Back in 2008, one of the biggest arguments in favor of Obamacare was that the legislation would help alleviate bad debt at hospitals created by people who required emergency care but didn’t have health insurance or the financial means to cover their treatment. Of course, like most promises made about Obamacare, the exact opposite of the Left’s original theories have played out in reality as restructuring lawyers are now warning that the healthcare industry is about to experience a massive wave of hospital bankruptcies. Per Bloomberg:
A wave of hospitals and other medical companies are likely to restructure their debt or file for bankruptcy in the coming year, following the recent spate of failing retailers and energy drillers, according to restructuring professionals. Regulatory changes, technological advances and the rise of urgent-care centers have created a “perfect storm” for health-care companies, said David Neier, a partner in the New York office of law firm Winston & Strawn LLC.
Some signs are already there: Health-care bankruptcy filings have more than tripled this year according to data compiled by Bloomberg, and an index of Chapter 11 filings by companies with more than $1 million of assets has reached record highs in four of the last six quarters, according to law firm Polsinelli PC. Junk bonds from companies in the industry have dropped 1.4 percent this month, a steeper decline than the broader high-yield market, according to Bloomberg Barclays index data.
Since 1997, health-care cases have made up only 5.25 percent of all U.S. bankruptcy filings, according to Bloomberg data. Year to date, they already comprise 7.25 percent of all filings. Emergency-room operator Adeptus Health, cancer-care provider 21st Century Oncology, and cancer treatment specialist California Proton Treatment are the largest filings. Those statistics exclude pharmaceutical company Concordia, which is restructuring in Canada, and Preferred Care Inc., one of the U.S.’s largest nursing home groups, operating 108 assisted living facilities.
So what has caused the sudden onset of hospital failures? Well, because Obamacare’s architects were so certain their legislation would completely eliminate uninsured citizens in the U.S., they decided to offset the costs of the “Affordable Care Act” by eliminating subsidy payments to hospitals that had previously been used to cover losses from treating uninsured patients…
Hospitals, including private rural ones, may be among the hardest hit, Winston & Strawn’s Neier said. The Affordable Care Act, known as Obamacare, reduced payments to hospitals that serve a large number of poor and uninsured patients, known as “disproportionate share hospitals,” on the theory that more patients would be insured under the law. Congress delayed those cuts several times, but didn’t do so for the current fiscal year, which may “single-handedly throw hospitals into immediate financial distress — many operate on less than one day’s cash,” he said in an interview.
“Smaller hospitals have already been struggling for years,” said Kristin Going, a partner in the New York office of Drinker, Biddle & Reath LLP. Both lawyers declined to discuss specific companies. Since 2010, a growing number of patients have enrolled in high-deductible health plans that force them to shoulder more of costs when they get treatment, according to the U.S. Centers for Disease Control and Prevention. That has translated into more bad debt from customers for hospitals and other providers.
Some publicly traded hospital companies that were already under pressure from high debt loads have been further buffeted by this year’s hurricanes. Community Health Systems Inc., with $1.9 billion in debt maturing in 2019, has suffered doctor revolts over crumbling, cash-strapped facilities, as well as losses linked to the storms in Texas and Florida earlier this year. A representative for Community Health didn’t return a call seeking comment.
…of course, here, in reality, things didn’t quite play out so perfectly as surging Obamacare premiums have pushed more and more people into high deductible plans or have forced them to forego insurance altogether and opt instead to simply pay the tax penalties levied by the legislation. Shocking that folks could simply absorb a doubling of their healthcare premiums in 4 years.
Just more proof that Obamacare is working perfectly and should be left just as it is.
Authored by Mark St.Cyr,
Cash burn, did you know that was, or could be: a problem?
In days of yore (i.e., 2008 BQE) businesses actually had to survive by selling products and services at a price that was more than they cost to produce, as to cover all other ancillary expenses. (I know, heresy, but stay with me.) If they didn’t? They weren’t called a business, they were called a charity.
If they did so manage to do this (i.e. continually, unabated, always replenishing ) for any length of time. Usually, the authorities from any number of agencies (think IRS, FBI, et al) would be knocking on the doors demanding to see the books. For the only way something like that could be taking place usually involved either, “dirty laundry” or someone with a name ending in Ponzi.
Today? It’s just called speculative “investing” or, “Angel” or, “Series A,B,C,” – LMNOP fund-raising. Bernie Madoff must be sitting in his cell wondering, “And just what am I in here for, precisely?”
Since I just brought up Bernie, let me give you what I call a “fun fact” to ponder. Ready?
If Madoff’s “cash burn” had allowed him to survive for about another 18/24 months, or so (he was arrested on Dec. 2008), he would have been able to not only cover his problematic “cash burn.” But with the help from Mr. “The Courage To Print” Ben Bernanke, he would probably be hailed today as one of the greatest investors of all time. For his so-called “stated” returns would now be in line with what was truly transpiring in the “markets.” i.e., Never a downdraft, and consistent double-digit gains for years. And no one would be the wiser, or at least, would care about how he did it. Think about it. But I digress.
Cash-burn since the development and implementation of QE (quantitative easing) and all its corollaries, has morphed from something to be concerned with (i.e., it usually signaled how many days were left before bankruptcy) to now it’s been deemed as something akin to: “No big deal, who cares, sell more Series ____(fill in the blank.) And while you’re at it, structure it so it raises the valuation a few more $Billion. I’m looking at getting a new yacht after this thing IPO’s and I want a big one, with a submarine, helicopter and such, like that Russian dude’s got. Oh, and what’s a ‘trep’ got to do to get a gluten-free-latte around here?”
