An FT article has revived risk aversion out inthe markets, by citing an S&P study which has raised questions over the financial strength of some of the biggest banks ahead of new rules that could require them to raise more funds. The analysis by S&P based upon their risk adjusted capital (RAC) ratios - a measure of balance sheet strength - showed that HSBC is the best capitalised bank in the world at 9.2%, while UBS, Citigroup and several of Japan's biggest banks were among the weakest with bare 2% ratios. S&P's capital ratio measure reportedly foreshadows the currently being overhauled Basel II rules that areexpected to be set early next yr. Japanese banking shares are being hitthe worst by the rpt, with financials down over 1% this mrg, whilst S&Pfutures are bobbing modestly in the red.
Sunday, 20 December 2009
Tuesday, 25 August 2009
Saving the Big Banks is NOT Necessary to Prevant a Depression
President Obama's economic team argues that one of the main lessons from the Great Depression is that we have to save the banking system and restore "liquidity" at all costs.
Specifically, Obama's top economic advisors - Larry Summers, Timothy Geithner and Ben Bernanke - argue that the Great Depression occurred largely because the government did not do enough to restore liquidity to the banks and so the credit system shut down, which in turn shut down the entire economy. They believe that restoring liquidity to the nation's banks - and especially the giant banks such as Citi, Bank of America, Wells Fargo, JP Morgan Chase - is essential.
But according to some of America's top economists, Obama's economic team is wrong.
For example, the Wall Street Journal interviewed Anna Schwartz in October 2008. Schwartz is the co-author with Milton Friedman of the leading book on the Great Depression (Friedman, the Nobel prize winning economist, is probably the most followed economist of the last 50 years). Schwartz is widely regarded as the leading living expert on monetary policy, and someone who actually lived through the Great Depression.
In the interview by the Journal, Schwartz said the current problem is a solvency crisis, not a liquidity crisis:
"The Fed," she argues, "has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible."
So even though the Fed has flooded the credit markets with cash, spreads haven't budged because banks don't know who is still solvent and who is not. This uncertainty, says Ms. Schwartz, is "the basic problem in the credit market. Lending freezes up when lenders are uncertain that would-be borrowers have the resources to repay them. So to assume that the whole problem is inadequate liquidity bypasses the real issue."
Indeed, in the article - entitled "Bernanke Is Fighting the Last War " - Schwartz says:
In the 1930s, as Ms. Schwartz and Mr. Friedman argued in "A Monetary History," the country and the Federal Reserve were faced with a liquidity crisis in the banking sector. As banks failed, depositors became alarmed that they'd lose their money if their bank, too, failed. So bank runs began, and these became self-reinforcing: "If the borrowers hadn't withdrawn cash, they [the banks] would have been in good shape. But the Fed just sat by and did nothing, so bank after bank failed. And that only motivated depositors to withdraw funds from banks that were not in distress," deepening the crisis and causing still more failures.
But "that's not what's going on in the market now," Ms. Schwartz says. Today, the banks have a problem on the asset side of their ledgers -- "all these exotic securities that the market does not know how to value."
"Why are they 'toxic'?" Ms. Schwartz asks. "They're toxic because you cannot sell them, you don't know what they're worth, your balance sheet is not credible and the whole market freezes up. We don't know whom to lend to because we don't know who is sound. So if you could get rid of them, that would be an improvement."
Former Secretary of Labor Robert Reich agrees, writing in October:
Despite all the money going directly to the big banks, despite all the government guarantees and loans and special tax breaks, despite the shot-gun weddings and bank mergers, despite the willingness of the Treasury and the Fed to do almost whatever the banks have asked, the reality is that credit is not flowing.
Why? Because the underlying problem isn't a liquidity problem. As I've noted elsewhere, the problem is that lenders and investors don't trust they'll get their money back because no one trusts that the numbers that purport to value securities are anything but wishful thinking. The trouble, in a nutshell, is that the financial entrepreneurship of recent years -- the derivatives, credit default swaps, collateralized debt instruments, and so on -- has undermined all notion of true value.
Many of these fancy instruments became popular over recent years precisely because they circumvented financial regulations, especially rules on banks' capital adequacy. Big banks created all these off-balance-sheet vehicles because they allowed the big banks to carry less capital.
