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HomeElizabeth Warren Calls for New Bank Stress Tests
Posted by Larry Doyle on February 11th, 2010 9:34 AM |
The initial Bank Stress Tests run by Treasury Secretary Geithner were largely a sham. I questioned as much last April in writing, “Bank Stress Tests: Major Sham?”:
As with any test, the results are only meaningful if the process and proctor have unquestioned integrity. The proctors for the Bank Stress Test are none other than Treasury Secretary Tim Geithner and Fed chair Ben Bernanke. Why is a testing authority of the magnitude of FDIC, led by Sheila Bair, not more involved in the process? Ms. Bair is the one individual in our country with the greatest level of interaction with and understanding of the student body, that being the banking industry as a whole and individual banks specifically.
What does the FDIC, led by Ms. Bair, have to say about the upcoming Bank Stress Tests? The New York Post provides a CHILLING perspective: (more…)
Sheila Bair and the PPIPs Tour: Cancelled
Posted by Larry Doyle on June 4th, 2009 7:56 AM |
What is going on with the PPIPs?
The Public Private Investment Program was “scheduled” to play a grand national tour in helping the banking industry cleanse itself of toxic assets. Did the “lead singer,” Sheila Bair, lose her voice? Did the “backup” in the form of the banks and investors lose their rhythm? Let’s “boogie” on over and check it out.
The FT reports, FDIC Stalls Sale of Toxic Loans:
Details of the Treasury’s toxic asset plan are in doubt after the Federal Deposit Insurance Corporation on Wednesday said it was suspending a test run of the legacy loans programme.
Sheila Bair, chairman of the FDIC, said development of the programme – designed to encourage investors to buy toxic, or legacy, loans from banks in order to restart the flow of credit – would continue but a pilot sale of assets was on hold.
“Banks have been able to raise capital without having to sell bad assets through the LLP, which reflects renewed investor confidence in our banking system,” Ms Bair said in a statement.
Is this all that it appears to be or is there more of a smokescreen on the stage inhibiting all parties – Uncle Sam, the banks, and investors – from “giving it their all”? Let’s dive into the mosh pit.
Sense on Cents views the situation as follows:
1. Impetus for banks to liquidate toxic assets (now called legacy assets by the Obama administration) is dramatically lessened. Why? Are they now less toxic? No, anything but that. With the relaxation of the mark-to-market accounting standard, banks can now “mark to model.” As such, banks are not forced to write the asset value down. In so doing, banks are now not compelled to sell it at a price which would incentivize an investor to purchase.
2. What about all of the equity capital raised by banks over the last few weeks after results of the Bank Stress Tests? Has that had an influence on banks need to raise capital via the PPIP?
Yes, but remember that the Bank Stress Tests only covered the largest 19 banks in our nation. These banks have been largely successful in raising new capital. That said, the toxic legacy assets remain on their books. Do not forget, though, that many small to medium sized banks and thrifts have a sizable amount of underperforming loans (residential mortgages, commercial real estate, corporate loans) on their books. These banking institutions were neither put through a “stress test” nor are they in a position to raise capital as easily as the large banks.
A successful PPIP program would have helped these institutions.
3. Hints of potential self-dealing by banks involved in the PPIP, both as seller of assets and buyer of assets, would have created a firestorm. I addressed this problem in writing, Putting “The Fix” in the PPIP.
4. With all due respect to the lead singer, Sheila Bair, all indications are that her handler – an individual named “Uncle Sam” – can not be trusted. Potential investors have been very reluctant to get overly involved with Sam. Why? In other performances, Sam has “strip searched” individuals upon entry and also played various iterations of “bait and switch.”
As the FT reports:
Banks and investors, meanwhile, had misgivings over taking part in the PPIP amid fears the politically charged climate could prompt Congress to change rules on issues such as executive compensation for those firms that participated in the programme.
While this tour is being cancelled, don’t get overly despondent. I am sure our Summer concert series will be able to provide plenty of entertainment going forward!!
