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Friday 09.30.2016

Why is Deutsche Bank now the biggest worry in the financial world?

Since the credit crunch in 2008, banks have been struggling to adapt to their new environment. Low interest rates coupled with meagre yields in the financial markets mean banks can generate fewer profits from the deposits they collect, the loans they dole out, and the market services they provide.

While government schemes such as Funding for Lending have propped up some of the banks’ operations, they have dampened activity in other areas, for example by subduing market volatility with vast quantitative easing programs.

Even insiders admit that the sector is still going through a rough patch. Tidjane Thiam, who took over as boss of Credit Suisse in 2015, described big European banks as “not really investable” this week. Many European organisations are giving up on "universal banking" and have rowed back their investment banking activities, although their efforts to reshape themselves have yet to produce any real improvement in returns.

After several years of fretting about Spanish, Italian and French banks as the eurozone economy staggered onwards, the financial markets became nervous about the health of the German powerhouse Deutsche Bank and its smaller competitors at the start of this year.

Germany's Commerzbank cuts nearly 10,000 jobs

Germany's Commerzbank (CBKG.DE) will cut more than a fifth of its workforce and suspend its dividend as it tackles the challenges of low interest rates, weak profits and the shift to online banking.

Germany's second biggest lender said on Thursday it plans to cut 9,600 of its 45,000 full-time positions, a more drastic move than the 10 percent staff reduction at larger rival Deutsche Bank (DBKGn.DE), which remains under pressure for deeper cost cuts.

Squeezed by the European Central Bank's money printing policy, German lenders have been seeking ways to boost revenue by passing on costs to corporate customers and increasing fees for retail depositors, but profit margins remain thin in one of Europe's most competitive banking markets.

Commerzbank said its overhaul, which includes merging its four main business segments into two and moving 80 percent of its processes online, would make its earnings less volatile. Chief Executive Martin Zielke, who has been working on the plan since taking the helm in May, was due to lay out details at a news conference at 0930 GMT on Friday. "We simply don't earn enough money to lead the bank sustainably and successfully into the future. And this situation will get worse if we don't do something about it," he said in a draft note to employees inadvertently posted on the bank's internal website and seen by Reuters

Yellen says Fed purchases of stocks, corporate bonds could help in a downturn

The Federal Reserve might be able to help the U.S. economy in a future downturn if it could buy stocks and corporate bonds, Fed Chair Janet Yellen said on Thursday. Speaking via video conference with bankers in Kansas City, Yellen said the issue was not a pressing one right now and pointed out the U.S. central bank is currently barred by law from buying corporate assets.

But the Fed's current toolkit might be insufficient in a downturn if it were to "reach the limits in terms of purchasing safe assets like longer-term government bonds."

"It could be useful to be able to intervene directly in assets where the prices have a more direct link to spending decisions," she said, adding that buying equities and corporate bonds could have costs and benefits.

Yellen told a conference last month the Fed would fight a future recession by buying government debt and jaw boning interest rates lower with pledges on future policy. But she said other tools might be necessary, including expanding the range of assets it would purchase.

Is America's Tax System Fair?

Banks like to talk about blockchain, but none wants to be the first to actually use it

There are more than 50 major banks clamoring to adopt the technology known as blockchain – the underpinnings of bitcoin – but none of them wants to be the first.

Goldman Sachs, JPMorganChase, and Bank of America are among the big names that have signed onto R3, an industry-wide body trying to bring blockchain technology to the finance world.

They all expect blockchain to simplify and streamline transactions in a way that reduces costs, increases security, and boost profits by making markets more efficient. But blockchain technology only works effectively if there is an industry wide standard and all the banks are using it. For the first bank to adopt this digital system and overhaul existing infrastructure, it could mean a risky and expensive investment, and that bank would then have to hope others follow suit.

That's why this is one of the few cutting edge technologies that is generating a lot of talk, but not a lot of action among banks. While they are dabbling in the technology, attending conferences and joining R3, no one bank is actually taking the lead, going from proofs of concept to actually using it in the real world. "The network effect here is important," said Fredrik Voss, VP of Blockchain Innovation at Nasdaq, at the IMN distributed ledger conference in Manhattan. The more companies use blockchain, the more useful and valuable it is.