As the Huffington Post pointed out in March, Nobel laureate Paul Krugman, economist James Galbraith, and - apparently - the chair of the Council of Economic Advisors, agree:
Christina Romer, at a speech at the Brookings Institution Monday afternoon, appeared to give support to critics of Treasury Secretary Timothy Geithner who say that he is wrongly treating the economic collapse as a "liquidity crisis" when it is instead a crisis of solvency in the banking system brought on by a collapse in asset prices.
"Most obviously, like the Great Depression, today's downturn had its fundamental cause in the decline in asset prices and the failure or near-failure of financial institutions," she said in prepared remarks, where she compared and contrasted the current crisis with the Great Depression. The assets in question are, by and large, houses and other real estate....
It's more than just an academic question. The administration can't fix the economy if it can't accurately diagnose the problem. But if Romer did say publicly, in an explicit way, that the banking system faced a solvency crisis, that statement in itself could cause chaos in the markets as was seen on a smaller level when Sens. Chris Dodd (D-Conn.) and Charles Schumer (D-N.Y.) said they were open to nationalizing insolvent banks, causing CitiGroup and other bank stocks to dive.
Critics of Geithner, including Nobel Prize winning economist Paul Krugman, insist that the real problem is an asset collapse that led to a crisis of solvency in the banking system. In other words, Krugman argues that home values have come back to Earth, while Geithner hopes to solve the problem by pushing home values back to where they were. The conflict is a serious one because it dictates what response is appropriate.
Geithner's understanding of the crisis as one of liquidity -- which Fed chief Ben Bernanke agrees with -- leads to some bizarre conclusions, Krughman has written:
Thus, in a recent interview Tim Geithner, the Treasury secretary, tried to make a distinction between the "basic inherent economic value" of troubled assets and the "artificially depressed value" that those assets command right now. In recent transactions, even AAA-rated mortgage-backed securities have sold for less than 40 cents on the dollar, but Mr. Geithner seems to think they're worth much, much more.
And the government's job, he declared, is to "provide the financing to help get those markets working," pushing the price of toxic waste up to where it ought to be.
What's more, officials seem to believe that getting toxic waste properly priced would cure the ills of all our major financial institutions....
Economist James Galbraith, who has been critical of the administration's rescue effort as insufficient, said in an e-mail that "the recognition that the fundamental decline (collapse) in asset prices is the problem firmly contradicts the administration's line that credit is 'blocked' and can be made to 'flow.' The asset price (read: housing price) problem undercuts that completely, not so much by establishing insolvency of the banks, but by establishing the lack of credit-worthiness of the borrowers. Whether Christina Romer recognizes this is an interesting question."...
At a closed-door meeting with House Democrats on Monday night, according two members of Congress who were in the meeting, Geithner repeated that he believed the problem with the financial system was a lack of liquidity and that if he could get credit flowing again, the problem would right itself. Key to this analysis is the question of whether one thinks the rise of housing prices was an artificial bubble or if the collapse is reversible and we can return to those highs. Policymakers have resisted labeling it as a bubble. Romer, on Monday, came close, referring to a "run-up in housing prices that sure looks like a bubble."...
If the crisis is understood as one of liquidity, then the appropriate response is to continue injecting capital into the banking system and fiscal stimulus into the general economy until asset prices return toward previous highs. Japanese policymakers initially understood their crisis to be one of liquidity and injected hundreds of billions during the 1990s, to little effect. But if the problem is something different -- a solvency crisis brought on by essentially permanent asset-price declines -- then the policy response needed is different.
And in an essay today entitled "The risk of a double-dip recession is rising", well-known professor of economics Nouriel Roubini writes:
This is a crisis of solvency, not just liquidity, but true deleveraging has not begun yet because the losses of financial institutions have been socialised and put on government balance sheets. This limits the ability of banks to lend, households to spend and companies to invest...
The releveraging of the public sector through its build-up of large fiscal deficits risks crowding out a recovery in private sector spending.
The question of whether the current crisis is mainly an insolvency crisis or a currency crisis is vital because - as noted above - the wrong diagnosis leads to the wrong government response.
