Two months ago I was hoping I was seeing some “Green Shoots in Smaller Bank Lending,” (http://seekingalpha.com/article/220685-green-shoots-in-smaller-bank-lending). Last month I found very little encouragement in the banking data released by the Federal Reserve: “Still No Life in Banking,” (http://seekingalpha.com/article/224851-still-no-life-in-banking).
The most recent data seem to indicate that things may be getting worse.
Remember, as of June 30, 2010, the FDIC listed 829 banks on its list of problem banks, and these banks are the smaller ones. Note that this is more than ten percent of the commercial banks in the banking system. Elizabeth Warren, in congressional testimony, has stated that there are at least 3,000 commercial banks facing major problems in the future, primarily in the area of commercial loans, (http://seekingalpha.com/article/215958-elizabeth-warren-on-the-troubled-smaller-banks.) I have made my own forecast that the number of domestically chartered banks in the United State will drop from around 8,000 to less than 4,000 in the next five years or so (http://seekingalpha.com/article/223340-say-goodbye-to-the-smaller-banks).
Total assets in the smaller banks in the United States (the smaller domestically chartered commercial banks consists of all banks below the top 25 in asset size and make up about one-third of the banking assets in the United States) are about the same this year as they were last year. Yet, cash assets in these banks increased by almost 38% from August 2009 to August 2010 and by more than 2% in the four week period ending September 29, 2010.
The concern, of course, is that the smaller banks are preparing for more trouble in the future. The larger banks are now in the process of reducing their cash assets: the cash asset at large, domestically chartered banks are down about 4% over the last four weeks; down about 5% over the past thirteen weeks; and down about 6% over the past year.
Thus, the decline in excess reserves that has occurred in the banking system over the last six- to eight-week period, has come in the big banks indicating that they are prepared to adjust to a new lower level of liquidity in the banking system.
However, the smaller banks are not ready to become less liquid, just the opposite. This, to me, indicates that the Federal Reserve is staying “extremely loose” not so much because the economy is weak, but because the solvency of the smaller banks in the banking system is in question.
There is no doubt that the smaller commercial banks in the United States are getting more conservative. Loans and leases at these smaller institutions continue to decline; they have dropped about one percent in the last four weeks.
The thing to keep an eye on, however, is the commercial real estate portfolio. In the smaller domestically chartered banks, the decline in these loans on the bank balance sheets seem to have accelerated in the past four weeks and in the past thirteen weeks from earlier time periods.
Commercial real estate loans have declined across the board, but the concern is that commercial real estate loans make up about 26% of the assets of the smaller domestically chartered banks and only are about 8% of the assets of the large banks. The declines in the smaller banks have a proportionately larger impact than does a similar decline in the big banks. Furthermore, this is where Elizabeth Warren pointed us to in her congressional testimony.
The two categories of loans that have recently increased at the smaller banks are “Revolving home equity loans” and “Credit card and other revolving plans.” The home equity loans at these smaller banks have risen by about 2% over the past 13-week period and are up slightly over the past 4-week period. At the big banks these loans are down by over one percent for the longer period and down slightly less than one percent for the shorter period.
Credit card and other revolving debt at the smaller institutions is up by over 4% in the past 13-week period and up by about 3% in the past 4-week period. At the larger banks, these numbers are down 3.5% for the longer period and down one percent for the shorter period.
Recent analysis of credit card debt indicates that, for the larger issuers, much of the decline in credit card debt has come because of these organizations charging off bad debt.
Could it be that the smaller banks are not charging off their delinquent home equity loans and credit card or revolving consumer debt because they don’t have the capital to absorb the losses? Could this be the reason that these loans are increasing at the smaller banks and not at the larger banks?
If one accepts this analysis, then the smaller banks have a lot to do on their balance sheets in the future to handle not only troubled commercial real estate loans but to handle revolving credit debt. Do the smaller commercial banks have the capital to go through this process?
There remain many concerns about the commercial banking system. Now that people expect that we will go through a period in which the profit performance of the larger banks is to be relatively flat, might this put even more pressure on the overall United States financial system?
My guess is that the big banks will do just fine. The problem is with the smaller banks, and the situation does not look encouraging for them. I still believe that this is the main reason why the Federal Reserve is keeping excess reserves in the banking system at such a high level. The Federal Reserve, in my mind, is scarred silly that there still may be massive bank failures in the future. The FDIC has been smoothly working through bank closures and helping many distressed institutions to find partners to absorb them. The question remains as to whether the massive amounts of liquidity in the banking system will allow this “work out” to continue its smooth and quiet pace in the face of growing problems with commercial real estate debt and consumer revolving debt?
Showing posts with label elizabeth warren. Show all posts
Showing posts with label elizabeth warren. Show all posts
Monday, October 11, 2010
Thursday, August 12, 2010
"We don't know what we are doing"--the Fed
The Federal Reserve has two basic problems right now. First, those running the Fed don’t know what they are doing. Second, they are doing a terrible job explaining this to the world.
Never have I seen such confusion in such an important institution. Never have I seen such inadequate leadership.
We have experienced the end of the Fed’s exit strategy, the effort undertaken by the Fed to reduce the size of the Fed’s balance sheet. The exit strategy was designed to reduce the massive amounts of reserves pumped into the financial system by the Fed so that a period of hyper-inflation would not result. That exit strategy saw the Fed’s balance sheet grow by $331 billion over the twelve-month period the “exit” strategy was in place. Excess reserves held by the banking system rose by 38% during the same time period.
(http://seekingalpha.com/article/219717-federal-reserve-exit-watch-part-13)
One can only imagine what the end to the "exit strategy” will mean for bank reserves.
So, the Fed is now not going to let its balance sheet decline. As securities mature it will replace those securities with newly purchased securities. Impact is “net zero” on the balance sheet. If the economic recovery does not pick up steam or if it stalls or even declines, the Fed will purchase even more securities resulting in a further increase in bank reserves.
The reason for this change in focus? Well, the Fed has observed that the economy is moving more slowly than previously thought.
This is the Fed and the Fed leadership that continued to fight inflation as the housing market tanked and financial institutions balanced on the edge of collapse. The Fed seems to have totally missed the August 2007 meltdown of hedge funds failing to act until September 2008. Then, in the fall of 2008, Bernanke panicked and we got the infamous TARP legislation and an inconsistent mish-mash of bailouts that “saved the financial system.” (http://seekingalpha.com/article/106186-the-bailout-plan-did-bernanke-panic)
The Fed continues to frame its statements in terms of the weakness of the economy. However, in the statement released after the last meeting of the Open Market Committee the Fed admits that “Bank lending has continued to contract.”
This is all the attention the Fed gives to the banking system; the industry which the Fed supposedly knows intimately? And, this banking system has over $1.0 in excess reserves and is not lending? This banking system that has 775 banks on the FDIC’s list of problem banks? This banking system that Elizabeth Warren claims has 3,000 banks facing severe solvency problems? This banking system that has one out of every 2 banks in it in trouble?
The statements of the Fed just don’t coincide with what people and the financial markets see out in the real world.
There seems to be a significant disconnect between what is going on in the Federal Reserve and what is going on in the world. Damn those econometric models!!!
We got where we are because the Fed didn’t understand what was happening and then threw everything it could against the wall to see what would stick. I fear that we are experiencing déjà vu all over again!
Never have I seen such confusion in such an important institution. Never have I seen such inadequate leadership.