But that was then, and this is now, and let’s just say, “it’s different this time.”
Just before the holiday Elon Musk took to the stage, once again, to unleash his next creation, in P.T. Barnum fashion, that I deemed “Future Hype.” To be fair, I’m a fan of Mr. Musk and his chutzpah when it comes to big thinking ideas. What I’m speaking directly to here is business and the models for conducting it.
It is here where “big ideas” have performed what can only be called “magical thinking” alchemy. i.e., The Model S, X, and 3 may be wonderful vehicles, but the business model to produce them are anything but. And it seems Mr. Musk needs to now focus as much time and energy producing future-hype scenarios (think range and power still not developed) to sell the idea to any and all investors, just as much, if not more so, than trying to produce already “sold” production commitments.
Suddenly “Cash Burn” is becoming a hot topic. I was surprised (actually very) to read two very provoking pieces in regards to Tesla™ over the last few days. First, there’s the outright questioning of battery claims. But what caught my attention was the second, which almost in the same breath, suddenly questions Tesla’s survivability claims based on current (wait for it…) cash-burn projections.
Do you, or can you dear reader, remember a time before this year when business metrics, of any type, where the two words “cash burn” were included or even questioned? Let alone, actually laid out prompting that “concern” might be a reasonable conclusion going forward anywhere in the mainstream business/financial media? Again – anywhere?
It would appear the worm-has-turned (or turning) in the “it’s different this time” bottle of magical business alchemy, yes?
Suddenly Mr. Musk’s claims, rationales, or responses to anything regarding his entire business structure are now open game for in-depth questioning and testing of metrics where 2+2=4 math applies. This alone should be concerning for any and all BTFD devotees, regardless if one is an investor in Tesla, or just the broader “markets.”
The reasoning? Just look at a current snap-shot regarding the big-picture, if you will. Where future-hype had once reined supreme. Here’s an example, for if a picture tells a thousand words, than a chart can portend $Billions of reasons for concern. To wit:
The above is a chart showing Tesla on the left and the NASDAQ 100™ on the right, via daily intervals. Notice anything? That’s right, suddenly, as sung by Sesame Street®, “One of these things is not like the other…”
The time frames are the same, but no longer is their BTFD trajectory in lock-step, as they once were. Today, that “trajectory” seems to be stunted as further questioning of prior claims, promises, and future-hype takes its toll on questioning “investors.” Unlike the Nasdaq which still (at least for the time being) has its BTFD mojo propellant working in the unquestioning vacuum of central bank hopium.
So here’s where things get interesting from a cash-burn prospective. How you say? Good question, and it is this: If, Tesla the stock just hovers in its current location, what are the ramifications (again, if any for it’s all conjecture) if we suddenly have some form of a pullback or heaven forbid, bonafide correction within the very near future?
Again, if the indexes such as the Nasdaq and others, which have been impervious to any and all bad news, whiffs of impending Armageddon, European sovereign risks, Middle East turmoil, just to name a few: What happens to not just a cash-burn dependent company such as Tesla? But rather, the entire complex?
What complex is that? Once again, great question, did I mention unicorns yet? Let’s do that now, shall we?
I’m only going to use one for this example, not to pick on them, but I really feel there is no other mascot of the current unicorn debacle that sums up everything facing it. Of course, I’m speaking of Uber™.
And here again is where “it’s different this time” thinking has turned in Judas fashion against the once claims and models for valuation, and business domination.
Over the last year, or so, there have been more negative stories in regards to Uber than positive. This once Wall Street darling has gone from championed mythical creature sporting a “horn made of gold” – to having its head removed in full public view, then allowed to be seen via that same public reminiscent of the old joke of “letting it run around with its head removed as it continued to spurt “cash.” (i.e., Remember the initial and unfolding debacle with its CEO’s ousting and its fallout, all while it was publicly reported on, and playing out with, its Board and current investors?)
And then, suddenly, like a bolt-of-lightning from beyond, cash-burn questions began, and are becoming the norm, when any discussion about them arrises. Talk about its different this time!
The problem here for Uber (and all its stablemates, I’ll contend) is it faces the same abnormality as does Tesla. For it would seem the old “play book” is no longer working. Because, if the underlying cash-burn issues it has will not go away, nor, at the least be turned a blind-eye as was prior? Are you beginning to see my point?
Again, if the “market” as much as hiccups in the very near future: Will the putting of money in the line of fire of further cash-burn, with no end in sight, be the first place scared money goes? Or, the last? And if it’s the latter?
Add to this almost forgotten item: If the Fed. does indeed raise in a few weeks, and the budget debacle begins simultaneously, along with the possibility of a failed meaningful tax bill by year-end?
Can you say, “It’s different this time?” The reasoning? These business models needed to produce, or reduce the concern of cash-burn, stat. And not only does that not appear to be happening within these once “darlings”, but rather, they’re disappearing along with ever-the-more “cash” at an alarming rate and scale.
Uber it seems is losing more territory than its gaining, the latest is London. But what’s more concerning is the loss of its perceived credibility for forging a more disciplined path forward. And it’s here where things might go awry in a manner and form once vigorously outmaneuvered or outright disregarded.
Here I’m speaking to the revelation that Uber not only had a data breach, but paid to cover it up, and the new CEO, the new supposed “adult in the room” reportedly also knew, months in advance.
Can you say, “Uh, oh?”
The issue again here is this: The future-hype playbook is no longer as effective as it once was. But it’s not for a lack of trying, I’ll contend.