As I have previously pointed out, many top economists say that we must break up the giant insolvent banks to save our economy. As Fortune, BusinessWeek and Federal Reserve governor Daniel K. Tarullo have all pointed out, breaking up the largest, insolvent banks would allow more competition from small to mid-size banks, and such banks may actually make more loans to small businesses.
Therefore, if the government has misdiagnosed a solvency crisis as a liquidity crisis, it better change its prescription quickly. If it does so, the patient may yet regain health. If not, the patient is in mortal danger.
Specifically, Obama's top economic advisors - Larry Summers, Timothy Geithner and Ben Bernanke - argue that the Great Depression occurred largely because the government did not do enough to restore liquidity to the banks and so the credit system shut down, which in turn shut down the entire economy. They believe that restoring liquidity to the nation's banks - and especially the giant banks such as Citi, Bank of America, Wells Fargo, JP Morgan Chase - is essential.
But according to some of America's top economists, Obama's economic team is wrong.
For example, the Wall Street Journal interviewed Anna Schwartz in October 2008. Schwartz is the co-author with Milton Friedman of the leading book on the Great Depression (Friedman, the Nobel prize winning economist, is probably the most followed economist of the last 50 years). Schwartz is widely regarded as the leading living expert on monetary policy, and someone who actually lived through the Great Depression.
In the interview by the Journal, Schwartz said the current problem is a solvency crisis, not a liquidity crisis:
"The Fed," she argues, "has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible."
So even though the Fed has flooded the credit markets with cash, spreads haven't budged because banks don't know who is still solvent and who is not. This uncertainty, says Ms. Schwartz, is "the basic problem in the credit market. Lending freezes up when lenders are uncertain that would-be borrowers have the resources to repay them. So to assume that the whole problem is inadequate liquidity bypasses the real issue."
Indeed, in the article - entitled "Bernanke Is Fighting the Last War " - Schwartz says:
In the 1930s, as Ms. Schwartz and Mr. Friedman argued in "A Monetary History," the country and the Federal Reserve were faced with a liquidity crisis in the banking sector. As banks failed, depositors became alarmed that they'd lose their money if their bank, too, failed. So bank runs began, and these became self-reinforcing: "If the borrowers hadn't withdrawn cash, they [the banks] would have been in good shape. But the Fed just sat by and did nothing, so bank after bank failed. And that only motivated depositors to withdraw funds from banks that were not in distress," deepening the crisis and causing still more failures.
But "that's not what's going on in the market now," Ms. Schwartz says. Today, the banks have a problem on the asset side of their ledgers -- "all these exotic securities that the market does not know how to value."
"Why are they 'toxic'?" Ms. Schwartz asks. "They're toxic because you cannot sell them, you don't know what they're worth, your balance sheet is not credible and the whole market freezes up. We don't know whom to lend to because we don't know who is sound. So if you could get rid of them, that would be an improvement."
Former Secretary of Labor Robert Reich agrees, writing in October:
Despite all the money going directly to the big banks, despite all the government guarantees and loans and special tax breaks, despite the shot-gun weddings and bank mergers, despite the willingness of the Treasury and the Fed to do almost whatever the banks have asked, the reality is that credit is not flowing.
Why? Because the underlying problem isn't a liquidity problem. As I've noted elsewhere, the problem is that lenders and investors don't trust they'll get their money back because no one trusts that the numbers that purport to value securities are anything but wishful thinking. The trouble, in a nutshell, is that the financial entrepreneurship of recent years -- the derivatives, credit default swaps, collateralized debt instruments, and so on -- has undermined all notion of true value.
Many of these fancy instruments became popular over recent years precisely because they circumvented financial regulations, especially rules on banks' capital adequacy. Big banks created all these off-balance-sheet vehicles because they allowed the big banks to carry less capital.
As the Huffington Post pointed out in March, Nobel laureate Paul Krugman, economist James Galbraith, and - apparently - the chair of the Council of Economic Advisors, agree:
Christina Romer, at a speech at the Brookings Institution Monday afternoon, appeared to give support to critics of Treasury Secretary Timothy Geithner who say that he is wrongly treating the economic collapse as a "liquidity crisis" when it is instead a crisis of solvency in the banking system brought on by a collapse in asset prices.
