viernes, 7 de diciembre de 2012

viernes, diciembre 07, 2012



December 6, 2012 4:21 pm
 
Watch out for the second US cliffhanger
 


Another week, another round of shadow boxing on the edge of America’s fiscal cliff. But as Washington and Wall Street nervously try to work out whether there will be a $600bn fiscal shock on December 31, there is a second potentialcliffinvestors should be watching, this time in relation to the banks.




At the end of this month, the so-called Transaction Account Guarantee programme, which the Federal Deposit Insurance Corporation introduced as a supposedlytemporary measure during the height of the 2008 financial panic, is finally scheduled to end. Outside the ranks of financial policy makers and corporate treasurers, not many people know what TAG is. Little surprise: bank insurance schemes are a mystery to most non-bankers, and TAG never sounded nearly as exciting as, say, the AIG bailout.
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But that little-noticed TAG has quietly had a big impact. Until it was introduced, the FDIC only guaranteed the first $250,000 worth of bank depositsmeaning that if companies or consumers had accounts holding more than that, they lost money if a bank collapsed. However, under TAG, the FDIC protects an unlimited amount of money – if that is deposited in a non-interest-bearing account.




In normal times, that last caveat should be a big disincentive to use TAG. But these are not normal times. On the contrary, as fears have erupted about eurozone banks, companies and wealthy individuals have been shifting money across the Atlantic on a large scale. And as bond yields have plunged, the “cost” of using TAG relative to bonds has declined. Some savers have also been exiting money market funds, which have no protection. As a result, in the past two years the size of TAG accounts has doubled to reach $1,500bn in the third quarter of this year, representing 13 per cent of bank assets. More than half of this is from corporate accounts.




This begs a crucial $600bn question: what will happen when (or if) that TAG expires on December 31? Martin Gruenberg, FDIC chairman, hopefully insists that banks should be able to handle this “in an orderly manner”. After all, those FDIC banks are far healthier today than when TAG was introduced: in the third quarter they posted their best earnings since 2006 and there are nowonly694 banks on the FDICproblemlist, compared with 888 early last year. Moreover, depositors and bankers have – in theory known for a long time that TAG would end, and have had time to prepare.




Indeed, as my colleague Stephen Foley reports, some financial institutions are already responding in entrepreneurial ways by launching innovative forms of ultra-short-term bond funds to offer corporate treasurers another home for their funds.




But the crucial rub is size; most notably, the gargantuan scale of that TAG pot, relative to other markets. If corporate treasurers feel sufficiently confident about the health of American banks, and equally disenchanted with other investment options, that they leave most of their deposits in place after December 31, or withdraw them slowly, then there is reason to think this “cliff” should not cause a jolt. But if there is a stampede out of TAG funds, the money in motion may not only destabilise the banks but the wider bond markets, too.




Right now, estimates for the outflows vary. JPMorgan reckons “just$100bn-$300bn will leave; analysts at Royal Bank of Scotland predict twice that. But if those outflows go, as widely expected, into short-term Treasuries, then this could damp yields dramatically. Indeed, investment management groups such as Conning predict that short-term US rates could turn sharply negative next year as a result of going off that TAG cliff.




This prospect appalls some financiers. Consequently groups such as the American Bankers Association are now lobbying to have TAG extended. But although Harry Reid, the Senate majority leader, has introduced a bill calling for that, some Republicans and large banks are fighting back. They insist that extendingcrisis measures such as TAG will simply create even more market distortion, creating more headaches at a later date.




How this will develop is hard to predict in the current political climate. But in the meantime, there is a powerful lesson for investors to ponder. When TAG was first introduced it seemed an excellent idea; and in the past couple of years it has indeed been valuable. But the problem with government support measures is that they tend to become dangerously addictive – and hard to exit smoothly.




Beneath the veneer of calm in financial markets today, in other words, the reality is that many half-hidden cogs in the financial machine are dislocated, if not broken. And the job of fixing those cogs has barely started




Politicians and investors would forget this at their peril. Particularly when Washington is playing such a dangerous game over the other, more visible, fiscal cliff.




 
Copyright The Financial Times Limited 2012.

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