We have experienced the end of the Fed’s exit strategy, the effort undertaken by the Fed to reduce the size of the Fed’s balance sheet. The exit strategy was designed to reduce the massive amounts of reserves pumped into the financial system by the Fed so that a period of hyper-inflation would not result. That exit strategy saw the Fed’s balance sheet grow by $331 billion over the twelve-month period the “exit” strategy was in place. Excess reserves held by the banking system rose by 38% during the same time period.
(http://seekingalpha.com/article/219717-federal-reserve-exit-watch-part-13)
One can only imagine what the end to the "exit strategy” will mean for bank reserves.
So, the Fed is now not going to let its balance sheet decline. As securities mature it will replace those securities with newly purchased securities. Impact is “net zero” on the balance sheet. If the economic recovery does not pick up steam or if it stalls or even declines, the Fed will purchase even more securities resulting in a further increase in bank reserves.
The reason for this change in focus? Well, the Fed has observed that the economy is moving more slowly than previously thought.
This is the Fed and the Fed leadership that continued to fight inflation as the housing market tanked and financial institutions balanced on the edge of collapse. The Fed seems to have totally missed the August 2007 meltdown of hedge funds failing to act until September 2008. Then, in the fall of 2008, Bernanke panicked and we got the infamous TARP legislation and an inconsistent mish-mash of bailouts that “saved the financial system.” (http://seekingalpha.com/article/106186-the-bailout-plan-did-bernanke-panic)
The Fed continues to frame its statements in terms of the weakness of the economy. However, in the statement released after the last meeting of the Open Market Committee the Fed admits that “Bank lending has continued to contract.”
This is all the attention the Fed gives to the banking system; the industry which the Fed supposedly knows intimately? And, this banking system has over $1.0 in excess reserves and is not lending? This banking system that has 775 banks on the FDIC’s list of problem banks? This banking system that Elizabeth Warren claims has 3,000 banks facing severe solvency problems? This banking system that has one out of every 2 banks in it in trouble?
The statements of the Fed just don’t coincide with what people and the financial markets see out in the real world.
There seems to be a significant disconnect between what is going on in the Federal Reserve and what is going on in the world. Damn those econometric models!!!
We got where we are because the Fed didn’t understand what was happening and then threw everything it could against the wall to see what would stick. I fear that we are experiencing déjà vu all over again!
Monday, August 2, 2010
No Banks, No Recovery
More and more information is coming out about the problems that exist in the banking sector. About ten days ago, Elizabeth Warren, the Chair of the Congressional Oversight Panel, in testimony given to the U. S. Senate Committee on Finance, revealed more than anyone else in Washington, D. C. had done up to the time about the serious problems that existed in the banking sector. (See my post “Elizabeth Warren on the Troubled Smaller Banks”, http://seekingalpha.com/article/215958-elizabeth-warren-on-the-troubled-smaller-banks.)
Now, it seems as if almost every day we learn more about the difficulties still facing the banks.
The problem that goes along with the problems in the banking industry is that there will be little or no real economic recovery in the United States if the banking industry is not present in making business loans. Without any financial support, the economy will just not be able to grow.
My initial concern for the banking industry came from the behavior of the Federal Reserve System. For at least ten months, I have been arguing that the Fed was keeping its target interest rate low because of the problems that existed in the commercial banking system, especially among the smaller banks. Although the Fed stated that the reason for keeping its target rate so low was the fact that the economy was not picking up steam in terms of recovering from the Great Recession, I felt that their policy stance was caused by something deeper within the banking system. I believed that the asset values being carried on the balance sheets of a large number of banks were so inflated relative to market values that there was a major solvency issue within the banking industry, especially amongst the smaller banks.
FDIC data gave us confirming information on this: as of March 31, 2010, the FDIC placed 775 banks on its problem list. With the five banks closed last Friday, 106 banks have been closed this year, a rate of 3.5 banks per week. Expectations are for this rate of closure to continue for at least 12 more months.
Warren stated in her written testimony that quite a few small banks had received TARP funds and, “Notwithstanding the fact that those small banks that received TARP funds were required to prove their financial health, fewer than 10 percent have managed to repay their TARP obligations, and 15 percent have failed to pay at least one of their outstanding dividends.”
Furthermore, in her oral testimony, she admitted that “3,000 small banks faced serious problems in the future related to the residential housing market and the wave of commercial real estate loan resets forthcoming in the future.” One could therefore argue that, given this estimate and the FDIC problem list banks, about 1 out of every 2 banks in the banking system faces “serious problems.”
And Congress is working on a new program that would send $30 billion to “struggling” community banks. (See “Community Bank Bailout: Program Risks $30 Billion to Save Weak Banks”, http://www.huffingtonpost.com/2010/08/01/community-bank-bailout-pr_n_666776.html.) Saturday, President Obama described this new bailout program a “common-sense” plan to help spur on bank lending to small business owners.
This, of course, is the “new” Washington line to justify the help. Give the money to the small banks and they will lend to small businesses.
What about the $1.0 trillion in excess reserves that are currently held by the banking system?
What a weak cover, Mr. President!!!
Further information is coming from the banking system, information on the loan sales that commercial banks have recently made. Peter Eavis has a very insightful piece in the Wall Street Journal this morning concerning some specific loan sales and how these sales have impacted bank balance sheets. (See Eavis’ article: http://professional.wsj.com/article/SB10001424052748703314904575399592715122512.html?mod=ITP_moneyandinvesting_8&mg=reno-wsj.)
The bottom line: a lot of the assets that commercial banks carry on their balance sheets are seriously over-valued. When these assets are finally sold, large write downs take place which are absorbed by a reduction in bank earnings. Eavis concludes his article with this comment:
“More loan sales would be welcome. Not only because they relieve banks of burdensome assets, but also because they might inject more reality into the balance sheets seen by investors.”
What does this say about the state of the banking industry? What does this say about the Federal Reserve’s efforts to keep its target interest rate close to zero? Maybe the Fed doesn’t want commercial banks to sale the over-valued assets from off of their balance sheets?
Furthermore, all this is before the “wave of commercial real estate loan resets” forthcoming in the future that Elizabeth Warren talks about. It is also before another 500,000 foreclosures Realty Trac Inc. expects to occur before the end of the year 2010. And, how many foreclosures will take place in 2011? Historically there have only been about 100,000 foreclosures every year in the United States.
It is very difficult to see the United States economic recovery accelerating if the banking system is sitting on the sidelines. The part of the banking system to worry about is the 8,000 banks that do not make the list of the 25 largest domestically chartered banks in the country. These make up approximately one-third of the banking assets in the United States. About 1 in 8 of these banks are on the FDIC’s list of problem banks, and at least 3 in 8 of these banks are on Elizabeth Warren’s list of banks that face “serious problems.”
And, as we know the 25 largest banks have a lot of cash on hand but are not lending it out. Many of the largest non-financial companies in the United States have a lot of cash on hand but are not currently doing anything with it. It would seem that these organizations are looking to use this cash for something other than economic expansion. Could it be that they see the coming period as one in which there will be major consolidation of industry and a restructuring of the economy. (See my post “The Source of Economic Success”, http://seekingalpha.com/article/216450-the-source-of-economic-success.) This will certainly not result in much economic growth or a reduction in the unemployment rate.
Now, it seems as if almost every day we learn more about the difficulties still facing the banks.
The problem that goes along with the problems in the banking industry is that there will be little or no real economic recovery in the United States if the banking industry is not present in making business loans. Without any financial support, the economy will just not be able to grow.
