Worries of a New Debt Contagion Rattle Wall Street [View article]
Under the IMF/EU proposed plan Greece's debt to GDP will actually worsen between now and 2014. Some feel it will peak in 2015, strongly underscoring the point that the issue of sovereign debt will be with us for some time and during this period it is certain to spread to other countries.
Before I share some material from the FT, let me add that the level of restructuring being proposed for Greece, as measured by the primary deficit, is of epic proportions and few countries have successfully achieved this order of change. This points to how far out of control matters are in Greece and how difficult it will be to rebalance the primary account. From the FT:
The presentation of the main economic arithmetic behind the Greek Economic Policy Programme (EPP), as agreed with the IMF, EC and ECB, reveals the enormity of the task ahead. The programme envisages that the general government deficit will be cut from 13.6% of GDP in 2009 (which could be revised to about 14%) to 8.1% of GDP this year, 7.6% in 2011, 6.5% in 2012, 4.9% in 2013 and 2.6% in 2014. Assuming Greek real GDP expansion is about 2.1% by 2013-14, this implies the debt/GDP ratio would peak at 149% in 2013 (note that the authorities seem to be including an assumption that the public debt/GDP ratio will be revised up 7pp, which would take the 2009 ratio to 122%).
Banks Negotiate Watered Down Stress Results [View article]
Here is another gem from Calculated Risk who quotes Roubini, confirming my suspicion about giving extraordinarily wide birth to the banks for estimating "earnings" over the next twop years. The IMF calculates the entire industry will earn $300 billion while Treasury is content, if not happy, to accept $362 billion as a working estimate for the nineteen largest banks. The quote from Calculated Risk:
"Second, the capital/needs of these banks depend on a race between retained earnings before writedowns/provisioning that will be positive given a high net interest rate margin and the losses deriving from further writedowns. It appears that regulators have overestimated the amount of such retained earnings for 2009-2010. The IMF recently estimated that retained earnings (after taxes and dividends) for all US banks – not just these 19 ones – would be only $300 bn total over the 2009-2010 period. The stress tests – instead – assumed much higher retained earnings - $362 bn - for these 19 banks alone for the 2009-2010 period in the more adverse scenario. Since these 19 banks account for about half of US banks assets if one were to use the IMF estimate of net retained earnings for these 19 banks their net retained earnings for 2009-2010 would be $150 bn rather than the $362 bn assumed by the regulators. While the IMF may have been too conservative in its estimates of net retained earnings it appears that regulators may have been too generous to these 19 banks in forecasting their earnings in an adverse scenario. Thus, ex-post capital needs will be significantly higher if net retained earnings turn out to be lower than assumed in the stress tests."
Banks Negotiate Watered Down Stress Results [View article]
Thanks John.
I was frustrated with both the outcome and its presentation; after downloading the file from the Fed, I could not reverse engineer the math used to calculate the SCAP requirements. Part disclosure and part politics.
Picking up on your theme, the original SCAP buffer estimated for BAC, WFC, FIFT and C was $105 billion; this was later negotiated down to $54.3 under the now familiar arguments abouts earnings and the ability to sell stuff. This accomodation, which results in a reduction of required additional capital to the tune of 48%, dilutes the the integrity of the entire exercise.
It was either in Time or the WSJ that someone quoted as saying these reduction are reflective of the entire process, suggesting the exerecise was unterdtaken more to calm jittery markets than it was to really discover and repair the health of the nation's banking system.
Using Fed numbers from the stress test, we can under the adverse scenario, which is now the expected case, look forward to an additional $600 billion in bank losses through 2010. We can also expect banks to offset $362 billion of this number through earnings; this represents annual returns on risk weighted assets of 2.3%. BAC earned 2.2% in 2006 and 1.1% in 2007.
In addition to fudging the numbers to make everybody happy, we are essentially desiging a system wherein the banks can earn there way out of this mess. And in constructing the system, we probably have maximized the potential for bank earnings and, perhaps, understated likely losses.
I think the problem is larger than money; I think the fundamental problem is that investors do not believe the administration has a viable plan to restore stability to the banking system and systematically deal with the core issues facing the sector.
Under both Bush and Obama, the TARP program has lacked clear goals, has been implemented in piece meal fashion and has suffered from lack of transparency. From the very beginning, the U.S. government made the mistake of addressing each major bank failure differently: aiding the takeover of Bear Sterns by JPMorgan, allowing Lehman Brothers to go bankrupt and then dumping $180 billion into AIG.