The media was all abuzz about 6 days ago (remember this timeline) with the proclamation that Uber entered into an agreement with Volvo™to purchase up to 24,000 self driving vehicles. Sounds just “fantastic!”, right? What you may not have heard about (unless you’re truly paying attention) is that about 5 days ago Colorado fined Uber $8.9 Million for driver issues. Funny how that driver issue thingy came only a day after the hoopla of setting the stage for not needing drivers at all. Can you say “future-hype?” But that’s just me, I guess.
However, this data breach debacle may be the very issue that any type of “hype” future, or not, may not quell. For if there’s one thing governments and politicians, of all types, whether it be in certain locales, nations, or otherwise. There’s one thing they all have in common and will agree on – if there’s an issue to place their bullseye on when it comes to their fund-raising. Let’s just say, laser-focus and pit-bull-jaws immediately come to mind.
And this (e.g., data breach) is just the sort of issue that allows politicians to decry for justice, and the extraction of large quantities of cash-burn resources, out of “their public duty and concern for constituent, or consumer protection!”
It would be somewhat ironic if it was a government regulatory issue that causes Uber the most distress at this point in its life, since it has openly made a mockery of how it both felt, dealt with, as well as adhered, to any so-called rules, regulations, or business ethics since it began.
And make no mistake: “Cover-up”, and “data breach” are two terms no company wants any politician to be both able too say, let alone prove it’s correct, in today’s current political environment. Hint: See Equifax™ or even Wells Fargo™ for clues.
You think any of this “future-hype” along with “cover-up” has anything to do with keeping any Softbank™ hope of investing further cash burn fuel alive?
And if it didn’t, or doesn’t?
Heads will roll, again, for any and all “it’s different this time” believers, showered in the electric sparks from a crashing “it’s different this time” reality.
It is the ‘opinion of the European Central Bank‘ that the deposit protection scheme is no longer necessary:
‘covered deposits and claims under investor compensation schemes should be replaced by limited discretionary exemptions to be granted by the competent authority in order to retain a degree of flexibility.’
To translate the legalese jargon of the ECB bureaucrats this could mean that the current €100,000 (£85,000) deposit level currently protected in the event of a bail-in may soon be no more. But worry not fellow savers, as the ECB is fully aware of the uproar this may cause so they have been kind enough to propose that:
“…during a transitional period, depositors should have access to an appropriate amount of their covered deposits to cover the cost of living within five working days of a request.”
So that’s a relief, you’ll only need to wait five days for some ‘competent authority’ to deem what is an ‘appropriate amount’ of your own money for you to have access to in order eat, pay bills and get to work.
The above has been taken from an ECB paper published on 8 November 2017 entitled ‘on revisions to the Union crisis management framework’.
It’s 58 pages long, the majority of which are proposed amendments to the Union crisis management framework and the current text of the Capital Requirements Directive (CRD).
It’s pretty boring reading but there are some key snippets which should be raising a few alarms. It is evidence that once again a central bank can keep manipulating situations well beyond the likes of monetary policy. It is also a lesson for savers to diversify their assets in order to reduce their exposure to counterparty risks.
Bail-ins, who are they for?
According to the May 2016 Financial Stability Review, the EU bail-in tool is ‘welcome’ to it:
…contributes to reducing the burden on taxpayers when resolving large, systemic financial institutions and mitigates some of the moral hazard incentives associated with too-big-to-fail institutions.
As we have discussed in the past, we’re confused by the apparent separation between ‘taxpayer’ and those who have put their hard-earned cash into the bank. After all, are they not taxpayers? This doesn’t matter, believes Matthew C.Klein in the FT who recently argued that “Bail-ins are theoretically preferable because they preserve market discipline without causing undue harm to innocent people.”
Ultimately bail-ins are so central banks can keep their merry game of easy money and irresponsibility going. They have been sanctioned because rather than fix and learn from the mess of the bailouts nearly a decade ago, they have just decided to find an even bigger band-aid to patch up the system.
‘Bailouts, by contrast, are unfair and inefficient. Governments tend to do them, however, out of misplaced concern about “preserving the system”. This stokes (justified) resentment that elites care about protecting their friends more than they care about helping regular people.’ – Matthew C. Klein
But what about the regular people who have placed their money in the bank, believing they’re safe from another financial crisis? Are they not ‘innocent’ and deserving of protection?
When Klein wrote his latest on bail-ins, it was just over a week before the release of this latest ECB paper. With fairness to Klein at the time of his writing depositors with less than €100,000 in the bank were protected under the terms of the ECB covered deposit rules.
This still seemed absurd to us who thought it questionable that anyone’s money in the bank could suddenly be sanctioned for use to prop up an ailing institution. We have regularly pointed out that just because there is currently a protected level at which deposits will not be pilfered, this could change at any minute.
The latest proposed amendments suggest this is about to happen.
Why change the bail-in rules?
The ECB’s 58-page amendment proposal is tough going but it is about halfway through when you come across the suggestion that ‘covered deposits’ no longer need to be protected. This is determined because the ECB is concerned about a run on the failing bank:
If the failure of a bank appears to be imminent, a substantial number of covered depositors might still withdraw their funds immediately in order to ensure uninterrupted access or because they have no faith in the guarantee scheme.
This could be particularly damning for big banks and cause a further crisis of confidence in the system:
Such a scenario is particularly likely for large banks, where the sheer amount of covered deposits might erode confidence in the capacity of the deposit guarantee scheme. In such a scenario, if the scope of the moratorium power does not include covered deposits, the moratorium might alert covered depositors of the strong possibility that the institution has a failing or likely to fail assessment.