The countries where cash is on the verge of extinction

My dad, a former Wall Street trader always advised me “cash is king” and to “hold on to it” when the economy gets tough. But in the Netherlands, cash is definitely not getting the royal treatment. In so many places, it has simply ceased to be recognised as legal tender. More and more Dutch stores, from upscale health-food store Marqt to my local baker and bagel shop, take pin — or debit — cards exclusively. Some retailers even describe going cash-free as “cleaner” or “safer”.

Tucking my debit card firmly away, I decide to see how far a bundle of cash will get me. Not far. The big-ticket items are strictly cashless affairs: my rent and my telephone bill among them.

I meet with baffled expressions and some resistance. “I can’t remember the last time we received a cash payment,” says Marielle Groentjes, an administrator with the company that manages my apartment, Hoen Property Management BV, and has worked there for a decade. “We don’t like cash in the office, we don’t have a safe, and banks charge you for depositing it

But it’s the smaller items that are giving me the biggest headaches. Not only can I not buy my organic produce at Marqt, but I am forced to wait in long cash-only lines at the supermarket while I watch those with debit cards quickly pay up and make it home for dinner. When I try to buy a tuna sandwich at Dutch bakery chain Vlaams Broodhuys, my cash is rejected. I can’t even use my euros to pay for parking in much of the city. “Cash is a dinosaur, but it will stay,” says Michiel van Doeveren, a senior policy advisor at the Dutch central bank, DNB (De Nederlandsche Bank). But he points out it's the logistics that make handling cash expensive (it must be transported, guarded, tallied and registered) versus the ease of electronic payments. “It’s important that the electronic economy increases. We want to foster more efficient payments.”

California pensions: How a deal went wrong and cost taxpayers billions

With the stroke of a pen, California Gov. Gray Davis signed legislation that gave prison guards, park rangers, Cal State professors and other state employees the kind of retirement security normally reserved for the wealthy.

More than 200,000 civil servants became eligible to retire at 55 — and in many cases collect more than half their highest salary for life. California Highway Patrol officers could retire at 50 and receive as much as 90% of their peak pay for as long as they lived.

Proponents sold the measure in 1999 with the promise that it would impose no new costs on California taxpayers. The state employees’ pension fund, they said, would grow fast enough to pay the bill in full. They were off — by billions of dollars — and taxpayers will bear the consequences for decades to come.

This year, state employee pensions will cost taxpayers $5.4 billion, according to the Department of Finance. That’s more than the state will spend on environmental protection, fighting wildfires and the emergency response to the drought combined. And it’s more than 30 times what the state paid for retirement benefits in 2000, before the effects of the new pension law, SB 400, had kicked in, according to data from the California Public Employees’ Retirement System.

Why the big banks are under scrutiny

Elizabeth Warren says government is forcing student borrowers to pay ‘fraudulent debts’

Tens of thousands of borrowers who were victims of fraud by their college are losing their tax refunds, Social Security benefits, and facing other debt collection practices over their student loans, according to Senator Elizabeth Warren.

The Massachusetts Senator sent a letter to the Secretary of Education Thursday asking his agency to halt collections on defaulted student loan debt of former students of Corinthian Colleges, the now-defunct for-profit college chain that collapsed last year, amid accusations the school lured borrowers with inflated job placement and graduation rates. Nearly 80,000 former Corinthian students are facing collections on their loans, according to Warren’s letter, which cites data the Department released to her staff.

“Instead of adding insult to injury for tens of thousands of Corinthian victims by pushing scores of them into debt collection, the Department of Education should stand up for these students as it has promised to do for more than a year and immediately halt all collections on this debt,” Warren wrote in the letter.

Ted Mitchell, the undersecretary of education, said in a statement that the Department shares Warren’s commitment to former Corinthian students and plans to try to reach more Corinthian borrowers affected who might be eligible for relief.

Report: 15 Million May Not Vote Over Fear of Hacked Election

More than 15 million people may not vote on Election Day over cyber security doubts, according to a new report. Carbon Black, a cyber security firm, released a report on Thursday after surveying 700 voters. The report found that more than half of voters (56 percent) fear the election could be affected be a cyber security attack. A slightly higher percentage of voters—58 percent—believe it’s likely that electronic voting machines could be hacked on Nov. 8. More than a one-third of voters think their information is not secure (36 percent).

