Tuesday, July 19, 2016

Glass-Steagall: A Meaningful Stock Market Risk

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*It was announced along with the Republican convention plans to bring back Glass-Steagall.
*The move would break up banks from brokers changing the face of the multi-business banks we know today. The Fed is already in motion through its living will process.
*Either scenario will tighten credit and force the Fed to pull back reserves from these banks which we've shown can crash markets.
*This is a material stock market risk.

On May 16th in a piece called Living Will Meltdown Hypothesis we said that too-big-to-fail "can become a front burner election debate." We said, "The main reason for the immense bail-outs in 2008 were due to the web of inter-party risk throughout the banking system." We expected in that report that if we are right and this issue becomes front burner, credit could tighten and be a risk to markets.
The move to bring back Glass-Steagall is even more severe than we expected.
"Living will" leaves the judgment to the Fed and FDIC to break up banks. They have backed off. Fed Chair Yellen did say recently that they intend to use their full power this year if there are more resolution plan failures. That said, maybe they do nothing even if there are more failures.
As a quick review, living will was a plan through Dodd-Frank wherein banks need to have a cogent plan to resolve themselves in default without needing tax-payer bail-outs. Some of the largest banks have failed multiple times. The ultimate penalty is bank break-ups.
For reference the five banks that the The Fed and the FDIC rejected plans on April 13th were JPMorgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC), Bank Of America (NYSE:BAC), State Street (NYSE:STT), and Bank Of New York Mellon (NYSE:BK). They gave these banks until October 1st to resubmit their proposals, right ahead of elections.
But Glass-Steagall has multiple serious consequences for markets that have to be identified.
1) There is no living will trial and all banks would have to comply. Banks would have to downsize and shed brokerage arms. We think that tightens credit. The previous larger size of bank assets cannot transfer to various divisions. This pulls credit from customers on opposite ends of the banking/broker businesses.
2) Not just the living will failing banks have to reduce in size. All banks will have to shed brokerage divisions. All banks will lose the total capital size that has benefited their overall business. This will pull credit from the economy.



Chaim Siegel has been working with hedge funds and mutual funds as an analyst and PM his entire career. Chaim specializes in earnings and predicts, analyzes and reacts to earnings and earnings events as well as developing current company stories with a hedge fund perspective. If you want his analysis real time sign up to the right for real time email alerts. #in, $spy, $qqq, $iwm, $vxx, $ycs, $fxe, $EUO, $YCS, ^GSPC, INDEXSP:.INX, #elazaradvisorsllc, CME Globex: ES Disclosure: These trades can lose you money and principal especially when using leverage BY USING THIS SITE YOU AGREE TO TAKE ALL RESPONSIBILITY FOR YOUR OUTCOMES AND LOSSES AND HOLD BESTIDEAS, ITS CONTRIBUTORS AND ELAZAR ADVISORS, LLC HARMLESS