LD
“Crony Capitalism”
Posted by Larry Doyle on May 29th, 2009 7:55 AM |
Has the economic integrity of the United States of America been reduced to the level of a banana republic? This theme is recurring through many channels. In the midst of a daily perspective, one may quickly and strongly dismiss such claims as overhyped libertarian fearmongering. I do not put myslef in that camp, but I do take pause to reflect on the long term implications of actions and programs enacted throughout our economic crisis.
Sin-Ming Shaw, a Thought Leader (left sidebar) here at Sense on Cents, provides sobering and thoughtful commentary on this topic in his article, “America’s Crony Capitalism.” While we all would like a swift, strong, and fast economic recovery, Shaw addresses the lack of integrity and transparency in the process. Many would maintain that “we did what we had to do” or similarly “these ends justifies these means.” I strongly believe the costs have not yet been paid, continue to accrue everyday, and will be astronomical over the long haul.
Shaw provides insights on the Bank Stress Tests:
The government had allowed bankers to “negotiate” the results, like a student taking a final examination and then negotiating her grade.
The truth is that the tests were not designed to find answers. Both Wall Street’s chieftains and the Obama administration already knew the truth. They knew that if the true conditions at many big banks were publicly revealed, many would have been immediately declared bankrupt, necessitating government receivership to stop a tsunami of bank runs.
Wall Street’s titans, however, had convinced Obama and his team that their continued stewardship was essential to getting the world out of its crisis. They successfully portrayed themselves as victims of a firestorm, rather than as accessories to arson.
Strong and indicting charges put forth by Shaw. The fact is, though, he is accurate in his analysis. Washington and Wall Street have sufficiently agreed in their assessment and analysis of this crisis. They have conspired on their entrance to solution. They will debate their exit knowing full well they are joined at the hip in the process.
The necessary rigor to expose and unearth the crime and criminals is severely lacking. Despite talk of a Financial Inquiry Commission, word from Washington is that stall tactics, turf wars, and partisan politics will once again rule the day in forestalling the needed indictments and prosecutions, both literally and figuratively, of those involved in this mess.
Our “Washington wizards” may declare short term victory (Austan Goolsbee interview yesterday), and point to recovering markets as evidence. Those who may care to look at the world from a larger and longer perspective, fully appreciate that history will judge this time using a different measure. Shaw asserts:
The world also wanted to see the US retaking the high road in reinforcing business ethics and integrity – so lacking under the last administration. As taxpayers had already put huge sums into rescuing failing banks, with the prospect of more to come, a transparent process to reveal how the money was being used was imperative.
All this said, our future for now is both clear and murky. The Obama administration, as well as the Bush administration, sacrificed integrity in the name of short term bank solvency. The efficacy of this move will be debated for years. The fact is, though, the cost of such a move is not fully appreciated. Shaw summarizes as much:
Like swine flu, crony capitalism has migrated from corrupt Third World countries to America, once the citadel of sound public and private governance. Is it any wonder that China is perceived as an increasingly credible model for much of the developing world, while the US is now viewed as a symbol of hypocrisy and double standards?
LD
Bank Stress Tests: Vigorous or Sham? Let’s Review HELOC Losses
Posted by Larry Doyle on May 20th, 2009 9:26 AM |
If you want to know just how inaccurate government loss assumptions were in the recently released Bank Stress Tests, let’s enter the world of HELOCs (Home Equity Lines of Credit).
Before we address loss statistics on HELOCs, let’s go to the Federal Reserve for a clearcut definition of the product. What is a Home Equity Line of Credit?
A home equity line of credit is a form of revolving credit in which your home serves as collateral. Because a home often is a consumer’s most valuable asset, many homeowners use home equity credit lines only for major items, such as education, home improvements, or medical bills, and choose not to use them for day-to-day expenses.
With a home equity line, you will be approved for a specific amount of credit. Many lenders set the credit limit on a home equity line by taking a percentage (say, 75%) of the home’s appraised value and subtracting from that the balance owed on the existing mortgage.