Under Geithner, there has been his underwhelming perfromance as a speaker and his inability to inspire confidence by communicating a thoughtful, comprehensive plan. Details of the stress test were slow to materialize and then there were the nagging questions of which capital ratios were to be used in guaging solvency. And there is the suggestion that purchases of preferred shares will be calibrated as losses occur.
Finally, when the government increased its stake in Citi to 36% and infused more capital into AIG, the markets took this to mean the problems are large, never ending and too big to be fixed. TARP has lost credibility with the market.
Worries of a New Debt Contagion Rattle Wall Street [View article]
Before I share some material from the FT, let me add that the level of restructuring being proposed for Greece, as measured by the primary deficit, is of epic proportions and few countries have successfully achieved this order of change. This points to how far out of control matters are in Greece and how difficult it will be to rebalance the primary account. From the FT:
The presentation of the main economic arithmetic behind the Greek Economic Policy Programme (EPP), as agreed with the IMF, EC and ECB, reveals the enormity of the task ahead. The programme envisages that the general government deficit will be cut from 13.6% of GDP in 2009 (which could be revised to about 14%) to 8.1% of GDP this year, 7.6% in 2011, 6.5% in 2012, 4.9% in 2013 and 2.6% in 2014. Assuming Greek real GDP expansion is about 2.1% by 2013-14, this implies the debt/GDP ratio would peak at 149% in 2013 (note that the authorities seem to be including an assumption that the public debt/GDP ratio will be revised up 7pp, which would take the 2009 ratio to 122%).
Banks Negotiate Watered Down Stress Results [View article]
"Second, the capital/needs of these banks depend on a race between retained earnings before writedowns/provisioning that will be positive given a high net interest rate margin and the losses deriving from further writedowns. It appears that regulators have overestimated the amount of such retained earnings for 2009-2010. The IMF recently estimated that retained earnings (after taxes and dividends) for all US banks – not just these 19 ones – would be only $300 bn total over the 2009-2010 period. The stress tests – instead – assumed much higher retained earnings - $362 bn - for these 19 banks alone for the 2009-2010 period in the more adverse scenario. Since these 19 banks account for about half of US banks assets if one were to use the IMF estimate of net retained earnings for these 19 banks their net retained earnings for 2009-2010 would be $150 bn rather than the $362 bn assumed by the regulators. While the IMF may have been too conservative in its estimates of net retained earnings it appears that regulators may have been too generous to these 19 banks in forecasting their earnings in an adverse scenario. Thus, ex-post capital needs will be significantly higher if net retained earnings turn out to be lower than assumed in the stress tests."
Banks Negotiate Watered Down Stress Results [View article]
I was frustrated with both the outcome and its presentation; after downloading the file from the Fed, I could not reverse engineer the math used to calculate the SCAP requirements. Part disclosure and part politics.
Picking up on your theme, the original SCAP buffer estimated for BAC, WFC, FIFT and C was $105 billion; this was later negotiated down to $54.3 under the now familiar arguments abouts earnings and the ability to sell stuff. This accomodation, which results in a reduction of required additional capital to the tune of 48%, dilutes the the integrity of the entire exercise.
It was either in Time or the WSJ that someone quoted as saying these reduction are reflective of the entire process, suggesting the exerecise was unterdtaken more to calm jittery markets than it was to really discover and repair the health of the nation's banking system.
Using Fed numbers from the stress test, we can under the adverse scenario, which is now the expected case, look forward to an additional $600 billion in bank losses through 2010. We can also expect banks to offset $362 billion of this number through earnings; this represents annual returns on risk weighted assets of 2.3%. BAC earned 2.2% in 2006 and 1.1% in 2007.
In addition to fudging the numbers to make everybody happy, we are essentially desiging a system wherein the banks can earn there way out of this mess. And in constructing the system, we probably have maximized the potential for bank earnings and, perhaps, understated likely losses.
TARP: Bailout or Money Pit? [View article]
Under both Bush and Obama, the TARP program has lacked clear goals, has been implemented in piece meal fashion and has suffered from lack of transparency. From the very beginning, the U.S. government made the mistake of addressing each major bank failure differently: aiding the takeover of Bear Sterns by JPMorgan, allowing Lehman Brothers to go bankrupt and then dumping $180 billion into AIG.
Under Geithner, there has been his underwhelming perfromance as a speaker and his inability to inspire confidence by communicating a thoughtful, comprehensive plan. Details of the stress test were slow to materialize and then there were the nagging questions of which capital ratios were to be used in guaging solvency. And there is the suggestion that purchases of preferred shares will be calibrated as losses occur.
Finally, when the government increased its stake in Citi to 36% and infused more capital into AIG, the markets took this to mean the problems are large, never ending and too big to be fixed. TARP has lost credibility with the market.