data, saying: “The jobs report does nothing to change my view of the economy. One just has to look at what sectors the jobs are being created in, and where they are flat or falling (manufacturing, mining, et al.). You can see that stable, well-paying jobs with upside are still not being added in the U.S. to make a significant difference in the direction of the economy.”

Lastly, Reader Chuck B. offered this take: “Those hiring stats seem highly suspicious. How would hiring double in one month? Also, how did that balance with the many recent layoffs by major companies and others? We haven’t gotten the last word yet. Did some clerk punch a 2 instead of a 1?”

Thanks for sharing. We’re definitely going to have to watch the incoming numbers to see if they confirm the strength in the October jobs figures. They definitely seem out of line with other reports we’ve gotten in recent weeks, and the overall trends apparent in the global economy.

If you weighed in already, thanks. If you didn’t, feel free to add more comments to this thread when you have time. This link will get you pointed in the right direction.

Other Developments of the Day

● Credit tightening is a months-long process, not a one-day event. We just got more evidence the cycle has turned from a Wall Street Journal story, which notes that banks are having a hard time unloading takeover loans.

Bank of America (BAC), Credit Suisse (CS), Morgan Stanley (MS) and others are finding that investors are less willing to buy up pieces of the riskier loans they made to finance corporate takeovers. That’s forcing the banks to cut the price of those loans, discount fees, eat losses, or otherwise suffer the consequences of too much easy lending.

● The BRICs are crumbling, at least at Goldman Sachs (GS). The investment bank threw in the towel on its BRIC fund, folding it into a more diversified emerging market fund it runs.

The acronym stands for Brazil, Russia, India and China, and investing in those countries as one group was all the rage a few years ago. But lousy performance, economic recession, and a strong dollar have led to massive outflows from those countries and funds that invest in them.

● Will energy sector consolidation pick up? It’s been a little like waiting for Godot there. But oil and natural gas giant Apache Corp. (APA) is reportedly in play. The firm received an unsolicited buyout offer for an undisclosed price, and is reportedly debating how to proceed.

● Three police trainers, two U.S. and the other South African, were shot and killed in Jordan by a Jordanian police officer. The assailant was then killed in the incident at the Jordan International Police Training Center, which may be linked to Jordan’s close support of U.S. anti-terrorism policy in the Middle East.

What do you think about energy sector consolidation, the news that it might be getting tougher to finance takeovers, or the latest potential terrorist act in the troubled Middle East? Share your thoughts on these or other stories I didn’t cover over at the website when you have a minute.

Until next time,

Mike Larson