My initial concern for the banking industry came from the behavior of the Federal Reserve System. For at least ten months, I have been arguing that the Fed was keeping its target interest rate low because of the problems that existed in the commercial banking system, especially among the smaller banks. Although the Fed stated that the reason for keeping its target rate so low was the fact that the economy was not picking up steam in terms of recovering from the Great Recession, I felt that their policy stance was caused by something deeper within the banking system. I believed that the asset values being carried on the balance sheets of a large number of banks were so inflated relative to market values that there was a major solvency issue within the banking industry, especially amongst the smaller banks.
FDIC data gave us confirming information on this: as of March 31, 2010, the FDIC placed 775 banks on its problem list. With the five banks closed last Friday, 106 banks have been closed this year, a rate of 3.5 banks per week. Expectations are for this rate of closure to continue for at least 12 more months.
Warren stated in her written testimony that quite a few small banks had received TARP funds and, “Notwithstanding the fact that those small banks that received TARP funds were required to prove their financial health, fewer than 10 percent have managed to repay their TARP obligations, and 15 percent have failed to pay at least one of their outstanding dividends.”
Furthermore, in her oral testimony, she admitted that “3,000 small banks faced serious problems in the future related to the residential housing market and the wave of commercial real estate loan resets forthcoming in the future.” One could therefore argue that, given this estimate and the FDIC problem list banks, about 1 out of every 2 banks in the banking system faces “serious problems.”
And Congress is working on a new program that would send $30 billion to “struggling” community banks. (See “Community Bank Bailout: Program Risks $30 Billion to Save Weak Banks”, http://www.huffingtonpost.com/2010/08/01/community-bank-bailout-pr_n_666776.html.) Saturday, President Obama described this new bailout program a “common-sense” plan to help spur on bank lending to small business owners.
This, of course, is the “new” Washington line to justify the help. Give the money to the small banks and they will lend to small businesses.
What about the $1.0 trillion in excess reserves that are currently held by the banking system?
What a weak cover, Mr. President!!!
Further information is coming from the banking system, information on the loan sales that commercial banks have recently made. Peter Eavis has a very insightful piece in the Wall Street Journal this morning concerning some specific loan sales and how these sales have impacted bank balance sheets. (See Eavis’ article: http://professional.wsj.com/article/SB10001424052748703314904575399592715122512.html?mod=ITP_moneyandinvesting_8&mg=reno-wsj.)
The bottom line: a lot of the assets that commercial banks carry on their balance sheets are seriously over-valued. When these assets are finally sold, large write downs take place which are absorbed by a reduction in bank earnings. Eavis concludes his article with this comment:
“More loan sales would be welcome. Not only because they relieve banks of burdensome assets, but also because they might inject more reality into the balance sheets seen by investors.”
What does this say about the state of the banking industry? What does this say about the Federal Reserve’s efforts to keep its target interest rate close to zero? Maybe the Fed doesn’t want commercial banks to sale the over-valued assets from off of their balance sheets?
Furthermore, all this is before the “wave of commercial real estate loan resets” forthcoming in the future that Elizabeth Warren talks about. It is also before another 500,000 foreclosures Realty Trac Inc. expects to occur before the end of the year 2010. And, how many foreclosures will take place in 2011? Historically there have only been about 100,000 foreclosures every year in the United States.
It is very difficult to see the United States economic recovery accelerating if the banking system is sitting on the sidelines. The part of the banking system to worry about is the 8,000 banks that do not make the list of the 25 largest domestically chartered banks in the country. These make up approximately one-third of the banking assets in the United States. About 1 in 8 of these banks are on the FDIC’s list of problem banks, and at least 3 in 8 of these banks are on Elizabeth Warren’s list of banks that face “serious problems.”
And, as we know the 25 largest banks have a lot of cash on hand but are not lending it out. Many of the largest non-financial companies in the United States have a lot of cash on hand but are not currently doing anything with it. It would seem that these organizations are looking to use this cash for something other than economic expansion. Could it be that they see the coming period as one in which there will be major consolidation of industry and a restructuring of the economy. (See my post “The Source of Economic Success”, http://seekingalpha.com/article/216450-the-source-of-economic-success.) This will certainly not result in much economic growth or a reduction in the unemployment rate.
Thursday, July 22, 2010
The Troubled Smaller Banks and Elizabeth Warren
For over nine months I have been expressing my view about the problems being faced by many of the small domestically chartered banks in the United States. Very little has been forthcoming from public officials about the problems of these smaller financial institutions. Well, yesterday, Elizabeth Warren, the Chair of the Congressional Oversight Panel, in testimony given to the U. S. Senate Committee on Finance, provided us with a little insight into what government officials are working with.
Here are some of her written comments: “The Panel’s most recent report analyzed the participation of small banks in the CPP (the Capital Purchase Program of the Troubles Asset Relief Program--TARP). Under the program, Treasury put money into 707 banks. The Panel found the experience of small banks differed substantially from that of the nation’s largest financial institutions. Seventeen of the 19 U.S. banks and bank holding companies, with assets totaling more than $100 billion, received the majority of funds (81 percent), most getting their money within weeks of the announcement of the program. Now 76 percent have repaid their TARP funds and returned to profitability. On the other hand, small banks entered the program more slowly, and ultimately most—about 90 percent—stayed out of TARP altogether. Notwithstanding the fact that those small banks that received TARP funds were required to prove their financial health, fewer than 10 percent have managed to repay their TARP obligations, and 15 percent have failed to pay at least one of their outstanding dividends. Their problems are substantial. Small banks face serious difficulties with the coming wave of commercial real estate loans resets. Moreover, small banks do not have the same access to the capital that larger banks have, and investors know that these regional and local banks are not too big to fail. Worse yet, if they cannot exit from TARP in the next few years, they face a TARP dividend that will increase sharply from 5 to 9 percent.
TARP gets its name from the so-called “troubled assets” that were weighing down the balance sheets of the nation’s financial institutions. The meltdown in the subprime mortgage market—and the eventual spillover effects into the prime and alt-A mortgage markets—saddled banks with assets composed of or derived from residential mortgages. These securities became difficult to price and hard to sell. Nearly one year after the passage of TARP, the Panel reported that these same assets continued to impair bank balance sheets. Today, some of these same assets continue to encumber the balance sheets of many banks—especially smaller banks that are also heavily exposed to commercial real estate assets, as the Panel identified in our most recent report. So long as the residential housing market remains weak and homeowners continue to default on their mortgages and fall into foreclosure, these troubled assets will continue to pose challenges for financial institutions.”
In verbal testimony, Ms. Warren provided a number: the number was 3000. She stated that 3,000 small banks faced serious problems in the future related to the residential housing market and the “wave of commercial real estate loan resets” forthcoming in the future.
I presume that this does not include the almost 800 commercial banks that were on the FDIC’s list of problem banks as of March 31, 2010 since these banks are already “problems”.
If her number is added to the number of banks on the FDIC’s list then we have close to one-half of the domestically chartered banks in the United States facing the substantial “challenges for financial institutions.”
One-half of the banks in the United States are facing “serious difficulties” and that ”investors know that these regional and local banks are not too big to fail.”
No wonder that the Federal Reserve is keeping its target interest rate close to zero and expects to keep the rate at this level for an “extended time.” Again, expectations are for this target rate to stay near zero into the third quarter of 2010, a period that goes beyond when most of these large commercial loans are supposed to reset.
