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Posts Tagged ‘Bank Stress Test’

The Scarlet Letter

Posted by Larry Doyle on April 16th, 2009 12:44 PM |

Competitive people by their very nature like to win. There is nothing wrong with that. In fact, our country was built upon risk taking entrepreneurs who blazed trails and opened markets in the pursuit of profit.

Clearly, we have experienced enormous abuses in many parts of our economy over the last decade. The fact that rating agencies and regulatory authorities have been negligent – if not complicit – in the process has only added to the turmoil. In my opinion, our legislators have been as much a part of the problem as the solution.

For many of those who have either mismanaged their business or abused business ethics along the way, the government has stepped in with billions in support. Our markets have suffered as a result.

Against this backdrop, the major rub in the world of finance is distinguishing between the strong banks and the weak banks. Well, Jamie Dimon issued as aggressive an assessment as I have ever seen on this specific topic. In a Bloomberg report on JP Morgan’s earnings,

Chief Executive Officer Jamie Dimon, who today reported first-quarter profit that beat analysts’ expectations, said his firm could repay U.S. government rescue funds “tomorrow.”

Dimon, called money received through the Troubled Asset Relief Program “a scarlet letter.”


Mum’s the Word

Posted by Larry Doyle on April 10th, 2009 12:40 PM |

shhhhThe movie Goodfellas provides a wealth of material for comparative analysis of the markets. The “insider activity,” the “fooling around,” “the payoffs,” and “the gambling” all make for great drama on the screen. Truth be told, one does not have to look all that hard to find striking similarities to certain activities in the world of Wall Street, and for that matter, Washington.

One of my favorite scenes in the movie occurs after the boys make the big heist. Immediately, the word is put out to keep your mouths shut and no indications of newfound wealth.

Back to reality. In terms of “putting the fix” into the world of our major money center banks, isn’t the relaxation of the mark-to- market the “newfound wealth”? Isn’t the “keep your mouths shut” the equivalent of the Treasury telling the banks not to comment on results of the Bank Stress Test? Speaking of the Bank Stress Tests, Bloomberg reports:

The U.S. Federal Reserve has told Goldman Sachs Group Inc., Citigroup Inc. and other banks to keep mum on the results of “stress tests” that will gauge their ability to weather the recession, people familiar with the matter said.

The Fed wants to ensure that the report cards don’t leak during earnings conference calls scheduled for this month. Such a scenario might push stock prices lower for banks perceived as weak and interfere with the government’s plan to release the results in an orderly fashion later this month.

Clearly the Fed and Treasury are trying to keep their “boys” quiet and lay low while the real regulators of the market, that being honest investors, are walking the beat.

If any of the boys talk, then the leaders of the family won’t be able to coordinate the stories and hoodwink the public.

Whatever happened to, “as long as you tell the truth, you don’t have to worry about having a bad memory”?

It seems we are operating much more in the realm of, “well, I can tell you but . . . ”

The Goodfellas: Henry Hill, Jimmy Conway, Paul Cicero, and Tommy DeVito

The Goodfellas: Henry Hill, Jimmy Conway, Paul Cicero, and Tommy DeVito

Henry . . . Jimmy . . . Paulie . . . Tommy . . .

Please let me know who in our government and world of finance are most appropriate to play each of these individuals? Let’s have some fun.

Behind the Scenes . . .

Posted by Larry Doyle on April 9th, 2009 7:14 AM |

A mixed bag of items you may have missed in the midst of some of the daily noise and pandering:

1. Bloomberg reported this morning that the government (Treasury and Federal Reserve) expects ALL 19 banks undergoing the Bank Stress Tests to pass!! Wahoo!! Bloomberg further reported, however, that certain banks may continue to need ongoing capital injections. Would the proctors of the exam please release the questions so the FDIC can provide a more thorough review? What a SHAM.

Please review, Bank Stress Tests: Major Sham?

2. The Federal Reserve yesterday released the minutes of its March 18th meeting. The Fed revised its projection for a bottoming of unemployment to mid-2010 from the end of 2009. Additionally, they lowered their projections for a turn in the economy. Lastly, in regard to the Fed’s purchases of government and mortgage-backed securities, they had differing opinions as to how to approach these purchases. The FT reports:

one Fed policymaker wanted to stick to buying mortgage-related securities. Another wanted to add only more Treasury purchases. Buying both was a way to keep everyone happy and hedge the Fed’s bets in the light of uncertainty as to which type of asset purchase might prove effective.

“Several members noted that working across a range of assets and instruments was appropriate when the effects of any one tactic were uncertain,” the minutes say.

Michael Feroli, an economist at JPMorgan, said the “uncertainty rationale” was novel. It added up to an experimental, portfolio-based approach to policy rather than one driven by strong conviction.

For what it is worth, on the day of the Fed’s announcement to buy both government and mortgage-backed debt, rates rallied close to 40 basis points, a truly historic move. Since then, those rates have totally reversed. While the Fed is buying, obviously somebody else is selling. Who may that be? The U.S. Treasury for one. I mean, the Treasury could literally walk the government notes and bonds down the street in Washington to the Fed and put these securities in their vault while the Fed simultaneously puts cash deposits into the Treasury vault.

Do you get the sense, though, that Fed officials are winging it to a large extent? I do. (more…)

Upon Further Review

Posted by Larry Doyle on February 26th, 2009 3:02 PM |

The FDIC just released its 4th quarter 2008 report. Read it and weep . . .

1. FDIC had a $26bln loss in the 4th quarter and now has only $18bln in reserves. (Little doubt that FDIC premiums — insurance premiums that banks must pay — will be increasing to rebuild reserves. All costs ultimately flow through to customers). In fact in today’s WSJ, FDIC Poised to Double Fees Charged to Lenders

2. banking industry had first loss in 4th quarter 2008 since 1990

3. troubled institutions rose to 252 from 171 in 3rd quarter

4. banks have taken a total of $750 billion in writedowns on problem assets!!

5. banks have increased loan loss reserves to $69 billion from $32 billion

These numbers in conjunction with the Bank Stress Test lead me to make the relatively easy projections that:

 — Government will have significant stakes in certain major institutions while continuing to take over and shut down many smaller institutions.

 — Banks will continue to look to build reserves against future losses. This development along with a limited if not nearly non-existent “shadow banking system” (securitized consumer loan market) will mean that credit will be tight.

 — As banks need to preserve capital, their ability to recruit and pay people will be severely restricted. I know employees are looking to leave these organizations to work at smaller shops without these problems.

 — Although bank stocks are currently getting a bounce given government indications of support, these are not companies that have attractive growth prospects under these conditions.


Going “All In”

Posted by Larry Doyle on February 26th, 2009 10:59 AM |

The government yesterday released the specifics of the Bank Stress Test to be undertaken by the 19 major banking institutions in our country. Those details in conjunction with the testimony provided this week by Treasury Secretary Geithner and Fed chair Bernanke provide a very clear signal as to the government’s approach to our economic problems. In my estimation they are clearly indicating they are going “all in!”

Before we get to the market reactions, allow me to share insights from a highly regarded bank analyst and then comment myself. 

Most analysts and economists view the government’s worst case scenarios under the bank test as not much more severe than what many already expect. I’m an optimist by nature but live by the mantra of hope for the best, prepare for the worst. The market will discount the government’s worst case. (more…)

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