Sense on Cents

Where’s the money?

America still wants to know where is the money that has flushed the banking system, but not flowed through to the American economy. That question is the convenient excuse put forth by Martha Coakley, her supporters, the Democratic establishment, and large segments of the media for the Democratic embarrassment in Massachusetts yesterday.

“Where’s the money” is a very fair question. My answer today is the same I offered on December 29th, 2008 when I wrote, “Where’s the Money??…”:

In large measure, our mainstream media has done an exceedingly poor job as to highlighting the dynamics at work in the banking system. The media is largely pandering to the public on this topic. Let me address the question as to “where’s the money?”

The business of banks is to lend money and in so doing they provide the liquidity to keep our economy moving. The banks lend money in a number of sectors, but they can be summarized as follows: credit cards, residential mortgages, commercial mortgages, and corporate loans. In addition to their lending role, most banks maintain a separate investment portfolio to further augment their revenue.

We have maintained that as a result of these investment activities, banks retained a wide array of what are now qualified as “toxic mortgage assets.”  While globally banks and investment banks have taken $1 trillion in write-downs on these assets, by my estimation and confirmed by independent research and analytics there are likely at least another $750 billion in write-downs yet to take on these assets.

So, “where’s the money?” It has already been lent and increasingly won’t be returned. Reserves are being built against these current and expected losses.

Are American banks still accruing reserves against losses and expected future losses on their outstanding loans? Yes sirree.

After a full year of generating enormous revenues and accruing reserves, American banks are still faced with significant embedded losses. Where are a lot of the losses currently? Home equity loans. Bloomberg addresses this reality in writing, Treasury Delay on Home-Equity Debt Imperils Housing:

“The issue of the second liens has to be escalated,” said Richard Neiman, New York’s banking superintendent and a member of the Troubled Asset Relief Program’s Congressional oversight panel. The government should consider forcing banks to participate and to recognize the “true value” of second liens, he said.

Bank of America, Wells Fargo, JPMorgan Chase & Co. and Citigroup Inc. carry such mortgages at about $150 billion more than their value, according to estimates by Joshua Rosner, an analyst at Graham Fisher & Co. in New York.

Equity lines and other second mortgages rank junior to typical mortgages, meaning they get wiped out in a foreclosure unless sale proceeds from a seized home exceed the first debt.

So there you go. Banks are still sitting on boatloads of home equity loans which are massively overvalued on the banks’ books. While this reality is the primary reason why banks are not providing credit, it does not fully explain America’s rage as expressed in Massachusetts yesterday.

America is steamed for two reasons:

1. Neither Washington nor Wall Street is honest about the real health of the American banking system.

2. If the banking system is sitting on $150 billion in unrecognized losses, then why and how are regulators allowing Wall Street banks to pay out approximately $140 billion in bonuses?

America may not fully know the particulars of writedowns, embedded losses, and the like, but the American public knows when they are getting taken for a ride. The Washington establishment has had more than a year to deal with this issue. The establishment curried favor with their Wall Street cronies rather than truly protecting the American public.

Americans are getting ready to repay the favor at the ballot box in 2010.

LD

This entry was posted on Wednesday, January 20th, 2010 at 3:00 PM and is filed under Banking Institutions, General, Wall Street. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.