The real estate bubble of the 2000s will not go away. It is the gift that just keeps on giving!
Here are some of her written comments: “The Panel’s most recent report analyzed the participation of small banks in the CPP (the Capital Purchase Program of the Troubles Asset Relief Program--TARP). Under the program, Treasury put money into 707 banks. The Panel found the experience of small banks differed substantially from that of the nation’s largest financial institutions. Seventeen of the 19 U.S. banks and bank holding companies, with assets totaling more than $100 billion, received the majority of funds (81 percent), most getting their money within weeks of the announcement of the program. Now 76 percent have repaid their TARP funds and returned to profitability. On the other hand, small banks entered the program more slowly, and ultimately most—about 90 percent—stayed out of TARP altogether. Notwithstanding the fact that those small banks that received TARP funds were required to prove their financial health, fewer than 10 percent have managed to repay their TARP obligations, and 15 percent have failed to pay at least one of their outstanding dividends. Their problems are substantial. Small banks face serious difficulties with the coming wave of commercial real estate loans resets. Moreover, small banks do not have the same access to the capital that larger banks have, and investors know that these regional and local banks are not too big to fail. Worse yet, if they cannot exit from TARP in the next few years, they face a TARP dividend that will increase sharply from 5 to 9 percent.
TARP gets its name from the so-called “troubled assets” that were weighing down the balance sheets of the nation’s financial institutions. The meltdown in the subprime mortgage market—and the eventual spillover effects into the prime and alt-A mortgage markets—saddled banks with assets composed of or derived from residential mortgages. These securities became difficult to price and hard to sell. Nearly one year after the passage of TARP, the Panel reported that these same assets continued to impair bank balance sheets. Today, some of these same assets continue to encumber the balance sheets of many banks—especially smaller banks that are also heavily exposed to commercial real estate assets, as the Panel identified in our most recent report. So long as the residential housing market remains weak and homeowners continue to default on their mortgages and fall into foreclosure, these troubled assets will continue to pose challenges for financial institutions.”
In verbal testimony, Ms. Warren provided a number: the number was 3000. She stated that 3,000 small banks faced serious problems in the future related to the residential housing market and the “wave of commercial real estate loan resets” forthcoming in the future.
I presume that this does not include the almost 800 commercial banks that were on the FDIC’s list of problem banks as of March 31, 2010 since these banks are already “problems”.
If her number is added to the number of banks on the FDIC’s list then we have close to one-half of the domestically chartered banks in the United States facing the substantial “challenges for financial institutions.”
One-half of the banks in the United States are facing “serious difficulties” and that ”investors know that these regional and local banks are not too big to fail.”
No wonder that the Federal Reserve is keeping its target interest rate close to zero and expects to keep the rate at this level for an “extended time.” Again, expectations are for this target rate to stay near zero into the third quarter of 2010, a period that goes beyond when most of these large commercial loans are supposed to reset.
The real estate bubble of the 2000s will not go away. It is the gift that just keeps on giving!
Friday, July 16, 2010
Real World Lessons of the Obama Administration
There are two things that some of President Obama’s base is finding out. First, you just cannot walk away from war. Before you are “in the office” you can say all you want about ending wars or not getting into wars, but once “you get the seat” just being against war is not a sufficient policy. There are dumb wars and there are smart wars; there are well run wars and there are stupidly run wars; but wars are always present in one way or another. To many of President Obama’s supporters, President Obama is not walking away from war, and they don’t like it!
The second thing is that powerful nations need a healthy business sector. Regardless of how important you feel the role of government is in a society, without a strong economic system that is performing well your government will always be weak relative to other countries that have strong economic systems that are performing well.
I addressed this point from a different perspective in a recent post: see “Emerging Markets and the Future”, http://seekingalpha.com/article/214661-emerging-markets-and-the-future. One can deduce a similar point from Floyd Norris in today’s New York Times, “How to Tell A Nation Is at Risk,” http://www.nytimes.com/2010/07/16/business/economy/16norris.html?_r=1&hp.
Norris writes: “Which governments will not be able to pay their bills?
The ones with private sectors that are not doing well enough to bail out the government.
That should be one lesson of the near default this year of the Greek government. Government finances are important, but in the end it is the private sector that matters most.
If so, those who focus on fiscal policy may be missing important things. Spain appeared to be in fine shape, with government surpluses, before the recession hit. Now Spain is being downgraded and has soaring deficits.”
The take away from these two pieces: You need to have a strong, vibrant capitalistic system in place, even if it is a state driven capitalism like that of China. The exception is those despotic nations that have a monopoly on a natural resource like Venezuela or many of the middle eastern fiefdoms, but these situations have their own problems. Economic weakness and slow growth lead to waning economic power. Check out much of Europe.
Today’s New York Times was filled with signs that the Obama administration was cognizant of the role the business sector must play in the economy in order to ensure its success and continuation. On the front page of the Times we read of the “Obama Victory” with respect to the financial reform package. This is the coin thrown to some of his supporters.
The real news, to me, is on the front page of the business sector in bold headlines: “Cut Back, Banks See a Chance to Grow: Its fight ended, Wall St. Is Already Working Around New Regulations.” (See http://www.nytimes.com/2010/07/16/business/16wall.html?ref=business.)
Funny, but some of this article seems especially like my recent post “Financial Reform: Ho, Hum”, http://seekingalpha.com/article/213263-financial-reform-ho-hum. The authors of the Times article write:
“The ink is not even dry on the new rules for Wall Street, and already, the bankers are a step ahead of everyone else…
So after spending many millions of dollars to lobby against the legislation, bankers are now turning to Plan B: Adapting to the rules and turning them to their advantage."
The Obama administration and those in Congress that wrote the bill had to have enough in the bill to “declare a win” but many are looking at the legislation as just a cost and an inconvenience. Main street must be given something to justify the possibility of re-electing those currently in office. But, Wall Street must be healthy so that the Administration can stand up to China!
Financial institutions spent a lot to keep a lid on Congress and its “spewing into the gulp” and in this respect have been more successful than BP with its oil spill. But, now that the cap is on in terms of the financial reform bill going to the President, it is time to get back to business. And, really, that is what the administration wants as well.
The third important headline on the front page of the business section (the other two articles were there too) is “With Token Settlement, Blankfein Unscathed”, http://www.nytimes.com/2010/07/16/business/16deal.html?ref=business. The New York Times claims that the deal Goldman Sachs reached with the Securities and Exchange Commission was a “Token”…mere pocket change. The people from the S. E. C. declared this to be a victory. What a joke! Well, now we can get back to business!
Just one more piece of information being shared this morning: Treasury Secretary Tim Geithner seems to be very opposed to Elizabeth Warren becoming the head of the new consumer protection agency created by the financial reform package. She is apparently too strong, too emotional of an advocate for the consumer. It seems as if such a person would rock the boat.
The reality of the situation seems to be that the Obama administration needs a strong, rebounding economy. It needs a strong, rebounding economy to not lose much ground in the elections this November. And, it needs a strong, rebounding economy to give the United States more bargaining power in the world.
The United States is still the number one economic and military power in the world. It is just that at this time, with a somewhat weakened economy, room is given to those large emerging nations to be more assertive in world affairs and to gain confidence in their ability to present their positions in world forums. Again, see my post on “Emerging Markets and the Future.”
The Obama administration is walking a narrow line. It cannot afford to lose the support it has been given in the past by the Independent voter and the middle of the political spectrum. And, it cannot afford to be captive of the sovereign wealth funds of the world that control large amounts of financial capital.
