Sidetalk

The latest from Satyajit Das analyzes the question of where bank earnings will likely go from here.  It’s a thoughtful and well reasoned piece.  His conclusion:

“Glamorous banks reliant on “voodoo banking” may find it difficult to achieve the high performance of the “go-go” years.  Banks with sound traditional franchises that have avoided the worst excesses of the last 10-15 years will do well in the changed market environment. Such old fashioned banking may ironically do well in the “new” environment. Interest rates that they charge customers have increased. Bank deposits have become far more attractive than other investments. Stronger banks have also benefited from a “flight to quality”.

Will the recovery in bank stocks take the form of “V” or “U”? It may be a “L”. With the Northern Rock and Bear Stearns bailouts, central banks and governments have signaled that major banks are “too big to fail”. This is a necessary but not sufficient condition for recovery of bank earnings and stock prices. The recovery might take the form of a “L” (Kirsten ITC font) – note the small upturn at the far right of the flat bottom.”

Read the entire article:  http://www.eurointelligence.com/article.581+M51e05e0377e.0.html

No, we’re not out of the woods.  B&B in  the UK and now Lehman on Wall Street are showing that when the tide goes out, we see who’s swimming naked.  Simply put, it’s not a good sign when investment banks and banks have to use credit to survive.  As observed so well today, what goes up must come down harder:

“Lehman is in serious trouble on Wall Street. But that’s nothing compared to Bradford & Bingley in the UK, which may be wiped out in a matter of days. As you can see below, they were very close a few days ago. A bank run has been avoided so far because of an alleged government guarantee for every first £35.000 in deposits. What that is truly worth remains to be seen if bank failures come fast and furious in the UK.

That scenario is not that far out in left field; most large UK banks are caught up in rights issues. That over-supply means that to get any new capital, they’ll have to sell themselves dirt cheap. Which in turn will provoke enormous anger among shareholders. It could happen very soon. But yes, it’s still possible that Gordon Brown sells the future of his people to save the banking system.

Not that Lehman is looking good, mind you, they’re going “money intravenous” for the third time in a few months, and they lost over 50% of their values at the same time. If that trend doesn’t stop, there is no way out of failure or a fire-sale. And following tight on the Lehman heels, Wachovia is lined up for the emergency room, and perhaps the last rites. Or, you guessed it, a fire-sale.

People are often asking for “the” moment, and “the” writing on the wall. How about this: “Sales of [US] commercial properties were down 71 per cent in the first quarter compared with a year earlier.[..] Commercial property prices in the US in February saw their sharpest decline since records began nearly 15 years ago.”

http://theautomaticearth.blogspot.com/2008/06/debt-rattle-june-3-2008-what-goes-up.html

Despite some variation, average ratio of high risk assets to equity was 188% across these major banks:


Many thanks to Russ Winter for chart and graphic!

For curiosity’s sake, take a look at the historical dollar amount of borrowing by depository institutions (banks) from the Federal Reserve.  It is hard not to notice that what we have here is unprecedented over the last 100 years.  When you hear someone say the credit crisis is almost over, check this chart and think again.

Total Borrowings of Depository Institutions from Fed. Reserve 1910 - present (Billions $US)

This in Wednesday, via a Reuters conference in London: Hugh Hendry, CIO of hedge fund Eclectica Asset Management, declared that financial stocks could take 25 years to recover from the subprime disaster and added that Citigroup Inc. would fall below $10 a share. (more…)

Germany’s Federal Financial Services Authority is known as BaFin. According to information obtained by SPIEGEL, an internal BaFin report says that shortfalls at finance institutions worldwide could end up totalling $600 billion (€380 billion). The shortfall comes as a result of ill-advised speculation on the US subprime market and resulting jitters in markets worldwide. BaFin says that its prognosis is merely a worst-case scenario. “Given what we know about the current situation on the markets, we presume that a total of $430 billion is more probable,” the 16-page report says. (more…)

Citi says the “great unwind” has begun: We are now confronted by a broad bloodbath in the credit markets,” Citigroup said. ” The most leveraged paper is falling in value because it is leveraged, and now the least leveraged paper is also falling in value because it is owned by leveraged investors.”   Investors should also avoid hedge funds themselves, along with private equity, Citi added. Both types of investment rely at least partly on borrowed money to generate returns. <snip> Leveraged economies, like the U.S., should also be avoided, in favor of emerging market countries, which have reduced borrowing, the bank advised. “With less capital sloshing around the world, and the dollar falling, the U.S. may have to compete more to finance its deficits. http://www.marketwatch.com/news/story/great-unwind-has-started-avoid/story.aspx?guid=%7B1DC25DFD%2D3543%2D4CF4%2DBE26%2D74EA4B9C9330%7D&dist=hplatest

 Jim Rogers’ reaction to Fed moves on Bloomberg  

Click on the thumbnail and weep.  This chart is the latest, and was updated as of 2/22/08.  It’s dramatic. ↓

Now click on this thumbnail to see latest (as of 2/15/0 Fed chart for banks’ total borrowings from the Federal Reserve -  without precedent it would seem.  ↓

                      For an excellent discussion of the meaning of all of this, check out “Borrowed Reserves and Tinfoil Hats” from Mish’s blog:  http://globaleconomicanalysis.blogspot.com/2008/02/borrowed-reserves-and-tin-foil-hats.html

Digested version:  bankers ignorant, reckless.  The Treasury committee of the Parliament has now issued its report after hearings conducted in 2007.  Readers’ Digest version:  bankers and credit rating agencies were ignorant, reckless.  As reported by the Telegraph, today’s report says that banks had not understood the financial products they were buying and selling.  “The committee singled out Lord Aldington, chairman of the Deutsche Bank’s London branch, who declined to explain the difference between a CDO and a CDO-squared when he appeared before them.”  The committee also lambasted the credit rating agencies for not responding earlier to the crisis in the US sub-prime mortgage market, and for alarming investors by making large downgrades at the height of the crisis.  Read the full report (pdf) here: 

parliamentbanks0308.pdf

   → You can use the FDIC’s EDIE online system to calculate the insurance coverage on your bank accounts:

    http://www2.fdic.gov/edie/

  → Read Sheila Bair’s (FDIC Chairman) speech from 2/25 calling for a return to sane lending standards: 

    http://www.fdic.gov/news/news/speeches/chairman/spfeb2508.html