"Most obviously, like the Great Depression, today's downturn had its fundamental cause in the decline in asset prices and the failure or near-failure of financial institutions," she said in prepared remarks, where she compared and contrasted the current crisis with the Great Depression. The assets in question are, by and large, houses and other real estate....
It's more than just an academic question. The administration can't fix the economy if it can't accurately diagnose the problem. But if Romer did say publicly, in an explicit way, that the banking system faced a solvency crisis, that statement in itself could cause chaos in the markets as was seen on a smaller level when Sens. Chris Dodd (D-Conn.) and Charles Schumer (D-N.Y.) said they were open to nationalizing insolvent banks, causing CitiGroup and other bank stocks to dive.
Critics of Geithner, including Nobel Prize winning economist Paul Krugman, insist that the real problem is an asset collapse that led to a crisis of solvency in the banking system. In other words, Krugman argues that home values have come back to Earth, while Geithner hopes to solve the problem by pushing home values back to where they were. The conflict is a serious one because it dictates what response is appropriate.
Geithner's understanding of the crisis as one of liquidity -- which Fed chief Ben Bernanke agrees with -- leads to some bizarre conclusions, Krughman has written:
Thus, in a recent interview Tim Geithner, the Treasury secretary, tried to make a distinction between the "basic inherent economic value" of troubled assets and the "artificially depressed value" that those assets command right now. In recent transactions, even AAA-rated mortgage-backed securities have sold for less than 40 cents on the dollar, but Mr. Geithner seems to think they're worth much, much more.
And the government's job, he declared, is to "provide the financing to help get those markets working," pushing the price of toxic waste up to where it ought to be.
What's more, officials seem to believe that getting toxic waste properly priced would cure the ills of all our major financial institutions....
Economist James Galbraith, who has been critical of the administration's rescue effort as insufficient, said in an e-mail that "the recognition that the fundamental decline (collapse) in asset prices is the problem firmly contradicts the administration's line that credit is 'blocked' and can be made to 'flow.' The asset price (read: housing price) problem undercuts that completely, not so much by establishing insolvency of the banks, but by establishing the lack of credit-worthiness of the borrowers. Whether Christina Romer recognizes this is an interesting question."...
At a closed-door meeting with House Democrats on Monday night, according two members of Congress who were in the meeting, Geithner repeated that he believed the problem with the financial system was a lack of liquidity and that if he could get credit flowing again, the problem would right itself. Key to this analysis is the question of whether one thinks the rise of housing prices was an artificial bubble or if the collapse is reversible and we can return to those highs. Policymakers have resisted labeling it as a bubble. Romer, on Monday, came close, referring to a "run-up in housing prices that sure looks like a bubble."...
If the crisis is understood as one of liquidity, then the appropriate response is to continue injecting capital into the banking system and fiscal stimulus into the general economy until asset prices return toward previous highs. Japanese policymakers initially understood their crisis to be one of liquidity and injected hundreds of billions during the 1990s, to little effect. But if the problem is something different -- a solvency crisis brought on by essentially permanent asset-price declines -- then the policy response needed is different.
And in an essay today entitled "The risk of a double-dip recession is rising", well-known professor of economics Nouriel Roubini writes:
This is a crisis of solvency, not just liquidity, but true deleveraging has not begun yet because the losses of financial institutions have been socialised and put on government balance sheets. This limits the ability of banks to lend, households to spend and companies to invest...
The releveraging of the public sector through its build-up of large fiscal deficits risks crowding out a recovery in private sector spending.
The question of whether the current crisis is mainly an insolvency crisis or a currency crisis is vital because - as noted above - the wrong diagnosis leads to the wrong government response.
As I have previously pointed out, many top economists say that we must break up the giant insolvent banks to save our economy. As Fortune, BusinessWeek and Federal Reserve governor Daniel K. Tarullo have all pointed out, breaking up the largest, insolvent banks would allow more competition from small to mid-size banks, and such banks may actually make more loans to small businesses.
Therefore, if the government has misdiagnosed a solvency crisis as a liquidity crisis, it better change its prescription quickly. If it does so, the patient may yet regain health. If not, the patient is in mortal danger.