In order to achieve these goals, the Obama administration cannot stifle the United States business engine. The issue it now faces is how to support Wall Street and business without appearing to be abandoning Main Street. The danger the administration runs is that in attempting to walk this narrow line, it might not please anybody.
The second thing is that powerful nations need a healthy business sector. Regardless of how important you feel the role of government is in a society, without a strong economic system that is performing well your government will always be weak relative to other countries that have strong economic systems that are performing well.
I addressed this point from a different perspective in a recent post: see “Emerging Markets and the Future”, http://seekingalpha.com/article/214661-emerging-markets-and-the-future. One can deduce a similar point from Floyd Norris in today’s New York Times, “How to Tell A Nation Is at Risk,” http://www.nytimes.com/2010/07/16/business/economy/16norris.html?_r=1&hp.
Norris writes: “Which governments will not be able to pay their bills?
The ones with private sectors that are not doing well enough to bail out the government.
That should be one lesson of the near default this year of the Greek government. Government finances are important, but in the end it is the private sector that matters most.
If so, those who focus on fiscal policy may be missing important things. Spain appeared to be in fine shape, with government surpluses, before the recession hit. Now Spain is being downgraded and has soaring deficits.”
The take away from these two pieces: You need to have a strong, vibrant capitalistic system in place, even if it is a state driven capitalism like that of China. The exception is those despotic nations that have a monopoly on a natural resource like Venezuela or many of the middle eastern fiefdoms, but these situations have their own problems. Economic weakness and slow growth lead to waning economic power. Check out much of Europe.
Today’s New York Times was filled with signs that the Obama administration was cognizant of the role the business sector must play in the economy in order to ensure its success and continuation. On the front page of the Times we read of the “Obama Victory” with respect to the financial reform package. This is the coin thrown to some of his supporters.
The real news, to me, is on the front page of the business sector in bold headlines: “Cut Back, Banks See a Chance to Grow: Its fight ended, Wall St. Is Already Working Around New Regulations.” (See http://www.nytimes.com/2010/07/16/business/16wall.html?ref=business.)
Funny, but some of this article seems especially like my recent post “Financial Reform: Ho, Hum”, http://seekingalpha.com/article/213263-financial-reform-ho-hum. The authors of the Times article write:
“The ink is not even dry on the new rules for Wall Street, and already, the bankers are a step ahead of everyone else…
So after spending many millions of dollars to lobby against the legislation, bankers are now turning to Plan B: Adapting to the rules and turning them to their advantage."
The Obama administration and those in Congress that wrote the bill had to have enough in the bill to “declare a win” but many are looking at the legislation as just a cost and an inconvenience. Main street must be given something to justify the possibility of re-electing those currently in office. But, Wall Street must be healthy so that the Administration can stand up to China!
Financial institutions spent a lot to keep a lid on Congress and its “spewing into the gulp” and in this respect have been more successful than BP with its oil spill. But, now that the cap is on in terms of the financial reform bill going to the President, it is time to get back to business. And, really, that is what the administration wants as well.
The third important headline on the front page of the business section (the other two articles were there too) is “With Token Settlement, Blankfein Unscathed”, http://www.nytimes.com/2010/07/16/business/16deal.html?ref=business. The New York Times claims that the deal Goldman Sachs reached with the Securities and Exchange Commission was a “Token”…mere pocket change. The people from the S. E. C. declared this to be a victory. What a joke! Well, now we can get back to business!
Just one more piece of information being shared this morning: Treasury Secretary Tim Geithner seems to be very opposed to Elizabeth Warren becoming the head of the new consumer protection agency created by the financial reform package. She is apparently too strong, too emotional of an advocate for the consumer. It seems as if such a person would rock the boat.
The reality of the situation seems to be that the Obama administration needs a strong, rebounding economy. It needs a strong, rebounding economy to not lose much ground in the elections this November. And, it needs a strong, rebounding economy to give the United States more bargaining power in the world.
The United States is still the number one economic and military power in the world. It is just that at this time, with a somewhat weakened economy, room is given to those large emerging nations to be more assertive in world affairs and to gain confidence in their ability to present their positions in world forums. Again, see my post on “Emerging Markets and the Future.”
The Obama administration is walking a narrow line. It cannot afford to lose the support it has been given in the past by the Independent voter and the middle of the political spectrum. And, it cannot afford to be captive of the sovereign wealth funds of the world that control large amounts of financial capital.
In order to achieve these goals, the Obama administration cannot stifle the United States business engine. The issue it now faces is how to support Wall Street and business without appearing to be abandoning Main Street. The danger the administration runs is that in attempting to walk this narrow line, it might not please anybody.
Wednesday, March 3, 2010
"Risk-taking at banks will soon be larger than ever"
A new report has been released by the Roosevelt Institute and has been announced by ABC News:
http://abcnews.go.com/Business/economists-warn-financial-us-economy/story?id=9990828. The chief economist of this institute is the Nobel prize-winning economist Joseph Stiglitz. Also, on the panel that produced the report is Elizabeth Warren of Harvard and head of the congressional group that is overseeing the spending of the TARP funds, Simon Johnson of MIT, Robert Johnson of the United Nations Commission of Experts on Finance and Peter Boone from the Centre for Economic Performance.
A major forecast of the report is that “Risk-taking at banks will soon be larger than ever.”
I am shocked!
Aren’t you?
In my view, risk-taking at commercial banks, big commercial banks, was going strong by the summer of last year. It has grown since.
Why?
Thank you Mr. Bernanke and the Federal Reserve System!
Over the past year or so, we have seen the largest subsidization of the banking system in the history of the world!
No, I don’t mean the bailout money. I mean the money the banks have access to that costs less than 50 basis points!
There is, of course, a reason for the low interest rates. The small- and medium-sized banks in the country are is serious difficulty. See my posts, “The Struggles Continue for Commercial Banks,” http://seekingalpha.com/article/190191-the-struggles-continue-for-commercial-banks, and, “Reading Between the Lines on Bernanke’s Testimony,” http://seekingalpha.com/article/191159-reading-between-the-lines-on-bernanke-s-testimony. The concern here is that if the Fed began to remove reserves from the banking system, the great “undoing”, it would precipitate even more bank failures than are projected now, given the number of banks, 702, that are on the FDIC’s list of problem banks.
The large banks, however, the top twenty-five of which make up almost 60% of the commercial banking assets in the United States, are making out like bandits. And, why not when they can borrow for almost nothing and lend out at spreads of 350 basis points or so…risk free.
And, the dollar-trade continues to prosper internationally.
But, this is not regular bank lending, lending to businesses or consumers. Regular bank lending supports the expansion of the economy and employment of workers. That lending has been declining for months and it appears as if that lending will not pick up for many more months in the future.
The large banks were too big to fail and now the large banks produce huge profits because the Fed believes that the other 40% of the banking system is “too big” to fail.
And, what are these big banks doing?
I’m not sure that there is anyone else that knows the answer to this other than the banks themselves. I have said this over and over again beginning last summer. The big commercial banks are way beyond the regulatory system in terms of what they are doing, perhaps more so now than in normal times.
Regulation is ALWAYS behind the regulated. This is just a law of nature. The issue always is, how far behind the regulated are the regulators?
When I was in the Federal Reserve System, the estimate we used was that the Fed was about six months behind the commercial banks. The banks would try something to avoid regulations and the Fed would then have to find out what the banks were doing. Once the Fed found out they would then have to bring the “regs” up-to-date to close the loop-holes.