This mortgage product, often a second mortgage, developed as an enormously popular vehicle for homeowners to tap the equity in their home, especially during the period of significant home price appreciation earlier this decade. Make no mistake, though, it is just another form of leverage. (more…)
Summers and Jarrett Provide Hints of What Is To Come
Posted by Larry Doyle on April 27th, 2009 8:57 AM |
Larry Summers threw some cold water on the economy yesterday morning in stating his belief the economy will continue to decline for some time to come. Specifically,
“I expect the economy will continue to decline,” with “sharp declines in employment for quite some time this year,” Summers said today on “Fox News Sunday.”
Is Summers positioning the administration for a forecast more in line with IMF projections than the Congressional Budget Office? Recall that the IMF believes the U.S. economy will have flat to only slightly positive growth in 2010 with a double digit unemployment rate. Those projections are decidedly weaker than projections previously employed by the administration.
Is Summers starting to manage expectations downward given what he sees on the horizon? I believe so.
Furthermore, Valerie Jarrett, senior economic advisor, offered hints of administration plans for our banking system this weekend, in stating:
“Whether management changes occur, whether banks are asked to raise more capital, all of that’s going to come forth in the coming week,” Jarrett said on CNN’s “State of the Union” program today.
My instincts tell me that an advisor in Jarrett’s position releases that statement in preparation for exactly those moves. Will this be Vikram Pandit’s last week at Citigroup? Will Ken Lewis be forced out at Bank of America? I think the odds for either of those moves – if not both – just increased.
Management of any organization, including the White House, needs to maintain credibility by providing a reasonably accurate flow of information. The Sunday morning talk shows provide a forum and I think Summers and Jarrett provided solid hints at what is to come from the White House in the days and months ahead. Bloomberg provides a full summary of these points and others, Summers Says U.S. Economy to Decline ‘For Some Time.’
LD
Bank Stress Tests? Take Home Exams and Partially Self-Graded
Posted by Larry Doyle on April 24th, 2009 3:10 PM |
The Treasury just released the methodology used in assessing the vitality of the 19 largest banks via the Bank Stress Tests. The market took the release of this methodology as a big yawn. Treasury offered that the capital at some banks has been “substantially reduced.” Please tell us something we don’t know.
The worst case scenario used by Treasury still falls into the camp of what most analysts view as the expected scenario.
In reading deeper into some of the reviews of the methodology, I am struck by the leeway provided to the banks in measuring the credit quality of loans on the banks’ books and the likelihood of deterioration on those loans. I view that as the wiggle room described by Meredith Whitney earlier this week.
As Bloomberg reports, Fed Says Capital at Some Major Banks Is Substantially Reduced:
“Firms were allowed to diverge from the indicative loss rates where they could provide evidence that their estimated loss rates were appropriate,” the study said.
Regulators used the market shocks of the second half of 2008, when Lehman Brothers Holdings Inc. declared bankruptcy, as the model for testing banks with trading portfolios of $100 billion or more.
As they pored over banks’ loan and securities portfolios and off-balance-sheet liabilities, examiners increasingly focused on the quality of credits. They were concerned about wide variations in underwriting standards, a regulatory official said this week.
Supervisors concluded that banks’ lending practices need to be given as much weight as macroeconomic scenarios in determining the health of each bank, the official said.
The goal of the reviews is to keep the major financial institutions lending over the next two years, and to determine how much capital they may need if the economic slump worsens.
Supervisors will weigh how much capital each company holds, its ability to retain earnings over the next few years, future access to private capital and the extent any asset writedowns.
The Bank Stress Tests are not only largely a take home exam, but now we discover they are partially self-graded.
Call me suspicious.
In speaking with friends on Wall Street, I have heard from a number of individuals that there is still a large short base in a number of the financials. The short base is providing a strong cushion to that sector specifically and the market in general.
LD
The Red Sea
Posted by Larry Doyle on April 24th, 2009 11:26 AM |
While there is tremendous focus on the Bank Stress Tests, there remains limited focus overall on the centerpieces of our domestic housing finance industry. I am talking about Freddie Mac, Fannie Mae, and the Federal Home Loan Banks. Some have categorized these institutions as “black holes.” I believe a more appropriate designation would be The Red Sea as these institutions are awash in losses and continue to bleed money.
