It is very convenient to just assume all of the problems that plague the US economy have just disappeared. With all of this talk about the recession easing or ending, as some commentators contend, it is tough to take an objective look at what is going on around us. There is some hope that the recession is ending, I even fall in that camp, but I am more grounded and expect it to last until year end, however there is a higher possibility that CIT Group may still be filing for bankruptcy protection.
Many have assumed that this problem has been fixed, but it has not. The firm recently delayed its quarterly filing and new rumors are forming about a potential bankruptcy in the very near future. Even though the firm has received money from its bondholders it was not enough to make the problems disappear and it is suffering from, as the WSJ put it, a severe liquidity problem.
If CIT fails it, combined with 72 bank failures, a massive increase in personal bankruptcy and pick any other issue of the minute, is evidence of the continuing credit problems that plague or economy. These issues are not exactly systemic risks individually, but combined it is a direct indication of the problems we face. Of course, a great productivity report this morning is sure to make people feel better, even though the report just shows we are squeezing more out of less people.
Our troubles have simply been postponed or buried to a future date and it is my opinion that government intervention is going to prolong our problems, not fix them. No one ever wants to hear, hi, I am from the government and I am here to help, because the government only makes things worse. However, we are closer to the end than we are to the beginning of this thing and we will come out of it, but it is important to recognize the problems that are still there so you do not get sucked in to believing everything is OK right now.
There is no question that the consumer is struggling, personal income is down and now savings are taking a hit based on, presumably, the high rate of unemployment. The really bad part about those filing for bankruptcy is that before 2005 it was a good option for Americans, but since the reform it is a less attractive option for Americans.
There is no question that people took advantage of the bankruptcy laws prior to its “reform” in 2005, but not all people are guilty of that. Based on aggressive lobbying by credit card companies and banks the new reforms made it impossible for a quick filing or for judges to modify mortgages on top of making it very expensive and the fact that you have to attempt to payback your debt before you could actual be approved for liquidation. The irony is that Joe Biden’s son was a lobbyist for MBIA who was one of the more aggressive lobbyists for the reform somehow won favor with Joe Biden who was credited for persuading Democrats to approve the new rules, so much for fighting for the little guy.
The further travesty of the bankruptcy reform was that judges could not modify mortgages along with more expensive filing fees and the new rule saying you had to attempt to repay creditors before you could be approved makes bankruptcy not only embarrassing, but painstaking and very unfair to the individuals. I would actually say that if that reform never took place then most of the problems over the past year could have been mitigated, to a certain degree. Instead, Congress sided with the folks paying their bills, banks, and essentially saying that the people they are supposed to represent do not matter.
Even with the terms of bankruptcy being more difficult and unfairly in favor of creditors, who already had ample rights under the law, new filings are at a new high. In July there were 126,434 filings which is a 34% increase year-over-year and an 8% increase from June of 2009. This is certainly no green shoot and a sign of the times with consumers drowning in debt and unable to repay their creditors. Simply put, filings will continue to go higher as unemployment increases and house prices decrease.
Congress should be acting to help its constituents and suspend the 2005 reform in order to help reduce the problem, over the long-term, and expedite the carnage. Since the only thing that has gone in the consumers favor is “cash for clunkers” it is high time Congress helps bailout the little guy, now. Another report out this morning was the fact that these same banks who destroyed out financial system and received billions in TARP funds are now bilking the hardest hit in America for a total of $38 billion in total overdraft fees.
I think we are at a point were enough is enough and without a bailout of the consumer we have little chance of a real recovery. There needs to be an emergency bankruptcy provision that should allow for the 2005 reform to be suspended, but also enact a shorter time on individuals credit reports. This will allow for the worst of the indebted people to file and start over again. The banks have already benefited tremendously off the backs of taxpayers and the current bankruptcy laws continue to favor banks while we double pay them back on our debt and with our tax dollars.
We all know there are problems within the banking sector from lack of lending, whether it is demand or banks unwillingness to lend is a matter of debate, and continuing credit losses. Banks are continuing to set aside more money for potential credit losses which indicates the road to recovery is still not clear yet. Not to mention the building commercial real estate issue which has yet to fully rear its ugly head yet, but recent numbers show commercial real estate delinquencies are up 585% over last year at this time.
However, what are not receiving much publicity is bank closures by the FDIC, which we post every Friday night when the report is issued in our piece called Friday Night Fun at the FDIC. One would think that seizures by the FDIC would have abated us by now with the massive bank bailouts which have cost us an estimated $3 trillion and has a projected cost of $23 trillion if things get really bad again.
Last year the US saw 25 banks closed through brokered deals by the FDIC with the most notable being Washington Mutual and Indy Mac. After those two closures we heard bits and pieces of other closures, but the news of closures began to dissipate at the early part of 2009. I suspect the media assumed that most banks worth saving had already been saved or they a carelessly overlooking the continuing problem.
I understand the “too big to fail” theory, but I disagreed with it in 1999 as much as I do today. In fact the greatest betrayal of our government and what is directly responsible for our current troubles was the dissolution of the Glass-Steagall Act which kept banks and investment firms separated in order to control risk. Because of the too big to fail theory those banks were saved first and very little rescue went out to smaller institutions.