Last summer or so, I surmised that the commercial banks, after they had paid back the bailout money, moved ahead rapidly to take advantage of the subsidy they were receiving from the Federal Reserve in terms of exceedingly low interest rates. The subsequent profit explosion at the large banks seemed to justify my suspicions.
By the fall of 2009, I was convinced that these large banks were way ahead of the regulators in terms of what they were doing. For one, the regulators still had a financial crisis on their hands and were diverted from the “new” activity. Second, as is always the case, the politicians decided to fight the last war. Their battle cry: “We have got to stop the commercial banks from doing what they were doing.” Of course, that is why regulation is seldom very effective.
The Roosevelt Institute report calls for more financial reforms: re-regulate. Of course, Joe Stiglitz is one of the leaders in crying for new, more stringent regulation. Elizabeth Warren is there also. But, the picture I have just painted contains with it the conclusion that regulation never really is that effective because it is always behind the curve. However, if the rules and regulations are excessively restrictive then innovation and change may be delayed. (How long did it take to get the Glass-Steagall Act removed?)
In this world, the world of the Information Age, innovation and change is going to take place somewhere because, as I have said before, finance is just about 0s and 1s. (See my post “Financial Regulation is the Information Age,” http://seekingalpha.com/article/184153-financial-regulation-in-the-information-age-part-a.) My feeling is that regulation can delay but it cannot stop the changes the bankers want to make. If regulation delays the ability of commercial banks to innovate and change, the innovation and change will take place elsewhere in the world. And, funds will flow to where the innovation and change is taking place.
If the conclusion of this report is that “Risk-taking at banks will soon be larger than ever,” my question to the authors of this publication is: “Where have you been?”
http://abcnews.go.com/Business/economists-warn-financial-us-economy/story?id=9990828. The chief economist of this institute is the Nobel prize-winning economist Joseph Stiglitz. Also, on the panel that produced the report is Elizabeth Warren of Harvard and head of the congressional group that is overseeing the spending of the TARP funds, Simon Johnson of MIT, Robert Johnson of the United Nations Commission of Experts on Finance and Peter Boone from the Centre for Economic Performance.
A major forecast of the report is that “Risk-taking at banks will soon be larger than ever.”
I am shocked!
Aren’t you?
In my view, risk-taking at commercial banks, big commercial banks, was going strong by the summer of last year. It has grown since.
Why?
Thank you Mr. Bernanke and the Federal Reserve System!
Over the past year or so, we have seen the largest subsidization of the banking system in the history of the world!
No, I don’t mean the bailout money. I mean the money the banks have access to that costs less than 50 basis points!
There is, of course, a reason for the low interest rates. The small- and medium-sized banks in the country are is serious difficulty. See my posts, “The Struggles Continue for Commercial Banks,” http://seekingalpha.com/article/190191-the-struggles-continue-for-commercial-banks, and, “Reading Between the Lines on Bernanke’s Testimony,” http://seekingalpha.com/article/191159-reading-between-the-lines-on-bernanke-s-testimony. The concern here is that if the Fed began to remove reserves from the banking system, the great “undoing”, it would precipitate even more bank failures than are projected now, given the number of banks, 702, that are on the FDIC’s list of problem banks.
The large banks, however, the top twenty-five of which make up almost 60% of the commercial banking assets in the United States, are making out like bandits. And, why not when they can borrow for almost nothing and lend out at spreads of 350 basis points or so…risk free.
And, the dollar-trade continues to prosper internationally.
But, this is not regular bank lending, lending to businesses or consumers. Regular bank lending supports the expansion of the economy and employment of workers. That lending has been declining for months and it appears as if that lending will not pick up for many more months in the future.
The large banks were too big to fail and now the large banks produce huge profits because the Fed believes that the other 40% of the banking system is “too big” to fail.
And, what are these big banks doing?
I’m not sure that there is anyone else that knows the answer to this other than the banks themselves. I have said this over and over again beginning last summer. The big commercial banks are way beyond the regulatory system in terms of what they are doing, perhaps more so now than in normal times.
Regulation is ALWAYS behind the regulated. This is just a law of nature. The issue always is, how far behind the regulated are the regulators?
When I was in the Federal Reserve System, the estimate we used was that the Fed was about six months behind the commercial banks. The banks would try something to avoid regulations and the Fed would then have to find out what the banks were doing. Once the Fed found out they would then have to bring the “regs” up-to-date to close the loop-holes.
Last summer or so, I surmised that the commercial banks, after they had paid back the bailout money, moved ahead rapidly to take advantage of the subsidy they were receiving from the Federal Reserve in terms of exceedingly low interest rates. The subsequent profit explosion at the large banks seemed to justify my suspicions.
By the fall of 2009, I was convinced that these large banks were way ahead of the regulators in terms of what they were doing. For one, the regulators still had a financial crisis on their hands and were diverted from the “new” activity. Second, as is always the case, the politicians decided to fight the last war. Their battle cry: “We have got to stop the commercial banks from doing what they were doing.” Of course, that is why regulation is seldom very effective.
The Roosevelt Institute report calls for more financial reforms: re-regulate. Of course, Joe Stiglitz is one of the leaders in crying for new, more stringent regulation. Elizabeth Warren is there also. But, the picture I have just painted contains with it the conclusion that regulation never really is that effective because it is always behind the curve. However, if the rules and regulations are excessively restrictive then innovation and change may be delayed. (How long did it take to get the Glass-Steagall Act removed?)
In this world, the world of the Information Age, innovation and change is going to take place somewhere because, as I have said before, finance is just about 0s and 1s. (See my post “Financial Regulation is the Information Age,” http://seekingalpha.com/article/184153-financial-regulation-in-the-information-age-part-a.) My feeling is that regulation can delay but it cannot stop the changes the bankers want to make. If regulation delays the ability of commercial banks to innovate and change, the innovation and change will take place elsewhere in the world. And, funds will flow to where the innovation and change is taking place.
If the conclusion of this report is that “Risk-taking at banks will soon be larger than ever,” my question to the authors of this publication is: “Where have you been?”
Thursday, February 11, 2010
Small Bank Loan Problems
A set of findings that will be released today by the Congressional Oversight Panel which oversees the TARP effort highlights exactly the problem I have been focusing on for the past year. The problem is the health of small- and medium-sized banks.
“Nearly 3,000 small U. S. banks could be forced to dramatically curtail their lending because of losses on commercial real-estate loans.” This from the article by Carrick Mollenkamp and Maurice Tamman in the Wall Street Journal, “TARP Panel: Small Banks are Facing Loan Woes.” (http://online.wsj.com/article_email/SB20001424052748703455804575057851154035196-lMyQjAyMTAwMDEwMTExNDEyWj.html).
Elizabeth Warren, who heads the TARP oversight panel is quoted as saying, “The banks that are on the front lines of small-business lending are about to get hit by a tidal wave of commercial-loan failures.”
My question is, why has it taken so long for this concern to surface at this level? This is vital information!
There are just over 8,000 in the United States. This means that from one-third to two-fifths of our banks face serious troubles with regards to their commercial loan portfolio, let alone any other problems they might face in their loan portfolios.
At the end of the third quarter, the FDIC had 552 banks on their list of problem banks. We will not get the report on the number of banks on the problem list for the end of the fourth quarter until later this month. The number of problem banks was expected to rise this year anyway before this information came out, but this is certainly not good news.