One out of every five voters who believe their information is not secure may potentially stay home over their cyber security fears, which could amount to more than 15 million voters, the report says. When asked which entities they believe pose the biggest potential risk when it comes to hacking the 2016 elections, 28 percent said they believe the threat would come from inside the United States, 17 percent said Russia, and 15 percent answered the candidates themselves.

The firm noted that there have never been indications of technology in previous elections being tampered with. Recent news events dealing with the hacking of the Democratic National Committee, Democratic Congressional Campaign Committee, and election databases may have increased these fears.

“With Election Day fast-approaching, we can work to mitigate the risks inherent in the current systems,” said Ben Johnson, the cofounder and chief security strategist for Carbon Black. “Beyond November, we suggest that states take a hard look at the systems they are using. We hope they go back to the drawing board with security top of mind. We, of course, highly recommend that every eligible voter still vote and encourage the use of paper (or absentee) ballots whenever possible.”

As Heavy-Truck Sales Go, So Goes the Economy

For most people, the economy’s ups and downs are best measured by famous indicators like monthly job reports and quarterly releases of gross domestic product. But students of the arcane took special notice earlier this month when the Bureau of Economic Analysis released some disturbing data that didn’t make anybody’s front page. In August, domestic heavy-truck sales fell 29 percent from the same period of 2015, the weakest month in well over three years.

Any drop that dramatic could always be an anomaly, but heavy-truck sales have been slipping for two years. Broad weakness in this category has historically been a reliable hint that a recession is on its way.

It’s too soon to be sure that this history is repeating itself. Brian Wesbury, chief economist at First Trust, says August’s plunge could reflect comparatively narrow economic problems like reduced domestic oil production and slackening mining activity. He also said that regulatory issues might have played a role if sales through mid-2015 were boosted by new requirements on trucks’ antilock braking systems. In that case, the August drop-off would just represent a return to normalcy.

Those are reasonable caveats. But there are other worrying signs. Caterpillar has said that used-machinery prices are down 10 percent from a year ago. That could also reflect the impact of oil and mining industry problems, yet a price decline in used construction equipment could have a dampening impact on new-equipment sales for big manufacturers.

China’s Economy Is Headed for a Hard Landing

The world’s second-largest economy is going to make a hard landing one day, China watchers have speculated for several years. The fact is, though, the Middle Kingdom already is well on its way.

Let’s first examine the “official” top-line numbers. In 2007, a year before the great global crisis, China’s real gross domestic product expanded at a 14.2 percent clip. Last year, it grew at 6.9 percent, representing a 50 percent decline. The official GDP figures are increasingly suspect, however. China often releases its quarterly figures just two weeks after the end of the quarter.

This is remarkable, given a nation of 1.35 billion and the fact that the government doesn’t make any revisions. Growth estimates “conveniently” fall within Beijing’s target range. Most importantly, credit growth continues to outpace real GDP growth by significant margins. In other words, China’s short-term growth is being pumped up by even more borrowing.

China’s aggregate debt (mostly corporate and government) is approximately 300 percent of GDP, a figure that surpasses that of the United States. Much of this debt is short term in nature and being used to roll over existing debt. The corporate sector has experienced particular stress, with debt recently soaring as China has continued to prop up its state-owned enterprises. The percent of income used by China’s companies to service their debts has doubled since the 2008 global crisis.

Why the Federal Reserve Is the Most Important Economic Issue in the 2016 Election

The next president of the United States will wield enormous influence over U.S. monetary policy, perhaps even more so than presidents past. "This is an extraordinarily important election for the future of the Fed," said Peter Conti-Brown, assistant professor of legal studies and business ethics at the Wharton School at the University of Pennsylvania. "It may well be the most important election in the Fed's history."

Donald Trump or Hillary Clinton will likely get to nominate at least two of its Board of Governors members and decide whether to reappoint current Chair Janet Yellen in early 2018.

There are typically seven Fed governors; however, for more than a year, there have only been five. President Barack Obama nominated Hawaii banker Allan Landon and University of Michigan economist Kathryn Dominguez to the vacancies in 2015, but Congressional approval has been a non-starter. Senate Republicans have declined to consider Obama's nominees, citing his refusal to appoint a vice chair for supervision at the Federal Reserve -- a position created under Dodd-Frank. Fed board member Daniel Tarullo has filled the role since 2010.