Therefore, argue the ECB the current moratorium that protects deposits could be ‘counterproductive’. (For the banks, obviously, not for the people whose money it really is:
The moratorium would therefore be counterproductive, causing a bank run instead of preventing it. Such an outcome could be detrimental to the bank’s orderly resolution, which could ultimately cause severe harm to creditors and significantly strain the deposit guarantee scheme. In addition, such an exemption could lead to a worse treatment for depositor funded banks, as the exemption needs to be factored in when determining the seriousness of the liquidity situation of the bank. Finally, any potential technical impediments may require further assessment.
The ECB instead proposes that ‘certain safeguards’ be put in place to allow restricted access to deposits…for no more than five working days. But let’s see how long that lasts for.
Therefore, an exception for covered depositors from the application of the moratorium would cast serious doubts on the overall usefulness of the tool. Instead of mandating a general exemption, the BRRD should instead include certain safeguards to protect the rights of depositors, such as clear communication on when access will be regained and a restriction of the suspension to a maximum of five working days by avoiding a cumulative use by the competent authority and the resolution authority.
Even after a year of studying and reading bail-ins, I am still horrified that something like this is deemed to be preferable and fairer to other solutions, namely fixing the banking system. The bureaucrats running the EU and ECB are still blind to the pain such proposals can cause and have caused.
Look to Italy for damage prevention
At the beginning of the month, it was explained how the banking meltdown in Veneto Italy destroyed 200,000 savers and 40,000 businesses.
In that same article, we outlined how exposed Italians were to the banking system. Over €31 billion of sub-retail bonds have been sold to everyday savers, investors, and pensioners. It is these bonds that will be sucked into the sinkhole each time a bank goes under.
A 2015 IMF study found that the majority of Italy’s 15 largest banks a bank rescue would ‘imply bail-in of retail investors of subordinated debt’. Only two-thirds of potential bail-ins would affect senior bond-holders, i.e. those who are most likely to be institutional investors rather than pensioners with limited funds.
Why is this the case? As we have previously explained:
Bondholders are seen as creditors. The same type of creditor that EU rules state must take responsibility for a bank’s financial failure, rather than the taxpayer. This is a bail-in scenario.
In a bail-in scenario the type of junior bonds held by the retail investors in the street is the first to take the hit. When the world’s oldest bank Monte dei Paschi di Siena collapsed ordinary people (who also happen to be taxpayers) owned €5 billion ($5.5 billion) of subordinated debt. It vanished.
Despite the biggest bail-in in history occurring within the EU, few people have paid attention and protested against such measures. A bail-in is not unique to Italy, it is possible for all those living and banking within the EU.
Yet, so far there have been no protests. We’re not talking about protesting on the streets, we’re talking about protesting where it hurts – with your money.
As we have seen from the EU’s response to Brexit and Catalonia, officials could not give two hoots about the grievances of its citizens. So when it comes to banking there is little point in expressing disgust in the same way. Instead, investors must take stock and assess the best way for them to protect their savings from the tyranny of central bank policy.
To refresh your memory, the ECB is proposing that in the event of a bail-in it will give you an allowance from your own savings. An allowance it will control:
“…during a transitional period, depositors should have access to an appropriate amount of their covered deposits to cover the cost of living within five working days of a request.”
The recovery in Eurozone growth has become part of the synchronized global growth narrative that most investors are relying on to deliver further gains in equities as we head into 2018. However, the “Zombification” of a chunk of the Eurozone’s corporate sector is not only a major unaddressed structural problem, but it’s getting worse, especially in…you guessed it…Italy and Spain. According to the WSJ.
The Bank for International Settlements, the Basel-based central bank for central banks, defines a zombie as any firm which is at least 10 years old, publicly traded and has interest expenses that exceed the company’s earnings before interest and taxes. Other organizations use different criteria. About 10% of the companies in six eurozone countries, including France, Germany, Italy and Spain are zombies, according to the central bank’s latest data. The percentage is up sharply from 5.5% in 2007. In Italy and Spain, the percentage of zombie companies has tripled since 2007, the Organization for Economic Cooperation and Development estimated in January. Italy’s zombies employed about 10% of all workers and gobbled up nearly 20% of all the capital invested in 2013, the latest year for which figures are available.
The WSJ explains how the ECB’s negative interest rate policy and corporate bond buying are keeping a chunk of the corporate sector, especially in southern Europe on life support. In some cases, even the life support of low rates and debt restructuring is not preventing further deterioration in their metrics. These are the true “Zombie” companies who will probably never come back from being “undead”, i.e. technically dead but still animate. Belatedly, there is some realization of the risks.
Economists and central bankers say zombies undercut prices charged by healthier competitors, create artificial barriers to entry and prevent the flushing out of weak companies and bad loans that typically happens after downturns. Now that the European economy is in growth mode, those zombies and their related debt problems could become a drag on the entire continent.
“The zombification of the corporate sector and banks (is) a risk for future living standards,” Klaas Knot, a European Central Bank governor and the head of the Dutch central bank, said in an interview.
In some ways, zombie firms are an unintended side effect of years of easy money from the ECB, which rolled out aggressive stimulus policies, including negative interest rates, to support lending and growth. Those policies have been sharply criticized in some richer eurozone countries for making it easier for banks to keep struggling corporate borrowers alive.
Talking of realizing the risk, as usual, the Bundesbank is acting as Mario Draghi silent conscience.
