Bright Light on a Shadow Economy

As rumors go, this one was not exactly a barn-burner. A customer of a small lender in Yancheng, a prefecture-level city in northeastern China, had asked to withdraw his money, which totaled a little over $30,000. He was denied. Not exactly a big deal, and by accounts it wasn’t even true.

But what happened next is definitely newsworthy. The rumor spread rapidly—from one person to dozens, then to hundreds. Social media inevitably played a part, with at least one user passing on the story via Weibo, the nation’s microblogging service. Soon enough, hordes gathered outside the bank asking if it was out of funds. Staffers from the institution and even government regulators stepped in to control the situation, reiterating that the story was completely unfounded. To show that the bank wasn’t out of money, stacks of bills were propped in the window for all to see.

It didn’t work. The crowds kept growing, and they wanted their money back.

In a triumph of capitalism, all of the bank’s branches were kept open. Armored vehicles brimming with cash were brought in to appease the depositors, some of whom, witnesses reported, were carrying bags and baskets with which to take home their savings.

Of course, the problems didn’t end there. If this bank was in trouble, how safe were others?

As the crisis entered a second day, and then a third, another institution became the victim of the same rumors. Rural Commercial Bank of Huanghai, which is close by, tried hard to combat the stories, with a brightly flashing electronic sign outside the main branch and a video message from its president. A statement issued jointly by representatives of the China Banking Regulatory Commission and the Zhejiang Sheyang Rural Commercial Bank assured depositors that the banks’ capital position was strong.

This being China, it’s hard to establish just how many customers actually took their money out. It seems likely that at least some of the panicked depositors were elderly folk with memories of the collapse of rural credit cooperatives, which wiped out many people’s savings. The concerns were perhaps justified: The cooperatives were part of the shadow banking sector, which promised unreasonably high returns to unwitting consumers, and many inevitably failed.

The consensus seems to be that it’s a different world now. But is it?

Hands with String

To be sure, China’s banking sector is tightly regulated. Bankruptcies are almost unheard of, which is why this most recent run on the bank caught everyone by surprise. But it did happen, so can it happen again, and perhaps on a much larger scale. To put it bluntly, as some have, is there a potential bomb of Lehman-like proportions ticking away?

China is now so integral to the global economy that it’s certainly a fair question. Some signs are troublingly familiar:  For the last five years—by no coincidence at all, not long after the banking crisis in the United States—the government has actively promoted a credit boom. The market responded with gusto, and the numbers are astonishing.

However, this is all in the Chinese economy, and the most unnerving element in the equation is that a significant majority of this credit is not exactly transparent or otherwise above board. In fact, it’s estimated that at least two-thirds of the financing came from financial institutions that are not banks. At least some of those vast funds supporting the infrastructure building bubbled up from the shadow sector. Could the boom be followed by a bust?

The banking crisis of 2008 was arguably halted by a cash infusion, the infamous bank bailouts. Thanks to its considerable lending over the past decade and more, the central Chinese administration appears to have the resources to conduct a similar rescue, if one is needed. For all the posturing in foreign policy, not to mention the stark philosophical difference, China and the U.S. both have nothing to gain and everything to lose by letting important institutions go under.  The run on the bank in Yancheng was no more than a ripple, and there’s no danger of a flood.

However, the Chinese banking economy still represents a queasy mix of free-market capitalism and heavy-handed socialism, with the latter having more power. This kind of structure is historically unprecedented, and it would be naïve to think that we have all the answers.

 

Fast Facts: Current Economic Conditions in the United States

The Financial Services Roundtable recently released another iteration of its Fast Facts, reliable, bullet-point research about issues facing the financial services industry. Topics span TARP, Dodd-Frank, insurance, lending, retirement savings and more. This iteration focuses on the current economic conditions in the United States.

The United States has enjoyed more than three years of modest uninterrupted economic growth since the end of the recession, with a promising improvement to select industries, including the housing market.