Yellen has pushed Congress to act on the matter, but a political stalemate means neither Obama nominee is likely to be confirmed. Instead, it will be his successor who addresses it.

Generation X increasingly worried about retirement

It's only natural that people approaching retirement worry a little about whether they'll be able to get by without a paycheck. Maybe people with a few million socked away don't think about it much, but the rest of us worry. A survey by American Funds – part of Capital Group – finds members of Generation X are increasingly concerned. And maybe with good reason.

After all, Baby Boomers had years of savings behind them when the Great Recession hit. Many Millennials were still in school. Generation X was just approaching its prime earning years when the unemployment rate soared past 10%, almost overnight. "After experiencing the dot-com bust, the global financial crisis and the housing collapse, as well as stagnant wage growth during their formative adult years, Gen Xers — or Generation AnXious — are wary about their financial future," said Heather Lord, senior vice president and head of strategy and innovation at Capital Group.

And of course, career disruptions have affected retirement saving. Millennials learned the Great Recession lesson pretty well, and many of its members started saving for retirement by age 25. Even though time is beginning to run short for Generation X, financial advisers say it's never too late to start saving for retirement. A good target, says wealth management advisor Michelle Perry Higgins, is putting away 20% of your income.

But Generation X is a victim of bad timing. Not only did the Great Recession hit it in mid career, there were big changes taking place in employer-based retirement systems just as Generation X was entering the workforce. A 2014 study by the TransAmerica Center for Retirement Studies calls Generation X the “401(k) generation.” It entered the workforce along with the introduction of 401(k) plans and the decline of defined benefit plans. Because the plans were new, early participants didn't get the same education and guidance that are standard practice today.

ObamaCare Is Overpaying Insurers, Government Auditor Says

The Obama administration is illegally ignoring the text of the 2010 health law to overpay insurers by $3 billion and counting through ObamaCare's reinsurance program, the Government Accountability Office said Thursday. The Department of Health and Human Services "may not use amounts collected for the Treasury to make reinsurance payments," the legal opinion from GAO General Counsel Susan Poling concluded.

The finding could jeopardize a portion of reinsurance payments due to exchange participants to cover a portion of the bills for their costliest ObamaCare individual market customers in 2016. Even though financial losses are already driving UnitedHealth (UNH), Aetna (AET) and Humana (HUM) out of most ObamaCare exchanges next year, their earnings might take an incremental hit from reduced reinsurance payments. Likewise, Anthem (ANTM), Centene (CNC) and Molina Healthcare (MOH) also could see smaller reinsurance payments than they expect.

Centene's latest earnings report says it has $217 million in reinsurance payments coming as of June 30, while Anthem received $753 million in reinsurance payments for the 2014 year. The program is temporary, with payments gradually covering a reduced share of costs in each year and phasing out altogether after 2016.

The GAO opinion adds weight to the argument that Republicans in Congress have made that the Obama administration is ignoring the letter of the law. The 2010 law, officially the Patient Protection and Affordable Care Act, required insurers to submit a fee, $63 in 2014 and gradually declining, for each individual and small-group customer. Those fees were expected to tally up to $12 billion in the first year, but came in short of $10 billion. Part of those funds, including $2 billion in the first year, were supposed to be directed to the treasury, according to the law, which was likely done as a way to keep the cost of the law down in the contentious period leading to its passage.

Credit Suisse's CEO Talks Brexit, Income Inequality & Interest Rates

Child care now costs more than in-state college tuition

Most parents with young children work outside the home. So they need an affordable, high-quality, easily accessible place to leave their kids while they work. But, the average cost of full-time daycare for kids up to the age of 4 has reached $9,589 a year, according to a new report from the think tank New America. That now tops the average cost of in-state college tuition, which runs about $9,410.

The top five states with the highest overall care score are Connecticut, New Hampshire, Massachusetts, Rhode Island and Minnesota. That means parents earning the national median household income (a little north of $53,000) would need to shell out 18% of their income for the care of just one child.