The ECB said in late October it would extend its giant bond-buying program through next September, likely pushing back the date of any interest-rate increase until at least 2019. A small group of central-bank officials opposed the decision, including Jens Weidmann, president of Germany’s Bundesbank. In a speech in September, Mr. Weidmann cited an academic study that concluded a bond-buying program by the ECB in 2012 had helped stabilize banks in southern Europe and boost lending but resulted in more loans to weak companies by the same banks. There was no positive impact on employment or investment, the study found.
The WSJ focuses on two industries with structural challenges, namely retail and shipping, and begins with a company which is an archetypal Zombie, Stefanel.
Italian clothing maker and retailer Stefanel SpA became famous for its knitted coats and cardigans. Many economists, investors and bankers know Stefanel as something starkly different: a zombie company. It has posted an annual loss for nine of the last 10 years and restructured its bank debt at least six times, including several grace periods when Stefanel only had to pay interest on what it owed. After booming during Italy’s post-World War II expansion, Stefanel and its lumbering factories were overwhelmed by Spanish fast-fashion giant Zara and then battered by the economic slowdown that hit Italy in 2008. Stefanel is still alive but staggering. So are hundreds of other chronically unprofitable, highly indebted companies being kept afloat with new infusions from lenders and shareholders, especially in Southern Europe.
As the WSJ goes on to highlight, even the radical corporate and debt restructuring of Stefanel has only reduced its debt by 12%.
Banks restructured Stefanel’s debt even when the apparel maker’s financial problems worsened. The banks continued to collect interest, and some of the loans were repaid, but their decisions not to wipe the debt off their balance sheets meant the banks had less money for healthy firms. Stefanel’s lenders included Banca Monte dei Paschi di Siena, where bad loans peaked at nearly $58 billion in 2016. The Italian government took over the bank earlier this year.
The bank and Stefanel declined to comment. As part of a new restructuring plan, two distressed-debt funds will get a 71% stake in Stefanel by year-end for about $13 million. Giuseppe Stefanel, the founder’s son and company’s largest shareholder, will wind up with a stake of about 16%, down from his previous 56%. Banks owed $125 million by Stefanel will see that decline to about $110 million. Banks demanded that Mr. Stefanel give up control and step down as chief executive as a precondition for approving the turnaround plan, according to a person familiar with the matter. Mr. Stefanel will remain non-executive chairman and “have no control whatsoever,” the person said. Mr. Stefanel declined to comment.
We fear that this is unlikely to be enough to see Stefanel through the next downturn. But it’s not just southern Europe, German banks have been the largest lenders to the struggling shipping industry, where Zombie companies abound. Moody’s estimated that the five biggest German lenders to the shipping industry had roughly $26 billion of distressed shipping loans at the end of last year. This is a ratio of 37% compared with total shipping loans and was up from 28% the year before.
The relationship between Nordeutsche Vermoegen and HSH Nordbank is the example the WSJ cites to show how are keeping companies alive, barely. From the WSJ.
“Some of these zombie companies are getting financed at (interest rates of) 2% because banks are trying to throw good money after bad,” said Basil Karatzas, a shipping-industry consultant in New York…German shipping company Norddeutsche Vermoegen Holding GmbH & Co. KG suffered total losses of $1.1 billion from 2010 to 2015. Its debt quadrupled to more than $2 billion, or almost nine times revenue, from 2007 to 2010. The companthe “Zombification” of a chunk of the Eurozone’s corporate sector is not only a major unaddressed structural problem, but it’s getting worsey hasn’t reported annual results for 2016. In 2016, Norddeutsche Vermoegen got a half-billion euros in debt relief from HSH Nordbank, a German bank that was until recently the world’s largest lender to the shipping industry. According to the shipping company’s financial statements, Norddeutsche Vermoegen made a profit due to “loan forgiveness by the bank.” Norddeutsche Vermoegen and HSH Nordbank declined to comment.
The gravity of the situation has warranted greater scrutiny by the ECB as the article explains. Back in May, the ECB announced on-site inspection for banks with exposure to distressed shipping debt. In a speech earlier this month, Draghi acknowledged the bad debt problem, while lamenting that many banks lack the ability to absorb losses.
“We all know the damage that persistently high levels of NPLs can do to banks’ health and credit growth. And though NPL levels have been coming down for significant institutions – from around 7.5 per cent in early 2015 to 5.5 per cent now – the problem is not yet solved. “Many banks still lack the ability to absorb large losses, as their ratio of bad loans to capital and provisions remains high,” he said.
The ECB faces a Catch-22, pressing banks to address the problem more aggressively not only threatens the banks but the provision of credit to the broader economy. The WSJ highlights the Morgan Stanley view that a resolution in Italy, for example, will last a decade.
Italian banks have set aside half of the value of their $407 billion in gross problem loans at the end of 2016, according to the country’s central bank. That means the banks would be hit with billions of euros in additional losses if they sell the loans. Many lenders would rather hold on to the shaky loans and hope for the best. The ECB proposed last month requiring banks to set aside more cash to cover newly classified bad loans. The proposal was criticized by senior Italian officials, including former Prime Minister Matteo Renzi.
“If they pass new rules, credit to small businesses will be impossible,” he wrote on Twitter. Some banks in Italy have begun to tackle the problem, including by announcing plans to sell billions of dollars of bad loans within three years. Analysts at Morgan Stanley estimate it will take the country’s banks 10 years to reach the European average for nonperforming loans.
This impressive piece of journalism ends on a thought-provoking note from Portugal which perfectly describes the endless suffering of the corporate “undead” in structurally challenged industries.