FACT: The US economy sped up in the first quarter of this year, with a growth rate of 2.5%. Despite growth, the Federal Reserve Bank has changed its 2013 GDP projection to an expansion rate in the range of 2.3% to 2.8%.

  • In December 2012, the Federal Reserve projected growth as high as 3.0%.
  • Consumer spending, exports, residential investment, and business spending on equipment and software rose, but it is unclear whether the trend will continue.
  • The Federal Reserve is also concerned that prices of consumer goods have only increased 1.3% year over year, instead of targeted inflation rate of 2% to reflect healthy rises in wages and employment.

FACT: According to nearly 30 investment strategists and money managers surveyed by CNNMoney, stocks will climb further, and the S&P 500 should deliver a healthy 11% return for the year.

  • Last week, the Dow Jones and the S&P 500 witnessed their worst drops since November due to discouraging international and national economic reports.
  • The declines in major stock indices came after dismal growth reports from China, reporting a growth rate of 7.7%, 0.2 percent lower than expected. The reports triggered a massive sell-off in commodities and equity.

FACT: Home prices rose by more than 7% last year, according to the S&P/Case-Shiller index.

  • The number of underwater borrowers, those whose mortgages exceed the value of their homes, fell by almost 4 million last year. While this is an improvement, 7 million borrowers, or one in five, are still underwater.
  • Headwinds from the current round of government spending cuts and tax increases could slow the housing market’s recovery.

FACT: The US unemployment rate fell 0.6 percentage points between March 2012 and March 2013, from 8.2% to 7.6%, but much of the decline from peak unemployment has occurred because of workers leaving the labor force.

  • Job growth slowed sharply in March, with employers adding only 88,000 jobs, much lower than the average monthly gain of 220,000 from November through February, although prior months were revised higher.
  • Health care, construction, and food services were among the top industries for job growth.
  • The monthly average number of Americans seeking unemployment benefits has declined steadily, if modestly, since November and in mid-April was at the lowest level since February 2008.

FACT: While others are slowly returning to work, the unemployment rate for Americans ages 16-24 stands at 16.2%. Additionally, the unemployment rate remains at an elevated 11.1% for those aged 25 and above with less than a high school diploma.

You can view all previous Fast Facts at www.RoundtableResearch.org.

Copyright © 2013 The Financial Services Roundtable, All rights reserved.

 

Fast Facts: Economic Impact of the Fiscal Cliff

The Financial Services Roundtable recently released another iteration of it’s Fast Facts, reliable, bullet-point research about issues facing the financial services industry. Topics span TARP, Dodd-Frank, insurance, lending, retirement savings and more.  Below are some updated Fast Facts on the economic impact of the fiscal cliff.

FACT: The fiscal cliff consists of dramatic tax increases and automatic spending cuts scheduled to go into effect on January 1, 2013.

FACT:  The fiscal cliff would remove approximately $600 billion from the economy in 2013 (twice the projected growth in U.S. GDP this year) and more than $8 trillion over the next ten years.

FACT:  The Congressional Budget Office projects that the U.S. economy will go into a recession in 2013 (including real GDP contracting by 2.9% in the first quarter of 2013 and an unemployment rate over 9%) if Congress and the Administration do not address the fiscal cliff before the end of the year.

FACT:  Many independent groups are speaking out about the negative economic impacts if the fiscal cliff occurs.  Moreover, businesses are saying that uncertainty surrounding the fiscal cliff is negatively impacting their lending, hiring, and company growth right now.