The younger your child, the higher your bill. Infant care costs about 12% more than toddler care. It ranges from a low of $6,590 a year in Arkansas, or 15% of median state income; to a high of $16,682 in Massachusetts, or about 25% of median income there. And, of course, the lower your income, the higher your level of stress over footing the bill. Minimum wage workers, on average, will have to fork over nearly two-thirds of their pay for child care.

Having a nanny at home will cost far more – an average of $28,353 a year. Put another way, that’s more than half of U.S. median household income, 188% of the income for a single minimum wage worker or three times the cost of average in-state college tuition.

The Shakeout Continues: 100 Oil And Gas Bankruptcies Yet To Come

The more than two-year oil bust has led to a shakeout in the oil industry, with high-cost and inefficient drillers forced out of the market. About 100 bankruptcies have been recorded in the North American energy industry, and stronger companies are damaged but leaner than they were before the collapse started in 2014. Nevertheless, the market may only be half way there – the industry could see another 100 bankruptcies before all is said and done, according to debt restructuring specialists.

"I think we've got easily another 12 to 18 months, and we could see as many filed bankruptcies from here on out as have (already) filed in the upstream sector," Bill Rhea, a consultant with J.W. Rhea & Associates, told CNBC. In 2015, a lot of companies survived because they had hedged their output at much higher oil prices from the year before. But now, with fewer and fewer companies protected from lucrative hedging, the entire industry is more or less exposed to $50 oil and below.

Moreover, a large number of indebted oil companies have been limping along, kept alive by creditors eager to avoid getting burned by a default. Creditors piled on more debt to keep drillers operating, hoping for a rebound in oil prices. But that cannot continue forever, and at some point lenders and investors may decide to pull the plug. "If there's not a complete 100 percent agreement, the only way you can solve those problems is through the bankruptcy process," Patrick Hughes, a partner at Haynes and Boone, told CNBC. "There's going to have to be more filings just because there's no price out there that's foreseeable that's going to bail these companies out," he added.

Major lenders conduct reviews twice a year, assessing and updating the credit lines offered to drillers. That process typically takes place in March/April and September/October. In other words, we are about to enter credit redetermination season, and a few more companies could get cut off from their financing.

Holiday Shopping: 34 Million Already Started

With nearly three months to go until Christmas Day, some 34 million Americans (about 14% of adults in the country) have already launched their hunt for the perfect gift. Well, maybe not perfect, but at least one that won’t have to be scurried after at the last minute.

That annoys those people who think that holiday shopping should occur closer to the actual holiday. In fact, nearly three-quarters of Americans (73%) say they are annoyed with the earlier start to the holiday shopping season. Just 21% disagreed, and the other 6% presumably said, “Bah, humbug.”

The data were released Thursday by researchers at CreditCards.com and are based on 1,000 telephone interviews with U.S. adults conducted between September 15 and 18 of this year. The margin of error is plus or minus 3.8%.

More than half of those surveyed (52%) said that around Thanksgiving Day is the right time for holiday displays and sales to appear. Another 21% say that around Halloween is a good starting time, while 7% think October 1 is better and 3% think Labor Day (Labor Day!) is best. Christmas shopping four months in advance, at least based on our experiences, means that those early presents for the children will be out of style and parents will have to try and exchange them for the latest hot item.

7 million Californians are getting a state-run retirement plan

Nearly 7 million California workers who don't already have access to a retirement plan at work will soon be enrolled in a new state-run IRA savings plan. The program, called California Secure Choice, was signed into law by Governor Jerry Brown Thursday.

It will require all businesses with at least five employees to participate if they don't already offer a pension, 401(k), or similar retirement plan for their workers. The requirement is expected to start in 2018 with businesses that have 100 or more employees, and phase in smaller businesses over the following three years.

Workers will be enrolled automatically, but will be able to opt-out at any time. If they remain in the program, 3% of their pay will be automatically contributed to the retirement account, but a worker will also be able to change how much they save.

Any contribution to the account must come from the worker. Employers will not be allowed to make an additional contribution, like some companies do for 401(k) plans. The funds will be invested in U.S. Treasuries, or similar low-risk investments -- at least at first. The program may eventually offer other investment options. It will be self-funded through a "small fee" paid by the workers, according to the California State Treasurer's office. It's undecided whether the account will look more like a traditional IRA, which is tax-deferred, or a Roth IRA, which is funded through after-tax dollars.

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