In Portugal, a program set up in 2012 by the government as part of the country’s bailout aimed to help heavily indebted companies reach agreements with creditors, avoid insolvency and free up money to invest and grow. In practice, the revitalization program can discourage banks from pulling the plug on battered companies, said Antonio Samagaio, an accounting professor at ISEG-Lisbon School of Economics and Management. The reason: The program allows lenders to take fewer write-downs because debt that isn’t forgiven still is considered performing for accounting purposes. Lisgráfica Impressão e Artes Gráficas SA, one of Portugal’s largest printers, entered the program in early 2013. Banks forgave 65% of the company’s debt and agreed to extend repayments. That helped Lisgráfica to keep most of its workers on the job. Now, though, Lisgráfica is having trouble making its debt payments. The company’s revenue has been hurt by the advertising decline at newspaper and magazine clients. Lisgráfica’s losses are widening.
Of course, at the heart of these structural problems are the failure by central banks too, firstly not create an artificial sense of prosperity via credit bubbles, but secondly, to accept some shorter-term pain for longer-term free-market gain. As Schumpeter asserted “The process of creative destruction is the essential fact about capitalism”, but this isn’t capitalism.
In a moment of rare insight, two weeks ago in response to a question “Why is establishment media romanticizing communism? Authoritarianism, poverty, starvation, secret police, murder, mass incarceration? WTF?”, we said that this was simply a “prelude to central bank funded universal income”, or in other words, Fed-funded and guaranteed cash for everyone.
prelude to central bank funded universal income
— zerohedge (@zerohedge) October 31, 2017
On Thursday afternoon, in a stark warning of what’s to come, San Francisco Fed President John Williams confirmed our suspicions when he said that to fight the next recession, global central bankers will be forced to come up with a whole new toolkit of “solutions”, as simply cutting interest rates won’t well, cut it anymore, and in addition to more QE and forward guidance – both of which were used widely in the last recession – the Fed may have to use negative interest rates, as well as untried tools including so-called price-level targeting or nominal-income targeting.
The bolded is a tacit admission that as a result of the aging workforce and the dramatic slack which still remains in the labor force, the US central bank will have to take drastic steps to preserve social order and cohesion.
According to Williams’, Reuters reports, central bankers should take this moment of “relative economic calm” to rethink their approach to monetary policy. Others have echoed Williams’ implicit admission that as a result of 9 years of Fed attempts to stimulate the economy – yet merely ending up with the biggest asset bubble in history – the US finds itself in a dead economic end, such as Chicago Fed Bank President Charles Evans, who recently urged a strategy review at the Fed, but Williams’ call for a worldwide review is considerably more ambitious.
Among Williams’ other suggestions include not only negative interest rates but also raising the inflation target – to 3%, 4% or more, in an attempt to crush debt by making life unbearable for the majority of the population – as it considers new monetary policy frameworks. Still, even the most dovish Fed lunatic has to admit that such strategies would have costs, including those that diverge greatly from the Fed’s current approach. Or maybe not: “price-level targeting, he said, is advantageous because it fits “relatively easily” into the current framework.”
Considering that for the better part of a decade the Fed prescribed lower rates and ZIRP as the cure to the moribund US economy, only to flip and then propose higher rates as the solution to all problems, it is not surprising that even the most insane proposals are currently being contemplated because they fit “relatively easily” into the current framework.
Additionally, confirming that the Fed has learned nothing at all, during a Q&A in San Francisco, Williams said that “negative interest rates need to be on the list” of potential tools the Fed could use in a severe recession. He also said that QE remains more effective in terms of cost-benefit, but “would not exclude that as an option if the circumstances warranted it.”
“If all of us get stuck at the lower bound” then “policy spillovers are far more negative,” Williams said of global economic interconnectedness. “I’m not pushing for” some “United Nations of policy.”
And, touching on our post from mid-September, in which we pointed out that the BOC was preparing to revising its mandate, Williams also said that “the Fed and all central banks should have Canada-like practice of revisiting inflation target every 5 years.”
Meanwhile, the idea of Fed targeting, or funding, “income” is hardly new: back in July, Deutsche Bank was the first institution to admit that the Fed has created “universal basic income for the rich”:
The accommodation and QE have acted as a free insurance policy for the owners of risk, which, given the demographics of stock market participation, in effect has functioned as universal basic income for the rich. It is not difficult to see how disruptive unwind of stimulus could become. Clearly, in this context risk has become a binding constraint.
It is only “symmetric” that everyone else should also benefit from the Fed’s monetary generosity during the next recession.
* * *
Finally, for those curious what will really happen after the next “great liquidity crisis”, JPM’s Marko Kolanovic laid out a comprehensive checklist one month ago. It predicted not only price targeting (i.e., stocks), but also negative income taxes, progressive corporate taxes, new taxes on tech companies, and, of course, hyperinflation. Here is the excerpt.
What will governments and central banks do in the scenario of a great liquidity crisis? If the standard rate cutting and bond purchases don’t suffice, central banks may more explicitly target asset prices (e.g., equities). This may be controversial in light of the potential impact of central bank actions in driving inequality between asset owners and labor. Other ‘out of the box’ solutions could include a negative income tax (one can call this ‘QE for labor’), progressive corporate tax, universal income and others. To address growing pressure on labor from AI, new taxes or settlements may be levied on Technology companies (for instance, they may be required to pick up the social tab for labor destruction brought by artificial intelligence, in an analogy to industrial companies addressing environmental impacts). While we think unlikely, a tail risk could be a backlash against central banks that prompts significant changes in the monetary system. In many possible outcomes, inflation is likely to pick up.
