The US banking system is still a mess no matter what the regulators and pundits say. From the Volker Rule to Basel III to fraudclosure there are issues that will have to come to ahead at some point in the not so distant future. Specifically, the Financial Times reported that because of the Basel III tier 1 capital requirements the top 35 US banks may be short $100 – $150 billion dollars. This means more capital raises for many of these banks, but don’t worry analysts say this is manageable.
Other parts of the FT’s article states that many of these banks may have to selloff $500B, in total, of assets to avoid the capital raise. The issue is that if all these banks, which the article admittedly says is not equally distributed between the top 35 banks, have to selloff $500B in assets to avoid a capital raise who will buy these assets? If the liability of these assets equals higher capital requirements buyers may be few and far between which means lower prices for the assets being sold or they will have to raise capital. Of note is the shortfall is only because of Basel III and not because of any other issue outstanding.
Remember how so many of these capital requirement issues were supposedly put to rest because of our “stress tests”? Clearly the stress tests, as has been stated time and time again, were worthless. In fact rumors are making their rounds that another round of stress tests are on the way for US banks. What is interesting about this is that the stress tests lack total credibility for 2 reasons. First, look at the EU’s stress tests which passed most banks and look what is happening in Ireland, they were a farce. Second, without good accounting rules, i.e. mark-to-market vs. mark-to-fantasyland, the stress tests are bogus. A loss is a loss and simply pretending it doesn’t exist is the most idiotic thing I have ever heard of and if investors do not do their research it can lead to major losses. In my opinion this is nothing more than state sponsored investor fraud.
What is missing out of all of these bank articles is the whole fraudclosure mess and its impact on the banks. As stated previously there is no remedy for a broken chain of title except to modify the mortgage which starts a new chain of title and eliminates the problem. There are issues with this though. First, doing nothing means that all of those MBS are worthless because there is no cash flow and the creditor cannot collect the collateral, think about that for awhile. Second, if your only option is to modify the mortgage it means that the MBS is worth less than face value. Either way someone somewhere is taking a loss and that means there may be a put back to the originating bank. When the Fed put back bonds to BoA that should concern investors… it’s the Fed telling banks you ripped us off.
If these put backs continue or escalate, which they will because who wants to take a loss on paper that was misrepresented to begin with, that could mean that banks have much larger problems than Basel III capital requirements. If the put back is widely exercised banks will need a lot more money than $100 – $150B. They might need a trillion or more, who really knows anymore? Frankly, Basel III is the last thing anyone should be worried about. People should be worried about what the put back risk is for many of these banks because the put back risk is far greater of an issue than the sub-prime crisis ever was. I believe we will find out if there are indeed “no more bank bailouts” or not. My guess is we will all be shareholders of some big banks in the near future. In the meantime I am waiting for my dividend check from our previously made, wildly profitable, insert sarcasm here, investments into GM, Citi, BoA, Ally…
I admit I have been delinquent on checking out the Euribor rates lately since the Federal Reserve has me scared to death about QE2, more on that later, but I do not think it will be what you believe it will be in November. However, the Euribor went ballistic thanks to the ‘perfectly safe’ Irish banks began to show that the ‘stress test’ were pure bull. How can a bank pass a stress test a couple of months ago and then do insolvent, basically? That doesn’t happen in a normal world and it proves that the ECB totally flubbed the stress test.
The fraud that the stress tests were showing up in the inter banking lending rates which went from benign to cancerous in a heartbeat. While the Euribor first continued to climb after the stress tests it did level out later in the summer, but now it went vertical and it probably is not looking back. Considering that European banks are still holding only God knows how much US MBS’s, which our current foreclosure fraud situation may render those MBS’s worthless over time, along with how much Greek, Portugal, Italian and Spanish debt and you got serious problems. The media is not going to touch this, but the bank lending markets talks about it only if you look at them.
The 3 month Euribor rate was below .90% until a week ago when it jumped to about 1%, .993% as I write this, which isn’t much until you consider we are in a zero interest rate policy (ZIRP). Actually, we are in a negative interest rate policy right now if you count all the QE going on. When you factor that in it kind of brings to light that something is wrong in Europe, still. US treasuries for 3 months are yielding about .14% so clearly European banks are pricing in a risk premium. The question is, what is the risk premium for? Clearly default is part of it and I think you will see more issues with banks very soon.
It is impossible to have bank holdings that consist of sovereign debt that is in trouble plus MBS holdings and not have any problems. There certainly will be more insolvency issues, but even if a bank is not insolvent their balance sheets will be impaired further. It is a mess and the real problem is that it is just not European banks, but US banks as well. While US banks do not hold a lot of sovereign debt, they do own tons of MBS holdings, unless the Fed buys them from the banks, which foreclosuregate, I hate these names we have now, will make many of these securities worthless or at the very least impair them well below par.
I do not know what is going to happen, but I am convinced that the serious problems that many thought were behind us never really went away. All we ended up having done was the government and the Fed paper over the problems. This went on all over the world with the ECB following suit as well. The Eurubor is telling us something, are many listening? Nope. Stocks are moving higher on some idiotic belief that inflating our way out of this mess will work, it might in nominal terms, but not in real terms. Phony stress tests clearly are not the answer as the fraud gets uncovered when banks that passed suddenly need a bailout. How central banks and governments have any credibility is simply beyond me. When a fraud is uncovered people usually talk about it, but the news on some financial channels is mute on the issue. When lending costs climb rapidly it usually makes news, did you hear about it? Nope. It is all just one big farce out there. I personally believe that the only safe haven seems to be commodities and I believe stocks are not as safe as people believe.
