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HomeBank Stress Tests: Threading the Needle
Posted by Larry Doyle on April 19th, 2009 12:44 PM |
For those involved in assessing the solvency of our domestic banking system, the prospects of releasing the results of the Bank Stress Tests are frightening. How do Secretary Geithner, Fed chair Bernanke, regulators, and President Obama himself maintain credibility with the markets while simultaneously growing confidence in the public?
As Bloomberg reports, Bank Regulators Clash Over U.S. Stress-Tests Endgame. Secretary Geithner clearly was trying to buy time when he proposed the Bank Stress Test model. The day of reckoning will soon be upon us. The administration will release the model used on April 24 and the results on May 4th. However, there are enormous conflicts within the administration and the regulatory community as to how to release the information and how much information to release.
As Bloomberg highlights,
The U.S. Treasury and financial regulators are clashing with each other over how to disclose results from the stress tests of 19 U.S. banks, with some officials concerned at potential damage to weaker institutions.
With a May 4 deadline approaching, there is no set plan for how much information to release, how to categorize the results or who should make the announcements, people familiar with the matter said. While the Office of the Comptroller of the Currency and other regulators want few details about the assessments to be publicized, the Treasury is pushing for broader disclosure.
The disarray highlights what threatens to be a lose-lose situation for Treasury Secretary Timothy Geithner: If all the banks pass, the tests’ credibility will be questioned, and if some banks get failing grades and are forced to accept more government capital and oversight, they may be punished by investors and customers.
“There are plenty of ways to go wrong here,” said Wayne Abernathy, executive vice president of the American Bankers Association in Washington. “It might have sounded good at the time, but now looking back, it has far more risk than benefit.”
What will come of this? The pressure from all corners is increasing on Geithner. Can he snatch victory from what may appear to be a lose-lose situation? Can he somehow or other get the results forestalled and maintain credibility? Can he keep the various constituencies placated? Truly, he needs to “thread the needle.”
Listen to NQR’s Sense on Cents with Larry Doyle this evening from 8-9 p.m. as I discuss how I think Secretary Geithner will try to thread the needle.
LD
Tune in Sunday Evening to NoQuarter Radio’s Sense on Cents with Larry Doyle
Posted by Larry Doyle on April 19th, 2009 7:34 AM |
Please join me Sunday evening from 8-9 p.m. ET for NoQuarter Radio’s Sense on Cents with Larry Doyle. 
The developments in the markets, economy, global finance, Wall Street, and Washington are occurring at breakneck speed. I will try to slow things down a bit and provide a sense of perspective. What did we learn in the markets over the last week and what does that mean for the weeks and months ahead? We will address a wide range of issues, including: transparency and quality of earnings, Goldman’s and JP Morgan’s initiative to pay back TARP, and upcoming bank stress test results.
In addition, my guest Sunday night will be Chris Lowney. Lowney, formerly a Jesuit, was named a Managing Director of J.P. Morgan while still in his thirties and held senior positions in New York, Tokyo, Singapore and London until leaving the firm in 2001. He served successively on Morgan’s Asia-Pacific, Europe, and Investment Banking Management Committees. Lowney’s first book, Heroic Leadership: Best Practices from a 450-Year-Old Company that Changed the World, was the #1 ranked bestseller of the CBPA (Catholic Book Publishers Association) and was named a finalist for a 2003 Book of the Year Award from ForeWord magazine. It has been translated into ten languages. (more…)
“I Want the Truth!”
Posted by Larry Doyle on April 15th, 2009 6:44 AM |
Recall how Hank Paulson compelled every major money center bank to accept government funds via the TARP last Fall. Paulson was concerned that if every institution did not participate in the TARP that the market would punish those institutions receiving funds.
The lack of delineation then and still now is creating stress for individual institutions and the market as a whole. Why? Markets thrive on two factors: capital and information. We have witnessed over the last year what a lack of capital in the form of credit has meant for the economy. We are also experiencing what a lack of information means.
Whether it is industrial and tech companies not providing guidance about their future earnings (GE, Intel just yesterday), banks utilizing relaxed mark-to-market accounting, or now banks being lumped together on Bank Stress Test results, the markets are sufferring as a result.
Are we seeing a version of the classic scene in a A Few Good Men? Who can ever forget this exchange?
Jessep: You want answers?
Kaffee (Tom Cruise): I think I’m entitled to them.
Jessep: You want answers?
Kaffee: I want the truth!
Jessep: You can’t handle the truth! Son, we live in a world that has walls. And those walls have to be guarded by men with guns. Who’s gonna do it? You? You, Lt. Weinberg? I have a greater responsibility than you can possibly fathom. You weep for Santiago and you curse the Marines. You have that luxury. You have the luxury of not knowing what I know: that Santiago’s death, while tragic, probably saved lives. And my existence, while grotesque and incomprehensible to you, saves lives…You don’t want the truth. Because deep down, in places you don’t talk about at parties, you want me on that wall. You need me on that wall.