The next crisis is also likely to result in social tensions similar to those witnessed 50 years ago in 1968. In 1968, TV and investigative journalism provided a generation of baby boomers access to unfiltered information on social developments such as Vietnam and other proxy wars, Civil rights movements, income inequality, etc. Similar to 1968, the internet today (social media, leaked documents, etc.) provides millennials with unrestricted access to information on a surprisingly similar range of issues. In addition to information, the internet provides a platform for various social groups to become more self-aware, united and organized. Groups span various social dimensions based on differences in income/wealth, race, generation, political party affiliations, and independent stripes ranging from alt-left to alt-right movements. In fact, many recent developments such as the US presidential election, Brexit, independence movements in Europe, etc., already illustrate social tensions that are likely to be amplified in the next financial crisis. How did markets evolve in the aftermath of 1968? Monetary systems were completely revamped (Bretton Woods), inflation rapidly increased, and equities produced zero returns for a decade. The decade ended with a famously wrong Businessweek article ‘the death of equities’ in 1979.
Kolanovic’s warning may have sounded whimsical one month ago. Now, in light of Williams’ words, it appears that it may serve as a blueprint for what comes next.
Below is the breakdown of settlement number by year since 1997…
… and the amount quietly paid out in settlement awards:
To be sure, the controversial and sensitive issue of Congressional harassments has taken center stage this week, with female lawmakers making fresh allegations of sexual harassment against unnamed members who are currently in office, and the unveiling of a new bill on Wednesday to change how sexual harassment complaints are reported and resolved. On Thursday, a former Playboy playmate shared her story of being groped and kissed without her consent by Sen. Al Franken in 2006.
And until yesterday, there was little specific data to help illuminate just how pervasive sexual harassment is on Capitol Hill, but finally, one figure has emerged: the total that the Office of Compliance, the office that handles harassment complaints, has paid to victims. On Thursday, the Office of Compliance released additional information indicating that it has paid victims more than $17 million since its creation in the 1990s. That includes all settlements, not just related to sexual harassment, but also discrimination and other cases.
According to CNN, an OOC spokeswoman said the office was releasing the extra data “due to the interest in the awards and settlement figures.” The OOC has come under fire in recent days for what lawmakers and Hill aides alike say are its antiquated policies that do not adequately protect victims who file complaints. CNN also learned that during the current Congress, no settlement payment approval requests have been made to the congressional committee charged with approving them.
Here’s what we know about that money:
When was this money paid out?
According to a report from the Office of Compliance, more than $17 million has been paid out in settlements over a period of 20 years — 1997 to 2017.
How many settlements have there been?
According to the OOC data released Thursday, there have been 264 settlements. On Wednesday, Rep. Jackie Speier, the California Democrat who unveiled a bill to reform the OOC, announced at a news conference Wednesday that there had been 260 settlements
Where did the settlement money come from?
Taxpayers. Once a settlement is reached, the money is not paid out of an individual lawmaker’s office but rather comes out of a special fund set up to handle this within the US Treasury — meaning taxpayers are footing the bill. The fund was set up by the Congressional Accountability Act, the 1995 law that created the Office of Compliance.
How many of the settlements were sexual harassment-related?
It’s not clear. Speier told CNN’s Wolf Blitzer on Wednesday that the 260 settlements represent those related to all kinds of complaints, including sexual harassment as well as racial, religious or disability-related discrimination complaints. The OOC has not made public the breakdown of the settlements, and Speier says she’s pursuing other avenues to find out the total.
In its latest disclosure, the OOC said that statistics on payments are “not further broken down into specific claims because settlements may involve cases that allege violations of more than one of the 13 statutes incorporated by the (Congressional Accountability Act).”
Who knows about the settlements and payments?
After a settlement is reached, a payment must be approved by the chairman and ranking member of the House administration committee, an aide to Chairman Gregg Harper, a Mississippi Republican, told CNN.
The aide also said that “since becoming chair of the committee, Chairman Harper has not received any settlement requests.” Harper became chairman of the panel at the beginning of this year. It’s not clear how many other lawmakers — if any — in addition to the House administration committee’s top two members are privy to details about the settlements and payments.
A source in House Speaker Paul Ryan‘s office told CNN that Ryan is not made aware of the details of harassment settlements. That source also said that the top Democrat and Republican on the House administration committee review proposed settlements and both must approve the payments. Similarly, a source in Minority Leader Nancy Pelosi‘s office told CNN that Pelosi also is not made aware of those details and that they are confined to the parties of the settlement and the leaders of the administration committee. “Leader Pelosi has expressed support for the efforts of Rep. Speier who is working on multiple bills to reform the secretive and woefully inadequate process,” the source added.
When asked about Ryan’s knowledge of any sexual harassment settlements, a spokesperson for Ryan’s office noted that the committee is conducting a full review of workplace harassment and discrimination.
What do these settlements tell us about the scope of the sexual harassment problem on Capitol Hill?
It is unclear how much of the $17 million is money paid to sexual harassment cases because of the Office of Compliance’s complex reporting process. However, even knowing that dollar figure doesn’t quantify the problem: a source within the Office of Compliance tells CNN that between 40 and 50% of harassment claims settle after mediation — an early stage in the multi-tiered reporting process.
And the number of settlements reached may not be indicative of how widespread sexual harassment is, as many victims chose not to proceed with OOC’s process for handling complaints. Tracy Manzer, a spokeswoman for Speier, told CNN last week 80% of people who have come to their office with stories of sexual misconduct in the last few weeks have chosen not to report the incidents to the OOC.
* * *
Now if only we could find out just what happened in 2002 to make that year such an outlier in terms of settlement awards… although we have the feeling the Bill Clinton may somehow be involved.