  • Failure to reach even a temporary arrangement to prevent the fiscal cliff and a repeat of the August 2011 debt ceiling episode would mean that the general election had not resolved the political gridlock in Washington and would probably result in a sovereign rating downgrade by Fitch. Fitch Ratings.  November 7, 2012.
  • If <fiscal> negotiations fail to produce policies that lead to debt stabilization and ultimately reduction, then we expect to lower the rating, probably to Aa1.  Moody’s Investors Service.  November 7, 2012.
  • If the U.S. falls off the fiscal cliff, it will take most of the decade for economic activity and employment levels to recover from the fiscal shock.  There will be a recession in 2013 and dramatically slowed growth in 2014.  More than 6 million jobs will be lost; the unemployment rate will be more than 11 percent; and there will be a cumulative 12.8 percent drop in GDP.  National Association of Manufacturers.  October 26, 2012.
  • Economists from member companies of The Financial Services Roundtable convened on October 25th and unanimously agreed the fiscal cliff is imposing a negative drag on business lending, hiring, spending, and investment right now. The Financial Services Roundtable. October 25, 2012.
  • Chief executives from 80 big-name U.S. corporations have banded together in the “Campaign to Fix the Debt,” ringing the opening bell at the NYSE and urging policymakers to deal with America’s out-of-control national debt by forging a comprehensive, bipartisan deal, not by going over the fiscal cliff.  Campaign to Fix the Debt.October 25, 2012.
  • At the end of the day, the United States is the biggest economy in the world and the dollar is the reserve currency in the world. I think it behooves us to act in a much more responsible way <with respect to the fiscal cliff.> Lloyd Blankfein, CEO Goldman Sachs. October 24, 2012.
  • General Electric refinanced $5 billion of bonds reaching maturity early next year to avoid any market downturn ahead of the looming fiscal cliff. General Electric. October 22, 2012.
  • Fifteen CEOs of the largest banks in the U.S. sent a letter to the President and to Congress, saying, “The consequences of inaction – for stability in global financial markets, for economic growth, for millions of Americans still without work and for the financial circumstances of American businesses and households – would be very grave.” The Financial Services Forum. October 18, 2012.
  • 42% of fund managers report that the fiscal cliff is their number one investment risk– up from 35% in September and 26% in August. Bank of America Merrill Lynch. October 16, 2012.
  • U.S. Bancorp in Minneapolis lowered its loan-growth expectations for the fourth quarter to reflect borrower uncertainty about the election, the fiscal cliff and the overall economic environment. Richard Davis, CEO U.S. Bank. October 17, 2012.
  • 61% of American clients say the fiscal cliff is affecting their hiring plans. J.P. Morgan.  October 6, 2012.
  • Macro Risk Advisors October survey of market uncertainty factors shows the risk most cited by U.S. investors as relevant to market conditions is the fiscal cliff and upcoming elections. Macro Risk Advisors. October 2012.
  • It would be smart to at least temporarily stop the full implementation of spending cuts, which would cause a lot of angst. Blackrock Investment Institute. October 2012.
  • We expect that the S&P 500 will fall sharply following the election when investors finally recognize the serious possibility that the ‘fiscal cliff’ problem will not be solved in a smooth fashion.  Goldman Sachs Global Economics, Commodities and Strategy Research team, September 25, 2012.
  • In our view, the U.S. economy is being hit with an uncertainty shock because of the looming fiscal cliff. Our forecast assumes that the uncertainty shock slows growth to 1.0 percent in the fourth quarter of this year.” Bank of America Merrill Lynch,  September 24, 2012.
  • Despite individual bank improvements, outlook for bank stocks is negative, predominately due to “a challenging domestic operating environment, characterized by low interest rates, high unemployment, weak economic growth and uncertainty over US fiscal policy.” Moody’s Investment Outlook for Banks. September 13, 2012.
  • More than 40% of companies cite the fiscal cliff as a major reason for their spending restraint.  Morgan Stanley. August 5, 2012.
  • Small business owners rated the severity of 75 business issues. Uncertainty about the economy ranked second while uncertainty about government policy ranked fourth, followed by unreasonable government regulations (fifth); federal taxes on business income (sixth); tax complexity (seventh), and; frequent changes in federal tax laws and rules (eighth). For perspective, securing long term funding was 56thNational Federation of Independent Business.  August 2012.
  • Nine out of ten small businesses are concerned about Congress’ ability to reach consensus on the fiscal cliff; 59% say failure to address the fiscal cliff will have a direct impact on their company’s growth.  U.S.  Chamber of Commerce.  July 16, 2012.

