Danielle was a guest with Jim Goddard on This Week in Money talking about recent developments in the world economy and markets. You can listen to an audio clip of the segment starting at 1:00 on the playbar. Here is a direct audio link.
Better Markets (BM) describes itself as a “non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again”. Eleven years in, BM continues to catalogue ongoing illegal activities within the largest US financial institution
s. This week it released a detailed 39-page report entitled Wall Street’s Six Biggest Banks: Their rap sheets & their ongoing crime spree which includes the table on left summarizing the 351 major legal actions taken against these banks in the past 20 years, as well as the $200 billion in corporate fines and settlements (with no directing minds or executives personally penalized), and $8.2 trillion in bailout funds given to them courtesy of taxpayers. All of this has enabled investment banks to continue inflicting harm, confident that their profits will be subsidized by everyone else, everywhere.
While the US banks have been world-leaders in this business model, big bank/investment sales franchises have followed the same playbook in varying degrees all over the world; hence why we now have similar problems of financial instability everywhere. Here’s Better Markets’:
In short, these institutions have continued to commit frequent and serious violations of law, spanning an extraordinary variety of civil and criminal misconduct and resulting in tens of billions of dollars in penalties, civil judgments, and other monetary sanctions. The Six Megabanks have not skipped a beat when it comes to committing fraud, market manipulation, and other abuses against their clients, investors, and the financial markets themselves. They continue to violate the law and to generate massive profits and huge compensation packages for their executives, without facing any meaningful punishment, deterrence, or accountability.
The break up of financial conglomerates and the return of Glass-Steagall style divisions between government-insured deposit-taking banks and firms that underwrite investment products is coming because it is essential. The next bear market will make the need painfully obvious once more.
Canadian financial shares make up 38% of the market cap of dividend-paying stocks in the broader TSX composite which most Canadian equity funds, managers and pensions are benchmarking. Lower credit-cycle exposure in the last two bear markets resulted in 40% and 55% losses (2000-02 and 2008-09) for Canadian bank shares, and the overall Canadian market followed them lower in lockstep. All the yield-seeking people who have moved into Canadian dividend paying, ‘growth and income’ funds and ETFs in recent years are heavily exposed to the credit normalization cycle coming. This will be very hard on those at and approaching retirement. Most have no clue of the risk they are holding today. Eisman explains in the segment below.
Moreover, while the current yield on the sector (XFN) is just 3.09% a year at currently elevated price levels, those who are able to buy the shares after a 40% decline would receive an income yield of more than 5% a year on top of any capital growth as the shares recover in the years thereafter. Present holders will still be earning just 3% (less, if any dividends are cut) while waiting years to grow back missing chunks of their capital. History tells us that most will not wait, but will sell near the bottom, lock in losses and not collect dividends during the next recovery. That is the usual investor cycle.
Neuberger Berman’s Steve Eisman, the money manager made famous by the book ‘The Big Short’ and its film adaptation, joins BNN Bloomberg to discuss why he’s short Canadian banks. Here is a direct video link.