As a result we have seen a tremendous increase in bank closures over the past 7 months. In fact, the closure rate is alarmingly high and accelerating every month. To date we have had 69, exhibit 1-1, banks fail in 2009 which is 276% more banks than last year and at the current rate it will double by the end of the year. Keeping in mind that in July alone we have had 24 banks closed by the FDIC which is almost 100% of all of last years closures, all were merged into new entities.
Exhibit 1-1
This should trouble you as it has an impact to the availability of credit in smaller communities. Even though most banks are merged with others having less competition could mean less credit if the new owner tightens lending standards or practices. This could also mean less jobs as many branches do get closed in these brokered deals mostly because of overlap or poor profit margins.
Most of the banks failing are “hot money” banks who dealt in brokered CD’s which offer higher paying yields than traditional brick and mortar bank CD’s. Since the bank pays more interest on these CD’s they must make higher risk loans to keep profitability intact. Most acquiring banks, especially lately, had declined these brokered CD’s leaving the FDIC on the hook for repayment from the asset sales or to make whole if not enough money was raised through liquidation of remaining assets. This costs you, the tax payer, money eventually and this is why the FDIC raised its premiums earlier this year.
Costs of Closures
Not only is the pace of closures accelerating, but the cost of the closures is also increasing at a much higher rate than you might think. Last year the loss of Washington Mutual was nothing to the FDIC, but who knows what guarantees or funding the Fed offered that we do not know about, but other closures did cost a significant amount of money to the FDIC totaling some $14.9 billion for 2008. We calculated the cost to the FDIC according to the higher end of their estimates and included all loss-sharing agreements.
During 2008 we had a real crisis with major institutions failing, but we have been told that this year things are much better and our banking system is safe. That may be true for firms such as JP Morgan and Goldman Sachs, but the truth of the matter is we have had bank failures almost every week this year. The banks are smaller, most are below $3 billion, but the net result is astonishing with the total projected costs reaching $13.5 billion, there were not even calculations of estimates in some of the FDIC press releases so we still do not have a real number. See exhibit 1-2 for a chart of the cost of bank failures
Exhibit 1-2
How can things be getting better when the banks are failing at an astonishing rate and the cost of the failures are going to surpass 2008 when we just crossed the half way point in the year. The fact that the media is not reporting on this is obscene and a disservice to the American people. The major media outlets are more interested in hearing the latest Obama speech or picking out the sparse pieces of good news proclaiming that the recession and the crisis is over all while ignoring this information.
These same pundits are also claiming we are in a new bull market and everything is just fine, but there is no mention of bank closures, none. Worse yet, we watched as many TV personalities pointed to a 3 month rise in the durable goods orders as bullish, but then turned around and said that the last report was too volatile, it is truly baffling that anyone takes these people seriously anymore.
The Bottom Line
The crisis is still here it has just been buried by the very same people you may trust on the TV. Anyone looking at these numbers, plus other evidence of the true health of the economy would not be calling for a bull market with another 20%+ to run.
You should be questioning everything from the falling dollar, which is the real reason for the bull rally besides an oversold situation, the lack of coverage of bank failures, the 35% reduced earnings expectations which were easily beat, with no top line earnings growth, unemployment is a lagging indicator, it is not in this case, and the record number of insiders selling their stock. Like it or not this time it is different than almost any other time in history because we do not loose major players like Lehman, Bear, Stearns and Washington Mutual in an average recessions.
Without questioning these things you are simply sticking your head in the sand and pretending that everything is OK, when we still have significant problems that remain unresolved. It is imperative that you do research before committing your capital to the equity markets and look at what is really going on otherwise you will get burned. If you want to hope everything is fine that is fine by me because, if the truth be known, I hope everything gets better soon as well, but do not hang your financial future on hope, that’s just crazy talk.
The CIT Group news is weighing on the markets this morning as the Fed’s have decided they will receive no help. There is no systemic impact from the firms failure, but it will cause issues within the banking sector. If you were with CIT Group and have not made alternative funding arrangements then clearly you would be at fault for not knowing the firm was in trouble.
I am pleased there will not be a bailout, firms need to go under to really have a recovery. However, I do feel that this is a test, kind of like how they let Bear Sterns and Lehman go, to see how the markets react. While this may be a test it is seems unlikely that the firm will actually go to bankruptcy court as the government will implement a shotgun marriage of some kind. This is based on testimony from Paulson yesterday who brazenly said that Lewis was threatened to do the deal and he made no apologies.
The question is who would be forced to buy them? I think it would be JP Morgan, US Bank or another large institution. It will be interesting to see how this plays out and the effect it will have on the markets. This also shows the weakness of the banking sector as well and things are not “stellar” as some people believe.
Do you see something wrong with this guy? Admittedly, I know nothing about baseball and never heard of this guy until yesterday. It seems unlikely that he is as successful as he says he is, especially when you hear his story and what he said and how he said it, it just looks sketchy.
The kicker is I guess he is selling investments to athletes to guarantee income, but he is filing bankruptcy. How ironic. I have to say that I do not know anyone who is 111-0 in the options market, but hey thats just the people I know. Anyhow, check out the video and see for yourself.
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