FACT: Economic output would be greater and unemployment lower in 2013 if the fiscal cliff were addressed before the end of the year, according to analysis from the Congressional Budget Office.

 

For additional resources and examples of member programs, visit http://www.fsround.org/fsr/financial_literacy/financial_literacy_corner.asp.

RPE: Measuring Employee Worth

Citigroup is one of the biggest financial services corporations in the world, so it’s no surprise that the sudden switch in the company’s two top executive spots continues to generate considerable attention. It’s even being reported that the Securities and Exchange Commission is investigating the circumstances behind the high-level shakeup.

But there’s another aspect to the story that’s also intriguing: While newly appointed CEO Michael Corbat has announced plans to optimize efficiencies at the venerable institution, the buzz is that he’s got his work cut out for him. That’s because, by some accounts at least, Citi has one of Wall Street’s least productive workforces.

The numbers seem to bear out that assertion. Citigroup generated about $206,000 in revenue per employee (RPE) through the first nine months of the year, down 7.5% from the year-ago period. Some other institutions, meanwhile, posted increases during the same time span.  This comes after the cutting of 100,000 jobs during the tenure of outgoing CEO Vikram Pandit. If current trends hold, according to estimates from Bloomberg, Citi will be one of only a half-dozen major lenders with a lower RPE than it had in 2005.

It’s easy—but according to experts, quite wrong—to overestimate the RPE metric when judging the business performance of not just banks but organizations in other industries.  “There’s only one metric that really matters when measuring HR.  It’s called Revenue per Employee (RPE),” claims a recent post in The HR Capitalist. “That’s all you need to know. The rest is BS.” That sentiment is echoed in other business performance sources as well.

So given the importance of this metric, how does the industry as a whole and, Citi in particular, stack up against other high-profile companies and industries?

24/7 Wall Street, which offers commentary for equity investors, did just such an analysis recently—tagging it as a study of companies with the ‘least valuable employees’—and the results make for interesting reading. Retailers and market-facing restaurant chains don’t fare too well: Sears (which also owns other brands) makes an appearance with an RPE of $139,000, as does Gap, with an RPE of $113,000, and JCPenney with $98,000. Starbucks may have some problems brewing at $89,000, and the stories of Mcjobs at McDonald’s may be true; the fast-food giant shows an RPE of only $65,000.

On the other side of the coin is Apple—the perfect company with the perfect products and the perfect market cap has one of the highest RPEs of any public corporation: $2.4 million. Even other flourishing tech brands can’t match that; for example, despite the much smaller employee base, Facebook (and coincidentally Google) come in at $1.2 million.

But here’s an element left out of this equation. Apple has come under attack for outsourcing much of its manufacturing; iPads and iPhones, among other devices, are made at corporations in China and elsewhere that pay a significantly smaller wage than Apple pays its own employees. There have also been numerous reports of less-than-ideal working conditions at some of these facilities, and even a recent strike at one.  If Apple built its products in-house, what would its RPE be then? And how would the market judge its performance?

Futurists frequently question the need for a central facility in a business environment where online collaboration technologies negate the need for a physical workplace. With business and support professionals virtually assembled around the world, it’s even possible to imagine a business world without Wall Street. But what other effects would this have?

RPE is surely a vital statistic, and it will be interesting to see how the new management team at Citigroup goes about raising productivity. But it’s also important to remember that in a complex global ecosystem, where jobs can be passed around between different economies and regions almost at will, it may be only one factor (and not the only factor) in gauging how good a company is at doing what it does.

What do you think about RPE? Let us know by tweeting at @bankingdotcom or replying in the comments section below.