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Posts Tagged ‘bank earnings’

How Long Can Uncle Sam Rig the Game?

Posted by Larry Doyle on May 13th, 2010 5:32 PM |

Is the market rigged?

Actually, the question of whether our markets are rigged or not is becoming less and less a question and more widely accepted as fact. This reality is evidenced by the totally incredulous evidence that four major banks on Wall Street had perfect (not one negative trading day) first quarters.

Some may think this is good for our economy. I am not one of them. Why? (more…)

Banks: What Lies Ahead?

Posted by Larry Doyle on May 12th, 2009 7:34 AM |

If the major money-center banks are neither going to be nationalized nor fail, at least for the time being, then what does the future hold for these institutions? Uncle Sam has provided massive backstops via a number of programs, but a socialized banking system is not consistent with free market capitalism.

Fed chair Bernanke addressed the three major risks — operational, liquidity, reputational — for these institutions moving forward. Let’s address each individually.

1. Operational: While Uncle Sam (Fed and Treasury) has done a lot (some would say too much) for the large banks, he can’t literally run the banks. With no “shadow banking system” (please read “All The King’s Horses and All the King’s Men“), reluctant consumers, and defensively postured corporations, how do the banks manage their increasing level of loan defaults? On top of that, how do they actually grow their business when, by necessity, they are forced to cut their own expenses?

Banks can only “massage” their numbers via the relaxation of the mark-to-market accounting rule for a brief period. While a few of these institutions have large capital market businesses which have recently provided solid returns, those are high risk operations and earnings from that division are volatile. Underwriting fees for new issues of debt and equity were at record lows in the 1st quarter 2009.

Will banks be able to manage their traditional “bricks and mortar” operations (underwriting and holding quality loans) and generate long term growth in this sector? Good question and a real risk.

2. Liquidity: Without Uncle Sam backstopping the short term markets, will banks be able to source sufficient daily liquidity to manage and grow their business units? Bernanke is setting the stage for the time when the Fed needs to drain liquidity from the system so the inflation monkey – if not the hyperinflation monster – does not spin out of control. (please read “Putting The Genie Back Inside the Bottle“)

In layman’s terms, how does the Fed wean the banking system from the drugs that have kept it alive? Will some of the banks be zombie-like, if not outright brain dead? Would we have been better off letting certain institutions fail? If banks can’t source their own liquidity to “live a healthy life,” perhaps Uncle Sam has been more of a benevolent old man when a strict disciplinarian was more in order.

3. Reputational: If banks are challenged to grow and source liquidity without Uncle Sam’s assistance, will they start to cut corners, and once again push the envelope out of desperation for earnings? Please read, “The Greatest Risk,” a recap of the risks undertaken by Bear Stearns, which played a major role in that 100 year old firm’s downfall. Desperate people do desperate things and similarly desperate institutions will also do desperate things. We have already seen ample evidence of extreme measures taken by banks to jeopardize the reputation of the institution in pursuit of the almighty dollar. In this realm, who will be watching? What type of regulations will be implemented and enforced?

On all these fronts, the risks faced by the banks are significant. The risks faced by consumers are also significant. If there is one thing we have learned throughout this ordeal, it is the fact that we can not blindly trust what executives of banks, as well as other institutions, lead us to believe. We must probe, look beyond the numbers, and seriously question the integrity of the data. If we don’t, then we increase our own risks as we navigate our own personal economic landscapes.


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…)

Is The Economy Turning The Corner?

Posted by Larry Doyle on April 21st, 2009 7:05 AM |

Markets correct by price (both up and down) and time (extended). Despite the 3+% price declines in equity markets yesterday, the markets are up approximately 20% since the market lows seen on March 6th. Some analysts believe this upward move signals an improvement in the economy largely due to the fiscal and monetary stimulus provided by Uncle Sam. I am not in that camp.

A few emerging economies, specifically China, have improved. Can the rest of the world, including the U.S., expect those economies to be the engine for a global turnaround at this juncture? I do not think so. I still see the following issues on our domestic horizon:

1. continued deterioration in loan performance on bank books

2. a banking system woefully capital deficient

3. an automotive industry which must downsize

4. municipalities which are faced with the predicamant of capital shortfalls and underfunded pensions

5. commercial real estate just starting to experience real defaults

6. a housing market with increased foreclosures pressuring prices

7. an unemployment rate clearly headed toward double digits

Earnings reports for the first quarter have been mixed. I view the recently reported bank earnings as largely “managed” via accounting gimmicks. Meredith Whitney believes the earnings for major money center banks will turn negative in the 2nd quarter. The regional banks, without the benefit of large capital market activities but facing credit writedowns, report earnings today. Key Corp just reported a loss of $1.09 eps (earnings per share) versus an estimate of -.21. I suspect we will see losses from other regional banks of a similar magnitude. (more…)

Increased Foreclosures: An Equal and Opposite Reaction

Posted by Larry Doyle on April 15th, 2009 11:53 AM |

There are tremendous cross currents in residential housing. Over the course of the last few months we have seen the following:

-an uptick in housing starts
-an uptick in new home sales
-a decline in home prices as indicated by the S&P/Case-Shiller Index

Do not forget, though, that Uncle Sam had Freddie Mac and Fannie Mae postpone the foreclosure process over the course of the last few months. Additionally, Congress compelled certain of the larger mortgage originators, such as JP Morgan Chase, Citi, and Wells Fargo, to also postpone foreclosures.

While the postponing of foreclosures allows for a delay in that process, regrettably it does not negate it. As the WSJ reports today, Banks Ramp Up Foreclosures.

The Federal Reserve knows that increased supply in housing in the face of rising unemployment will further depress home prices. In fact, just yesterday the Fed made a statement indicating it believes housing prices may overshoot to the downside much as they overshot to the upside earlier this decade. That scenario seems to be the equivalent of a physics principle – for every action, there is an equal and opposite reaction.

The subsequent impact of this increased foreclosure activity is an increase in chargeoffs by banks holding the mortgages. While certain banks, such as Wells Fargo, reported surprisingly strong 1st quarter earnings, be mindful that many analysts criticized Wells for not reserving more against future chargeoffs.

Over and above this impact on bank earnings, do not forget that the model used for the Bank Stress Tests incorporated an unemployment rate of 10.3% as the absolute worst case scenario.

That rate is now commonly accepted as a very strong likelihood.


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.

Could The FDIC Go Broke?

Posted by Larry Doyle on March 5th, 2009 9:45 AM |

In very short order, the FDIC (Federal Deposit Insurance Corporation) has seen its reserves plummet from $50 billion to $18.9 billion at the end of 2008. At that pace and with the expectation of more bank failures, could this bedrock of our national banking system go broke? Well, FDIC’s Bair Says Insurance Fund Could Be Insolvent This Year.  Is Sheila Bair unnecessarily sounding warning signals? Am I running to the bank to withdraw my money? No and no.

Sheila Bair is proactively managing expectations for all concerned, those being politicians, regulators, bankers, and consumers. In fact, if she did not highlight the current state of the FDIC reserve fund and expectations for future declines, she would not be fulfilling her obligations. (more…)

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