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America Still Wants to Know, “Where’s the Money?”

Posted by Larry Doyle on January 20, 2010 3:00 PM |

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.


  • Fed Up

    Where’s the money?

    The bank of Goldman Sachs.

    They got it, they want it, and they are going to keep it.

    Thank you, America.

  • deecue

    Not only do Americans know they’re being taken for a ride, but with this kind of banking hubris, surely there is fraudulent criminal activity going on…in Congress and the big banking concerns…our elected officials have been in bed for a very long time…perhaps the voters will vote most of the incumbents out

  • coe

    LD – There can be no doubt that there are hundreds of billions of dollars (in some circles, that is a big number) of unrecognized losses lying fallow within the bank sector’s consumer, mortgage, and commercial loan books. Unfortunately, I am pretty sure that the legislative “cure” cannot and will not tackle the complexity nor root of the problem. Consider the ineffectiveness of our dysfunctional accounting model, the gyrations of the multi-headed hydra of the regulatory framework, and the absolute opaque complexity of the operating nuances of both large and community banks (Take a look at Citigroup’s earnings release and related tables this week if you want an Excedrin headache…e.g. the pretzel logic of transfers across Citi Holdings vs the “good” bank, the disclosures re derivatives as well as reserves – wow, one needs to be a Nobel prize winner in Economics to decipher the truth – and we all remember that Jack Nicholson screamed how “You can’t handle the truth!”)…maybe the legislators should really think about stuffing the truth back into the Glass-Steagall bottle…all I’m saying is that unless and until shareholders of these mostly public companies direct their Boards and management teams to concentrate on delivering honorable and ethical fundamentals, while managing BOTH operational and reputational risk and credit and interest rate exposures in a thoughtful way, then we are doomed to watch behavior follow incentives like day follows night…the fact that the government and we the taxpayers now own a considerable economic stake in many of these companies (DUH – and let’s not forget the trillions in Freddie, Fannie, FHLB, FHA, and FDIC Resolution pockets of exposures) cause enough to demand more of the intersecting elements of the system…and we should well heed the lesson gleaned from the MA election – it’s a mistake to try to tackle things in a comprehensive way a la the Administration’s tone deaf gaffes re the health care bill…let’s try the the small step for man, giant step for mankind approach…just one man’s point of view…

    • Larry Doyle


      The depths of your coverage are professorial. The impact of your points are immediate.

      The old ways did not work. The same old ways will not work.

      On behalf of all those who will read your insights and gain the wisdom of your perspective, I thank you.

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