The rough rule of thumb is that one-third of the banks on the problem list can be expected to fail, and, using the third quarter figures, this means that two to three banks will fail each week for the next twelve to eighteen months. So far this year, we are roughly on track with this pace.
There are two problems here. First, the number of failing banks. The deposits and loans of these banks have to be absorbed into the banking system and this represents a de-leveraging of banks and the banking system that is consistent with the de-leveraging that is going on in the rest of the economic system.
Secondly, and this is what the Wall Street Journal focuses on, is that this atmosphere is not conducive to an expansion of loans. Whereas most of the big banks, (remember that the top 25 banks in the country have over 50% of the bank assets in this country) have become very active again, the small- to medium-sized banks do not have neither the resources nor the markets to pick up their lending or deal-making activity.
Unless you have worked in a smaller bank, you don’t realize the effort and the commitment of resources that is needed to work with troubled-lenders, especially if a substantial part of your portfolio is in loans that are having problems. You have neither the will nor the means to give much of your attention to making new loans.
Furthermore, even if you are not a part of the 3,000 banks facing a large amount of loan problems, why should you be lending much now? First of all, if you seem to be surviving, you are probably very, very thankful that you are not in the same position of these other banks and are feeling a great deal of relief. Yes, relief, but you are still wary, because the whole thing is not over yet.
Second, and I know this from my experience in turning around banks, if you don’t make a loan, that loan cannot go bad on you. The probability of this is 100%. That’s about as close to certainty that you can get in these very uncertain times.
The other side of this is something that I have said this many times before in these posts. The good news is that things seem to be pretty quiet on the banking front. Let’s hope that this quiet continues. Quiet is good, because it can mean that the bad and the not-so-bad situations are being worked out. And, if the economy continues to improve, some of the bad situations will become not-so-bad situations and some of the not-so-bad situations will actually become acceptable situations.
So, keep your fingers crossed.
This whole situation is further evidence of the extent that credit inflation enveloped the United States (as well as the world). In a credit inflation, it pays to go further and further into debt and to make more and more loans. At least, as long as the credit inflation can continue.
The leveraging and the moves to riskier assets usually begins with the larger institutions and then works its way through the economy. In most situations, the smaller institutions are the last ones to really follow the increased exposure that has been taken on by larger banks. However, more and more people and institutions succumb to the environment the longer the credit inflation continues. But, the increased risk taking does spread throughout the economy.
When the credit inflation stops, then de-leveraging must take place and this can be a long, slow process. And, again, the smaller institutions tend to trail the larger institutions. Thus, it is not surprising that the small- and medium-sized banks are still dealing with these problems even though the larger institutions have moved on.
Unless, of course, the government is able to “goose up” credit inflation again and eliminate the need to de-leverage.
The extent of the problem relating to “loan woes” is still substantial. The existence of this problem will weigh on the officials in the Federal Reserve System because a tightening of credit will just exacerbate the existing fragility of the banking system. The Fed does not want its “undoing” of the excessive amount of excess reserves in the banking system to be the “undoing” of the commercial banking system, itself.
The commercial banking system has always been a part of any economic recovery in United States history. It is hard to see how much of a recovery is possible if the commercial banking system, this time around, is “frozen”. At least for the small- and medium-sized banks.
Guess the loans to small- and medium-sized businesses will just have to come from the government!
(Please accept this last statement as being ironic!)
“Nearly 3,000 small U. S. banks could be forced to dramatically curtail their lending because of losses on commercial real-estate loans.” This from the article by Carrick Mollenkamp and Maurice Tamman in the Wall Street Journal, “TARP Panel: Small Banks are Facing Loan Woes.” (http://online.wsj.com/article_email/SB20001424052748703455804575057851154035196-lMyQjAyMTAwMDEwMTExNDEyWj.html).
Elizabeth Warren, who heads the TARP oversight panel is quoted as saying, “The banks that are on the front lines of small-business lending are about to get hit by a tidal wave of commercial-loan failures.”
My question is, why has it taken so long for this concern to surface at this level? This is vital information!
There are just over 8,000 in the United States. This means that from one-third to two-fifths of our banks face serious troubles with regards to their commercial loan portfolio, let alone any other problems they might face in their loan portfolios.
At the end of the third quarter, the FDIC had 552 banks on their list of problem banks. We will not get the report on the number of banks on the problem list for the end of the fourth quarter until later this month. The number of problem banks was expected to rise this year anyway before this information came out, but this is certainly not good news.
The rough rule of thumb is that one-third of the banks on the problem list can be expected to fail, and, using the third quarter figures, this means that two to three banks will fail each week for the next twelve to eighteen months. So far this year, we are roughly on track with this pace.
There are two problems here. First, the number of failing banks. The deposits and loans of these banks have to be absorbed into the banking system and this represents a de-leveraging of banks and the banking system that is consistent with the de-leveraging that is going on in the rest of the economic system.
Secondly, and this is what the Wall Street Journal focuses on, is that this atmosphere is not conducive to an expansion of loans. Whereas most of the big banks, (remember that the top 25 banks in the country have over 50% of the bank assets in this country) have become very active again, the small- to medium-sized banks do not have neither the resources nor the markets to pick up their lending or deal-making activity.
Unless you have worked in a smaller bank, you don’t realize the effort and the commitment of resources that is needed to work with troubled-lenders, especially if a substantial part of your portfolio is in loans that are having problems. You have neither the will nor the means to give much of your attention to making new loans.
Furthermore, even if you are not a part of the 3,000 banks facing a large amount of loan problems, why should you be lending much now? First of all, if you seem to be surviving, you are probably very, very thankful that you are not in the same position of these other banks and are feeling a great deal of relief. Yes, relief, but you are still wary, because the whole thing is not over yet.
Second, and I know this from my experience in turning around banks, if you don’t make a loan, that loan cannot go bad on you. The probability of this is 100%. That’s about as close to certainty that you can get in these very uncertain times.
The other side of this is something that I have said this many times before in these posts. The good news is that things seem to be pretty quiet on the banking front. Let’s hope that this quiet continues. Quiet is good, because it can mean that the bad and the not-so-bad situations are being worked out. And, if the economy continues to improve, some of the bad situations will become not-so-bad situations and some of the not-so-bad situations will actually become acceptable situations.
So, keep your fingers crossed.
This whole situation is further evidence of the extent that credit inflation enveloped the United States (as well as the world). In a credit inflation, it pays to go further and further into debt and to make more and more loans. At least, as long as the credit inflation can continue.
The leveraging and the moves to riskier assets usually begins with the larger institutions and then works its way through the economy. In most situations, the smaller institutions are the last ones to really follow the increased exposure that has been taken on by larger banks. However, more and more people and institutions succumb to the environment the longer the credit inflation continues. But, the increased risk taking does spread throughout the economy.
When the credit inflation stops, then de-leveraging must take place and this can be a long, slow process. And, again, the smaller institutions tend to trail the larger institutions. Thus, it is not surprising that the small- and medium-sized banks are still dealing with these problems even though the larger institutions have moved on.
Unless, of course, the government is able to “goose up” credit inflation again and eliminate the need to de-leverage.
The extent of the problem relating to “loan woes” is still substantial. The existence of this problem will weigh on the officials in the Federal Reserve System because a tightening of credit will just exacerbate the existing fragility of the banking system. The Fed does not want its “undoing” of the excessive amount of excess reserves in the banking system to be the “undoing” of the commercial banking system, itself.
