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

One of the most astute commentators on the economy in Florida and real estate particularly is Mike Morgan. His latest piece is fascinating but makes for a none so cheerful read. He thinks as goes FL goes the rest of the U.S. Is Florida a crystal ball we should all be looking into?

Excerpt: “I was going to call this “Banks March Us Into Depression,” or maybe more fitting is . . . “Complete Collapse of US Banking System.” Folks, that is what we are looking at. I don’t see any way around it. What we’re seeing here in Florida, is your crystal ball. And what happens here, is coming to a town near you . . . soon. This past week I didn’t write anything, because what I am seeing unravel is disturbing to the point I had to question what I was seeing and hearing. So I decided to take as much time as I needed to digest it all, and then put something together for you. So here goes . . .

I could prepare volumes of spread sheets with Bernankesque numbers. I could talk about commodity prices and oil and third world politics and a dozen other metrics that all lead to the same conclusion. But let me give you a ground zero look. That’s what I do best. I will leave the manipulation of the numbers to the folks on Wall Street that do it best. The same folks that have created the precipice they will soon push us off.

I spend a great deal of time dealing with Asset Managers hired by banks stuck with REOs. So as not to re-hash the events leading to the housing crisis, I will not discuss the free-money policies of the past, and I will not discuss the absolute lack of accountability in making the bad loans of the past. Let’s just deal with how the banks are attempting to recover.

Unfortunately, banks are not making a realistic effort to address the crisis. That may be because they cannot. As the banks and builders have announced write down after write down, my mantra has been . . . and continues to be . . . NOT ENOUGH - NOT ENOUGH - NOT ENOUGH. I still believe that. The builders and the banks have underestimated the magnitude of the problem, and they continue to do so. Analysts continue to look at the rear-view mirror and attempt to manipulate numbers based misguided historical assumptions.” Full article floridacrystalball

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!

euroarealendingsurvey0408  ←link to full report

The Euro Area lending survey for April 2008 is out, and shows considerable tightening in both lending standards and in loan demand across consumer, enterprise and mortgage credits. 

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)

From the “Mogambo Guru”:

“This same bankrupt America is getting ready to send out $160 billion in ‘economic stimulus’ checks, where the government is literally giving people free money even though the government is borrowing like crazy just to keep afloat, which means that we that are truly, truly toast. (more…)

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…)

Click through to see New York Federal Reserve Bank’s March 2008 chart explaining TAF, TSLF, among many others including acceptable collateral for each type of lending:

forms_of_fed_lending.pdf

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

And now…..it’s down to $2.00 (sold to JP Morgan and ….the US taxpayers via Fed’s guarantee of BSC liabilities as part of the deal).  This is a 3 month chart.  Wondering how an investment bank worth almost $100 3 months ago is suddenly worth $30 last Friday, and $2 today?  Answer:  reality. 

The Federal Reserve has certain assets — about $800 Billion in Treasuries.  Once it lends away the additional $200 Billion announced today, and counting the TAFs (Term Auction Facilities), about one-half of the Fed’s reserve of Treasuries will be gone.  This chart shows the Fed’s reserves before this additional $200 billion is given out, so you’ll have to continue that line downwards to imagine what it’ll look like by the end of March:

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

Der Spiegel reports that Germany is facing its worst banking crisis since 1931, with the government fearing the domino effects of allowing the insolvent banks to fail.  For now, capital infusions keep coming and instantly vanishing into thin air.  Included in the report is a very interesting story on WestLB, a bank that was insolvent and which was initially turned away at the door when it went begging for capital to stay afloat.  This shows how ugly can get:  “ In a crisis meeting two weeks ago, the two savings and loan associations in North Rhine-Westphalia that own half of WestLB had to admit that they were unable to come up with €1 billion in fresh capital for the ailing bank. They insisted that it was up to the state to cover another €3 billion in risks. (more…)