At a moment of widespread acknowledgment that the short-lived Islamic State is no longer a reality, and as ISIS is about to be defeated by the Syrian Army in its last urban holdout of Abu Kamal City in eastern Syria, the US is signaling an open-ended military presence in Syria.On Monday Defense Secretary Jim Mattis told reporters at the Pentagon that the US is preparing for a long-term military commitment in Syria to fight ISIS “as long as they want to fight.”
Mattis indicated that even should ISIS lose all of its territory there would still be a dangerous insurgency that could morph into an “ISIS 2.0” which he said the US would seek to prevent. “The enemy hasn’t declared that they’re done with the area yet, so we’ll keep fighting as long as they want to fight,” Mattis said. “We’re not just going to walk away right now before the Geneva process has traction.”
Mattis was referring to the stalled peace talks in Geneva which some analysts have described as a complete failure (especially as the Geneva process unrealistically stipulates the departure of Assad), as the future of Syria has of late been increasingly decided militarily on the battlefield, with the Syrian government now controlling the vast majority of the country’s most populated centers.
Ironically just as some degree of stability and normalcy has returned to many parts of the county now under government control, Mattis coupled the idea of a permanent US military presence with the goal of allowing Syrians to return to their homes. He said, “You keep broadening them. Try to (demilitarize) one area then (demilitarize) another and just keep it going, try to do the things that will allow people to return to their homes.”
Meanwhile, Turkey once again reiterated that the US has 13 bases in Syria, though the US-backed Syrian YPG has previously indicated seven US military bases in northern Syria. The Pentagon, however, would not confirm base locations or numbers – though only a year-and-a-half ago the American public was being assured that there would be “no boots on the ground” due to mission creep in Syria.
During the last year of the Obama administration, State Department spokesman John Kirby was called out multiple times by reporters for tell obvious and blatant lies concerning “boots on the ground” in Syria.
Remember this? “We are not going to be involved in a large scale combat mission on the ground in Syria. That is what the president [Obama] has long said.”
Last summer, in a move that angered the US administration, Turkish state media leaked the locations of no less than ten small-scale American military bases in northern Syria alone (revelations of US bases in southern Syria began surfacing as well). As another recent Pentagon press conference further acknowledged, these bases – though likely special forces forward operating bases – require a broad network of US personnel operating in various logistical roles inside Syria and likely now includes thousands of US troops deployed on the ground, instead of the Pentagon’s official (and highly dubious) “approximately 500 troops in Syria” number.
What makes even the timing of Mattis’ declaration of an open ended military commitment in to supposedly fight ISIS is that it came the same day that the BBC confirmed that the US and its Kurdish SDF proxy (Syrian Democratic Forces) cut a deal with ISIS which allowed for the evacuation of possibly thousands of ISIS members and their families from Raqqa.
According to yesterday’s bombshell BBC report:
The BBC has uncovered details of a secret deal that let hundreds of Islamic State fighters and their families escape from Raqqa, under the gaze of the US and British-led coalition and Kurdish-led forces who control the city. A convoy included some of IS’s most notorious members and – despite reassurances – dozens of foreign fighters. Some of those have spread out across Syria, even making it as far as Turkey.
IMPORTANT NOTE: Omar fields falling into hands of SDF could well have been part of a Quid pro quo deal that allowed ISIS to leave Raqqa for allowing SDF to capture Omar oil field after ISIS attacks #SyrianArmy positions. If you read 1 article today, make sure its one by BBC below https://t.co/FFQhOIjPEC
— EHSANI2 (@EHSANI22) November 13, 2017
— Elijah J. Magnier (@ejmalrai) November 13, 2017
Though it’s always good when the mainstream media belatedly gives confirmation to stories that actually broke months prior, the BBC was very late to the story. ISIS terrorists being given free passage by coalition forces to leave Raqqa was a story which we and other outlets began to report last June, and which Moon of Alabama and Al-Masdar News exposed in detail a full month prior to the BBC report.
And astoundingly, even foreign fighters who had long vowed to carry out attacks in Europe and elsewhere were part of the deal brokered under the sponsorship of the US coalition in Syria. According to the BBC report:
Disillusioned, weary of the constant fighting and fearing for his life, Abu Basir decided to leave for the safety of Idlib. He now lives in the city. He was part of an almost exclusively French group within IS, and before he left some of his fellow fighters were given a new mission.
“There are some French brothers from our group who left for France to carry out attacks in what would be called a ‘day of reckoning.’”
Much is hidden beneath the rubble of Raqqa and the lies around this deal might easily have stayed buried there too. The numbers leaving were much higher than local tribal elders admitted. At first the coalition refused to admit the extent of the deal.
So it appears that the US allowed ISIS terrorists to freely leave areas under coalition control, according to no less than the BBC, while at the same time attempting to make the case before the public that a permanent Pentagon presence is needed in case of ISIS’ return. But it’s a familiar pattern by now: yesterday’s proxies become today’s terrorists, which return to being proxies again, all as part of justifying permanent US military presence on another nation’s sovereign territory.
America’s Syrian adventure went from public declarations of “we’re staying out” to “just some logistical aid to rebels” to “okay, some mere light arms to fight the evil dictator” to “well, a few anti-tank missiles wouldn’t hurt” to “we gotta bomb the new super-bad terror group that emerged!” to “ah but no boots on the ground!” to “alright kinetic strikes as a deterrent” to “but special forces aren’t really boots on the ground per se, right?” to yesterday’s Mattis declaration of an open-ended commitment. And on and on it goes.