There is a lot of hot air coming out of Washington and the press about who saved the financial system over the past few months. The White House claims they saved the system, the press agrees, and others say Ben Bernanke saved the system, even though he caused or helped cause the problems. Others in Congress believe that they helped save the system, who knows how they think that. Out of all of these credit seeking entities it does raise the question of who really saved the system, for now.
As far as the White House is concerned, I cannot think of one legislative item they produced in the past year that directly did anything for the banking system, but they demand credit for the save. The fact of the matter is that TARP, for all of its flaws, did save the system and that was a Bush era solution. Obama and Geithner simply imposed a ‘stress’ test for the banking system, just an FYI on the stress test, we surpassed the ‘rigid demands of that test’ as far as unemployment and other economic hardships. It is safe to assume that the stress tests were a joke and meaningless other than a confidence booster. Outside of that particular item the administration simply spent trillions on pet projects through the stimulus bill, which is clearly a failure, and that is it. Obama had nothing to do with saving the system outside of his vote for TARP, period.
To think Obama or any Congress person did anything else to save the system is pure partisan politics. I am fine with people giving the credit to Obama, because it proves my point that people do not follow what is really going on and have the attention span of a nat. However, this is a double edge sward because nothing has changed within the system itself so are they going to take credit when this thing falls apart? I doubt it, but it will be interesting to watch them weasel their way out of it. It is also clear that the latest proposal to separate prop trading from banks proves that the current administration does not and never did understand what caused the problems to begin with. In short, they are empty on intellectual knowledge and packed full of the people who helped create the problem so they are all simply doing a major CYA right now.
Congress has done nothing for the system, sure we got show trials, but they just threw a bond broker in jail for selling AAA rated securities, talk about misplaced blame! The reality is one person saved the system, in my opinion, Ben Bernanke. Now, just because I am giving him credit for the save it does not mean I like him or his policies. Yes, he cleaned up, or started to, his own mess, but make no mistake about it, he caused or helped create the current mess. Ben denies that he had any responsibility in making the mess, but he did as he endorsed, feverishly, low interest rates for a prolonged period of time during the early 2000’s. He actively endorsed QE by other countries and, now, the US and did not realize that housing prices increasing at 10-20% a year were a bad thing, huh?
Ben did save the system, but he also is responsible for its demise at the same time, so how much credit can you really give him? I do not think Ben should be reappointed as he clearly has no forward looking vision as far as potential trouble in the economy. That is one reason why I find it funny that Ben ‘sees no bubbles’ in the US markets or economy now. Yes, I believe equities are in a bubble, I have always believed that, since there was no real fundamental reason for the markets to go from the March lows to 1,150 on the S&P and 10,600 on the Dow. The markets were due for a bounce as stocks were pricing in a financial system collapse, but not all the way back up to current levels. As it turns out we might be at the precipice of the much anticipated correction now, a weak currency and massive pumping up of the monetary system is not a good thing over the long-term and is why we saw such a rally.
Regardless, Ben believes the market’s reaction is normal which can be interpreted many different ways, the conspiracy minded will say that confirms the Fed is buying S&P futures, but I read it as Bernanke is just oblivious to reality as the market grinded its way higher, with no volume or flows from retail investors, away from the economic reality of the times. Green shoots are everywhere according to Ben, but consumer credit is contracting, housing is being propped up, unemployment is grinding higher, the national debt is increasing a scary rate, Greece, Ireland, and other European countries are on the verge of default, Dubai did default, banks will not lend and hiring is minuscule at best. Sure we saw some GDP growth, government induced, and some areas, technology, look promising, but other than that there is no fundamental good economic data to support the current market levels.
It is clear that the pricing in of all the good news has already happened, Intel released good earnings and it sold off, the same with IBM and a host of other firms. Just because the market goes up does not mean everything is fine or that the market is forward looking, it is not. If the market was a good forward indicator we would not have sharp corrections because the market would always know in advance. If the market was forward looking we would not have seen the Dow hit 14,000 in the fall of 2007 when all the warning signs were clear as a bell, the Fed was dumping hundreds of billions of dollars into the overnight markets. What I am saying is I am happy if you are long and made money, but just because you made money and the market is trading at irrational levels it does not mean it is correct. The market is also not a forward looking instrument, so stop saying it is.
At the end of the day it was only Ben who saved the system pushing rates to zero, putting together those funding programs, TALF and such, but he did this at a price. By moving rates to zero he forced savers out of secure investments into higher risk assets so firms can refinance their garbage and give it to safety seeking investors because they have nowhere to turn for yield. Ben has expanded the balance sheet to new weekly records for the past year and it will continue to grow indefinitely, at this rate. Ben has started QE and it looks like he cannot stop those programs without a huge amount of pain to everyone, so it will continue forever. Ben has risked the entire future of the USA by putting the central bank in a position to permanently devalue the dollar, part of the ultimate goal I might add, and by taking excessive credit risk.
Ben just might have put the country at greater risk than the banks did in the previous 10 years. While I know deflation is in the works for the foreseeable future it is only a matter of time before inflation does hit or we are forced to openly devalue the dollar. All because Ben saved the system for a few bankers who we could have lived without as smaller institutions would have stepped up to the plate. To re-nominate this guy is the single worst idea I have ever heard. To give credit to Obama for saving the system is laughable at best, just because we want to have a beer with the guy does not change the fact that his policies are horrible and he has done nothing in his first year in office. We have to stop being influenced by what we want to believe and look at the facts on the ground. Those facts tell us Washington and the Fed have failed, end of story.
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