By Pam Martens and Russ Martens: June 28, 2016
The overall stock market is staging a big rally at the open of trading this morning in New York, but that is not going to calm growing anxieties over how badly systemically risky global banks traded in Friday and Monday’s two days of carnage. Watching tens of billions of equity market capital vaporize at the mega banks in two trading sessions of just 6-1/2 hours each has put renewed attention on separating the insured depository banks that are backstopped by the taxpayer from the high risk investment banks and brokerage firms on Wall Street. That effort has just gained a lot more traction.
Quietly, with little media fanfare, restoring the Glass-Steagall Act has been added to the final draft of the Democratic Platform. The passage reads:
“The Democratic Platform will make clear that Wall Street cannot be an island unto itself, gambling trillions in risky financial instruments and making huge profits, all the while thinking that taxpayers will be there to bail them out again. The draft calls for defending and expanding Dodd-Frank. The Clinton and Sanders teams brought forward an amendment for an updated and modernized version of Glass-Steagall and breaking up too big to fail financial institutions that pose a systemic risk to the stability of our economy, which the Committee unanimously adopted.”
The two overarching questions now are whether the effort to restore the Glass-Steagall Act will come in time to prevent another epic crash of the banks or if there will be soiled, invisible hands working at the upcoming Democratic Platform meeting in Orlando, Florida on July 8-9 to gut the Glass-Steagall amendment from the party platform before the full Platform Committee votes.
On July 10 of last year, the Federal Reserve made clear that the largest banks on Wall Street needed to hold more capital. It said in a statement:
“In practice, this final rule will confront these firms with a choice: they must either hold substantially more capital, reducing the likelihood that they will fail, or else they must shrink their systemic footprint, reducing the harm that their failure would do to our financial system. Either outcome would enhance financial stability.”
One of the banks named in that statement was Morgan Stanley. In July of last year, Morgan Stanley was trading at $40. As of yesterday’s close, it had lost 41 percent of its market capitalization since last July with 13.5 percent of that loss coming in just two trading sessions on Friday and Monday. Morgan Stanley has 1.937 billion common shares outstanding, meaning that the stock market sliced $7.13 billion of capital out of Morgan Stanley in just two trading sessions. This has eerie parallels to the way the market treated Citigroup’s stock before its crash in 2008.
The Fed may have some quirky ideas about how to build capital levels at the Wall Street banking behemoths, but the market obviously has other ideas and, clearly, the market is getting the last word on the matter.
Another bank that has a big presence on Wall Street is the German institution, Deutsche Bank. Its stock trades on the New York Stock Exchange. Since September 1 of last year, Deutsche Bank has lost 52 percent of its market cap with 22.25 percent of that coming in Friday and Monday’s trading sessions. This is the kind of action one would expect in the midst of a serious banking calamity – which newspaper headlines have given us zero hints to believe is occurring.
Trading action in Deutsche Bank is well worth watching because, as this official document shows, when the large U.S. insurer, AIG, collapsed under the weight of its derivative counterparty exposure to Wall Street banks and foreign banks in 2008, Deutsche Bank received a large helping from that bailout: a total of $11.8 billion between payments on its derivatives and security lending obligations.
Morgan Stanley was a recipient of a secret $2 trillion in below-market-rate loans funneled to it by the Fed during the financial crisis in 2008. (See related article below.) It was an amendment by Senator Bernie Sanders and lawsuits by Bloomberg News that forced those secret bailouts into the sunshine.
An additional, growing market concern is the trading action in MetLife, a large U.S. insurer, which is reviving memories of AIG. In Friday and Monday’s trading sessions, MetLife lost 17.3 percent of its market capitalization or $8.4 billion. This comes at a time when MetLife is fighting in court the government’s designation of it as a non-bank systemically important financial institution or SIFI. It’s going to be a lot harder to argue your case in court when you are hemorrhaging capital like a risky global bank.
In response to the final draft of the Democratic Platform, Senator Bernie Sanders stated:
“The platform drafted in St. Louis is a very good start, but there is no question that much more work remains to be done by the full Platform Committee when it meets in Orlando on July 8 and 9. We intend to do everything we can to rally support for our amendments in Orlando and if we fail there to take the fight to the floor of the convention in Philadelphia. It is imperative that this platform be not only the most progressive in the history of the Democratic Party, but includes a set of policies that will be fought for and implemented by Democratic elected officials.”
Sanders’ supporters plan to press the Platform Committee to include a proposal to keep the Trans-Pacific Partnership from coming up for a vote in Congress and to include specific language on raising the federal minimum wage to $15 an hour. Other goals include a tax on carbon to address climate change and a ban on fracking.