We may never know the circumstances surrounding the death of acting Freddie Mac CFO, David Kellerman, but there is a lot of focus by government officials on these institutions. There has been much less focus by private analysts. To that end, I am most grateful to Bloomberg’s David Reilly for reporting on Fannie Mae Creates Housing Mirage With Bum Loans.
Effectively, Fannie Mae is giving funds away to very high credit risk individuals who would have otherwise most likely already defaulted on their mortgages. As Reilly reports:
Give money away. That was a solution to the housing crisis mortgage giant Fannie Mae hit on last year.
Faced with growing numbers of homeowners unable to make mortgage payments, Fannie decided to fund loans to borrowers that were instant losers.
The point was to buy time. Even though those loans resulted in a $453 million loss, they helped keep troubled homeowners from defaulting. That meant Fannie for now didn’t have to make good on loan guarantees that may have cost it as much as $2.4 billion.
Make no mistake, this Fannie Mae program was also being utilized by Freddie Mac. Reports have come out that Freddie Mac’s Kellerman was pressured by Freddie’s accountants to improperly report their financials. In a similar vein, Fannie is playing another version of the “shell game” in order to buy time and forestall losses. (more…)
1st Quarter Earnings: What Have We Learned?
Posted by Larry Doyle on April 22nd, 2009 5:45 PM |
As we work our way through the 1st quarter earnings reports, what have we learned?
1. Earnings for certain tech companies (Google, E-Bay, Apple, Qualcomm) have beat expectations. The fact that these companies have large cash positions and are not overly burdened with debt has benefitted them.
2. Major money center bank (Citi, BofA, JP Morgan, Wells Fargo) earnings looked good on the surface but there remain real questions about the quality and transparency of the numbers. The Bank Stress Tests hang over this sector. Independent analysis indicates that banks in general are lending less as credit writedowns continue to increase. The earnings in these banks are focused more on trading activities and mortgage refinancing while core consumer banking is quite weak. The strength in trading and refinancing is directly linked to government supported actions (related to AIG, Fed purchases of mortgage and government securities). Many analysts question whether the earnings from trading are repeatable while core banking activity is a drag.
3. Earnings for regional banks (KeyCorp, First Horizon, Bank of New York, Suntrust, Regions) and banks without sizable trading businesses are weak across the board. Credit chargeoffs on existing loans (credit cards, residential, commercial mortgages, corporate loans) continue to move higher and limited demand for new credit are hurting these institutions. (more…)
We Still Have To Pay The Bill
Posted by Larry Doyle on May 5th, 2009 4:16 PM |
Equity markets have rallied back to unchanged on the year. Libor is back to 1%. Housing is showing signs of life. Other economic indicators are declining at a less rapid rate. Fed chair Bernanke provides a cautiously optimistic tone in his testimony today. So why am I as concerned as ever?
Where are the losses? Well, the results of the Bank Stress Tests have been leaked and 10 of 19 banks will supposedly need more capital. The commercial real estate market is totally dependent on the government committing to 5 yr loans via the TALF. I view the rebound in the residential real estate market as mortgage mayhem, not mortgage magic. None other than the IMF continues to highlight that our economy has another $1 trillion plus in losses.
I will grant Obama and Bush and their respective administrations credit for succeeding to this point in what they were trying to accomplish. However, that success, in my opinion, only means that longer term costs will be steeper and longer term benefits will be further off as a result.
Nouriel Roubini and Matthew Richardson address these points in today’s WSJ, We Can’t Subsidize The Banks Forever.
From my perch, I view Obama and team as indiscriminately allocating capital across too many programs. I am becoming somewhat concerned that Bernanke is wondering if they have put too many chips on the table.
Roubini and Richardson offer:
While the tone feels better, there is no doubt we still have challenges. Private enterprise’s interaction with Uncle Sam is one of the biggest challenges.
All this said, the government had a choice between immediate losses with excruciating pain or buying time with long term underperformance. They chose the latter.
We still have to pay the bill.
LD
Tags: Bank Stress Tests, bernanke's commentary, commercial real estate, equity market rally, government intervention, IMF estimate of losses, Libor at 1%, mortgage mayhem, TALF
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