When Insolvent Banks Are Worth Billions [View article]
The Warren report speaks to this very point.
By relaxing accounting standards, we have allowed banks to generate income, build capital and avoid ridding themselves of those glowing green assets. PPIP, a cornerstone of the Financial Stabilization Plan, was DOA because the banks, under the relaxed accounting standards, do not have to sell the toxic assets at levels that would hurt earnings. So, they keep them and pretend they are worth whatever value they assign to them.
Meanwhile, in the real world, all forms of loans continue to deteriorate at a frightening pace consistent with that envisioned under the adverse scenario. The period of losses, though, will last longer than envisioned in the Stress Test. Much longer.
Whether interest rates or simply time, some catalyst will prick this bubble; if its time, it will be the long march of losses that exhaust the banks and reveal them to be the zombies they are. During the interim and before the Fed applies defibrillators, the banks will hoard cash and make few loans, fully aware of their fraudulent state.
The Treasury's Pump and Dump Scheme for Bank Stocks [View article]
The author and I are on the same page so to speak.
I would, though, like to add two comments. First, the change in accounting rules allowed banks to blow through estimated earnings in the first quarter. Beyond reducing losses through relaxation of M2M, some of the accounting profits are arcane and in some instances stem from fluctuating bond prices. In toto, though, the changes served their purpose and investors flocked like lemmings to part with money and invest in these citadels of finance.
Secondly, and with respect to too big to fail, I know that failure of a large financial firm could have unknown and unfavorable ripple effects throughout global financial markets which could be sufficiently ominous that no one wants to experiment with a big failure. And maybe TBTF stops here but I, in a conspiratorial epiphany, started thinking about ulterior motives. Maybe the administration and Treasury want big banks around for a more sinister purpose: purchase of Treasury debt.
Historically, they have accounted for precious little but that is not to say things could not change. And with bulging deficits and the avalanche of debt to be thrown at global markets, its not impossible that a deal was struck under which "I will save you if you save me".
25-to-1 Leverage Earns Banks an 'A' on the Stress Test [View article]
Since Treasury did not release the stress test in a form that permits replication of the underlying math, we are left to rely upon comments and assurances from Treasury.
And since they have possibly conflicting objectives, I do not believe everything said by Treasury officials can be taken at face value.
Having had time to think about the outcomes of the stress test, it's very clear the test was designed in such a manner so as to allow banks to maximize projected earnings and minimize potential losses, permitting the banks to earn themselves out of this mess.
Under consolidated results, banks will offset 60% of expected losses through projected earnings for the years 2009-2010. By keeping TCE at 4% as opposed to 5%, it allows banks to use more of projected earnings to offset potential losses while at the same time remaining in compliance with the "strict capital ratio standards" imposed by Treasury, FDIC, OTS and COC.
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.
When Insolvent Banks Are Worth Billions [View article]
By relaxing accounting standards, we have allowed banks to generate income, build capital and avoid ridding themselves of those glowing green assets. PPIP, a cornerstone of the Financial Stabilization Plan, was DOA because the banks, under the relaxed accounting standards, do not have to sell the toxic assets at levels that would hurt earnings. So, they keep them and pretend they are worth whatever value they assign to them.
Meanwhile, in the real world, all forms of loans continue to deteriorate at a frightening pace consistent with that envisioned under the adverse scenario. The period of losses, though, will last longer than envisioned in the Stress Test. Much longer.
Whether interest rates or simply time, some catalyst will prick this bubble; if its time, it will be the long march of losses that exhaust the banks and reveal them to be the zombies they are. During the interim and before the Fed applies defibrillators, the banks will hoard cash and make few loans, fully aware of their fraudulent state.
The Treasury's Pump and Dump Scheme for Bank Stocks [View article]
I would, though, like to add two comments. First, the change in accounting rules allowed banks to blow through estimated earnings in the first quarter. Beyond reducing losses through relaxation of M2M, some of the accounting profits are arcane and in some instances stem from fluctuating bond prices. In toto, though, the changes served their purpose and investors flocked like lemmings to part with money and invest in these citadels of finance.
Secondly, and with respect to too big to fail, I know that failure of a large financial firm could have unknown and unfavorable ripple effects throughout global financial markets which could be sufficiently ominous that no one wants to experiment with a big failure. And maybe TBTF stops here but I, in a conspiratorial epiphany, started thinking about ulterior motives. Maybe the administration and Treasury want big banks around for a more sinister purpose: purchase of Treasury debt.
Historically, they have accounted for precious little but that is not to say things could not change. And with bulging deficits and the avalanche of debt to be thrown at global markets, its not impossible that a deal was struck under which "I will save you if you save me".
25-to-1 Leverage Earns Banks an 'A' on the Stress Test [View article]
And since they have possibly conflicting objectives, I do not believe everything said by Treasury officials can be taken at face value.
Having had time to think about the outcomes of the stress test, it's very clear the test was designed in such a manner so as to allow banks to maximize projected earnings and minimize potential losses, permitting the banks to earn themselves out of this mess.
Under consolidated results, banks will offset 60% of expected losses through projected earnings for the years 2009-2010.
By keeping TCE at 4% as opposed to 5%, it allows banks to use more of projected earnings to offset potential losses while at the same time remaining in compliance with the "strict capital ratio standards" imposed by Treasury, FDIC, OTS and COC.
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.