We use words like honor, code, loyalty…we use these words as the backbone to a life spent defending something. You use ’em as a punchline. I have neither the time nor the inclination to explain myself to a man who rises and sleeps under the blanket of the very freedom I provide, then questions the manner in which I provide it! I’d rather you just said thank you and went on your way. Otherwise, I suggest you pick up a weapon and stand a post. Either way, I don’t give a damn what you think you’re entitled to!
Kaffee: Did you order the code red?
Jessep: (quietly) I did the job you sent me to do.
Kaffee: Did you order the code red?
Jessep: You’re goddamn right I did!!
Mum’s the Word
Posted by Larry Doyle on April 10th, 2009 12:40 PM |
The 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
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.
“Beholden to Failed Banksters”
Posted by Larry Doyle on April 9th, 2009 3:56 PM |
Any investor or manager with a degree of experience knows that the “first loss is the best loss.” What do I mean by that? Once the market detects a loss or a weakened position, the price for that asset will remain capped unless and until the asset is sold or liquidated. This price action occurs in every sector of every market.
Welcome to the world of global finance 2009. As banks, insurance companies, hedge funds, and other financial entities deal with losses, we see a lack of aggressive posture being taken on dealing with these losses. Why? Once moral hazard is violated with a single entity, every other entity will look to violate it as well.
Immediate losses are forestalled in hopes that they will be covered or disguised. However, every loss ultimately must be recognized. By whom and how is the question.
At this juncture, more of the losses in our financial system are being directed toward the taxpayers. How? Via the wide array of government programs. What is the cost? A likely underperforming economy due to a lack of credit, and higher taxes to offset lower revenues. (more…)
Bank Stress Tests: Major Sham??
Posted by Larry Doyle on April 8th, 2009 11:35 AM |
Why is it urban school dropout rates are 50%? Well, I am sure there would be as many reasons for that horrendous statistic as there are dropouts. The fact of the matter is, though, the state of urban education has promoted a phenomena known as “social promotion.” If students aren’t qualified to do the work, testing has been gamed, standards have been lowered, and corners have been cut. As a result, urban education at this stage is an unmitigated disaster. What does this have to do with the current state of our economy and the world of finance? I am glad you asked.
If banks, much like students, are not required to pass rigorous testing, then “social promotion” in finance will produce results not unlike those in education–underperformance and ultimately an inability to compete on the global stage.
Against that backdrop, I personally looked forward to the results of the Bank Stress Tests. Let’s finally get an honest assessment of the “students.” Let’s see how they have performed and let’s project to see how they will perform!!
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. (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.
LD
Repaying TARP Funds: Playing Ball With Uncle Sam
Posted by Larry Doyle on April 20th, 2009 10:27 AM |
Last evening on NQR’s Sense on Cents with LD (note: you can listen to audio recording of the show from the BlogTalkRadio player in the right sidebar), I proposed that the Obama administration would not release individual results of the Bank Stress Tests. I further added that I thought the administration may encourage stronger banking institutions to channel funds to weaker institutions. In so doing, these stronger banks – such as JP Morgan and Goldman Sachs – may actually take equity stakes in the weaker banks. Will JP Morgan and Goldman bear the entire risk of those equity stakes? Doubtful. Uncle Sam will likely negotiate terms along the lines of other bank bailouts in which a strong bank provides capital but the government bears the brunt of the losses.
As I write this, Bloomberg reports Bank of America is speculated to need another $10-20 billion in equity capital. BofA’s earnings were reported this morning at .44 earnings per share versus an expectation of approximately .03 earnings per share. Analysts are panning the earnings due to the propsects for ongoing increases in credit losses within BofA’s loan portfolio. BofA’s stock is down approximately 8% in early trading.
If BofA does need another $10-$20 billion in equity capital, where might it come from? In my opinion, in a non-public transferral of capital, those funds may come from JP Morgan and/or Goldman Sachs, and would actually be recycled TARP funds. Effectively, JPM and GS will merely be a conduit for increased government funds injected into BofA and Citigroup, as well. Remember JPM has $25 billion in TARP funds, Goldman has $10 billion. If BofA took $15 billion of these funds then Citi could receive $20 billion. What would JPM and GS receive in return? I would think these negotiations would be private and not released, although given that the capital provided is public money all information should be released. (more…)
Tags: Bank of America's earnings, Bank Stress Tests, FDIC-backed debt, Goldman Sachs repaying TARP, JP Morgan repaying TARP, Larry Summers comments on repaying TARP, TARP fund repayment
Posted in Bank Stress Test, Banking Institutions, TALF, TARP, Wall Street | 2 Comments »