The commercial banking system has always been a part of any economic recovery in United States history. It is hard to see how much of a recovery is possible if the commercial banking system, this time around, is “frozen”. At least for the small- and medium-sized banks.
Guess the loans to small- and medium-sized businesses will just have to come from the government!
(Please accept this last statement as being ironic!)
Thursday, December 11, 2008
Should Banks Start Lending Again?
Banks aren’t doing a lot of lending these days.
Why not?
The Federal Reserve System has bent over backwards dumping liquidity into the financial system. The United States Treasury Department has provided the banking industry with a lot of new ‘capital’. Why aren’t the banks’ lending? Why aren’t the banks even lending to themselves…
My question: Why should the banks be lending?
My answer: they shouldn’t…not right now!
A good reason for this is that United States financial institutions still do not have a firm grasp on the value of a large portion of their assets. “The biggest US financial institutions reported a sharp increase to $610 billion in so-called hard-to-value assets during the third quarter…” (“Financial groups’ problem assets hit $610 bn”, http://www.ft.com/cms/s/0/ea576c7c-c729-11dd-97a5-000077b07658.html.) These assets, primarily mortgage-backed securities and collateralized debt obligations, don’t have active markets at the present time and they are difficult to value. I should be noted that the assets so identified “are many times bigger than the market cap of the banks.”
If you were a banker right now, where would you be focusing your resources at the present time? Would you be attempting to put new loans on the books that would pay off over several years’ time…or…would you be trying to get your arms around the value of these ‘level-three’ assets and see how you can minimize the damage they might cause…in the immediate future?
As long as these assets are on-the-books bank managements are going to muddle around, attempting to minimize the information that is released, and ask for the government to protect them from the downside through asset purchase programs that shore up asset price and the like.
This only distracts efforts and prolongs things! Until the banks are forced to write down their assets to realistic (some form of market) values and take their hits…they will be unable to focus on business and get on with their lives.
But there are other things looming on the horizon. Why would you want to put on new loans when you have people talking about the rising level of foreclosures? Elizabeth Warren of Harvard who is leading the oversight of TARP stated on television last night that in the next two years 8 million houses will be in foreclosure, an amount that is about 16% of the housing stock. That is one out of every six houses in the United States will be in foreclosure within the next two years!
And, why would you want to put on new loans when you have people talking about the rising level of charge-offs related to credit cards? (See “Charge-offs Start to Shred Card Issuers”, http://online.wsj.com/article/SB122895752803296651.html?mod=todays_us_money_and_investing.) All the statistics in this area point to a surge in charge-offs that will be faced by credit card issuers in the future.
Furthermore, there is still the unknown number and size of business defaults that are coming down the road. Of course, there are the auto companies…but, the condition of the credit wings of the auto companies reinforce the concern. Ford Motor Credit Co. is teetering on the brink of bankruptcy…as is GMAC. (“GMAC Bondholders Balk at Debt Swap”, http://online.wsj.com/article/SB122891574162094585.html?mod=todays_us_money_and_investing. Also see “Doubts on GMAC bank holding plan”, http://www.ft.com/cms/s/0/3ccf9eb4-c727-11dd-97a5-000077b07658.html.)
Financial institutions cannot make loans when they are so uncertain about the loans that they have already made. Financial institutions cannot make loans when there is so much uncertainty about the length and depth of the recession, the rise in layoffs and the falloff in employment. (Just released: Jobless Claims hit a 26-year high!) Those individuals and businesses that are seeking loans want to refinance or restructure…to gain control over cash flows so that they don’t run out of cash. Borrowing related to expanding business or creating jobs is almost non-existent. (“Executives Are Grim on Economy”, http://online.wsj.com/article/SB122896532391397279.html?mod=todays_us_marketplace.)
Should banks be lending now?
The answer to this is no…they are not social institutions.
Yes, it would be helpful to the economy if all banks opened their doors and started flooding the market with loans. Everyone would benefit…right?
OK, then…who wants to be first?
Why not?
The Federal Reserve System has bent over backwards dumping liquidity into the financial system. The United States Treasury Department has provided the banking industry with a lot of new ‘capital’. Why aren’t the banks’ lending? Why aren’t the banks even lending to themselves…
My question: Why should the banks be lending?
My answer: they shouldn’t…not right now!
A good reason for this is that United States financial institutions still do not have a firm grasp on the value of a large portion of their assets. “The biggest US financial institutions reported a sharp increase to $610 billion in so-called hard-to-value assets during the third quarter…” (“Financial groups’ problem assets hit $610 bn”, http://www.ft.com/cms/s/0/ea576c7c-c729-11dd-97a5-000077b07658.html.) These assets, primarily mortgage-backed securities and collateralized debt obligations, don’t have active markets at the present time and they are difficult to value. I should be noted that the assets so identified “are many times bigger than the market cap of the banks.”
If you were a banker right now, where would you be focusing your resources at the present time? Would you be attempting to put new loans on the books that would pay off over several years’ time…or…would you be trying to get your arms around the value of these ‘level-three’ assets and see how you can minimize the damage they might cause…in the immediate future?
As long as these assets are on-the-books bank managements are going to muddle around, attempting to minimize the information that is released, and ask for the government to protect them from the downside through asset purchase programs that shore up asset price and the like.
This only distracts efforts and prolongs things! Until the banks are forced to write down their assets to realistic (some form of market) values and take their hits…they will be unable to focus on business and get on with their lives.
But there are other things looming on the horizon. Why would you want to put on new loans when you have people talking about the rising level of foreclosures? Elizabeth Warren of Harvard who is leading the oversight of TARP stated on television last night that in the next two years 8 million houses will be in foreclosure, an amount that is about 16% of the housing stock. That is one out of every six houses in the United States will be in foreclosure within the next two years!
And, why would you want to put on new loans when you have people talking about the rising level of charge-offs related to credit cards? (See “Charge-offs Start to Shred Card Issuers”, http://online.wsj.com/article/SB122895752803296651.html?mod=todays_us_money_and_investing.) All the statistics in this area point to a surge in charge-offs that will be faced by credit card issuers in the future.
Furthermore, there is still the unknown number and size of business defaults that are coming down the road. Of course, there are the auto companies…but, the condition of the credit wings of the auto companies reinforce the concern. Ford Motor Credit Co. is teetering on the brink of bankruptcy…as is GMAC. (“GMAC Bondholders Balk at Debt Swap”, http://online.wsj.com/article/SB122891574162094585.html?mod=todays_us_money_and_investing. Also see “Doubts on GMAC bank holding plan”, http://www.ft.com/cms/s/0/3ccf9eb4-c727-11dd-97a5-000077b07658.html.)
Financial institutions cannot make loans when they are so uncertain about the loans that they have already made. Financial institutions cannot make loans when there is so much uncertainty about the length and depth of the recession, the rise in layoffs and the falloff in employment. (Just released: Jobless Claims hit a 26-year high!) Those individuals and businesses that are seeking loans want to refinance or restructure…to gain control over cash flows so that they don’t run out of cash. Borrowing related to expanding business or creating jobs is almost non-existent. (“Executives Are Grim on Economy”, http://online.wsj.com/article/SB122896532391397279.html?mod=todays_us_marketplace.)
Should banks be lending now?
The answer to this is no…they are not social institutions.
Yes, it would be helpful to the economy if all banks opened their doors and started flooding the market with loans. Everyone would benefit…right?
OK, then…who wants to be first?
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