The risk of a double-dip recession is rising
By Nouriel Roubini
Published: August 23 2009 18:55
The global economy is starting to bottom out from the worst recession and financial crisis since the Great Depression. In the fourth quarter of 2008 and first quarter of 2009 the rate at which most advanced economies were contracting was similar to the gross domestic product free-fall in the early stage of the Depression. Then, late last year, policymakers who had been behind the curve finally started to use most of the weapons in their arsenal.
That effort worked and the free-fall of economic activity eased. There are three open questions now on the outlook. When will the global recession be over? What will be the shape of the economic recovery? Are there risks of a relapse?
On the first question it looks like the global economy will bottom out in the second half of 2009. In many advanced economies (the US, UK, Spain, Italy and other eurozone members) and some emerging market economies (mostly in Europe) the recession will not be formally over before the end of the year, as green shoots are still mixed with weeds. In some other advanced economies (Australia, Germany, France and Japan) and most emerging markets (China, India, Brazil and other parts of Asia and Latin America) the recovery has already started.
On the second issue the debate is between those – most of the economic consensus – who expect a V-shaped recovery with a rapid return to growth and those – like myself – who believe it will be U-shaped, anaemic and below trend for at least a couple of years, after a couple of quarters of rapid growth driven by the restocking of inventories and a recovery of production from near Depression levels.
There are several arguments for a weak U-shaped recovery . Employment is still falling sharply in the US and elsewhere – in advanced economies, unemployment will be above 10 per cent by 2010. This is bad news for demand and bank losses, but also for workers’ skills, a key factor behind long-term labour productivity growth.
Second, this is a crisis of solvency, not just liquidity, but true deleveraging has not begun yet because the losses of financial institutions have been socialised and put on government balance sheets. This limits the ability of banks to lend, households to spend and companies to invest.
Third, in countries running current account deficits, consumers need to cut spending and save much more, yet debt-burdened consumers face a wealth shock from falling home prices and stock markets and shrinking incomes and employment.
Fourth, the financial system – despite the policy support – is still severely damaged. Most of the shadow banking system has disappeared, and traditional banks are saddled with trillions of dollars in expected losses on loans and securities while still being seriously undercapitalised.
Fifth, weak profitability – owing to high debts and default risks, low growth and persistent deflationary pressures on corporate margins – will constrain companies’ willingness to produce, hire workers and invest.
Sixth, the releveraging of the public sector through its build-up of large fiscal deficits risks crowding out a recovery in private sector spending. The effects of the policy stimulus, moreover, will fizzle out by early next year, requiring greater private demand to support continued growth.
Seventh, the reduction of global imbalances implies that the current account deficits of profligate economies, such as the US, will narrow the surpluses of countries that over-save (China and other emerging markets, Germany and Japan). But if domestic demand does not grow fast enough in surplus countries, this will lead to a weaker recovery in global growth.
There are also now two reasons why there is a rising risk of a double-dip W-shaped recession. For a start, there are risks associated with exit strategies from the massive monetary and fiscal easing: policymakers are damned if they do and damned if they don’t. If they take large fiscal deficits seriously and raise taxes, cut spending and mop up excess liquidity soon, they would undermine recovery and tip the economy back into stag-deflation (recession and deflation).
But if they maintain large budget deficits, bond market vigilantes will punish policymakers. Then, inflationary expectations will increase, long-term government bond yields would rise and borrowing rates will go up sharply, leading to stagflation.
Another reason to fear a double-dip recession is that oil, energy and food prices are now rising faster than economic fundamentals warrant, and could be driven higher by excessive liquidity chasing assets and by speculative demand. Last year, oil at $145 a barrel was a tipping point for the global economy, as it created negative terms of trade and a disposable income shock for oil importing economies. The global economy could not withstand another contractionary shock if similar speculation drives oil rapidly towards $100 a barrel.
In summary, the recovery is likely to be anaemic and below trend in advanced economies and there is a big risk of a double-dip recession.
The writer is professor of economics at the Stern School of Business, NYU
Tuesday, 14 July 2009
Troppo presto per essere ottimisti
Tre ottimi motivi per essere pessimisti ed evitare trionfalismi
di Marco Onado, professore a contratto senior presso il Dipartimento di finanza della Bocconi
Dall’inizio della primavera si è diffusa la sensazione che il peggio della crisi sia passato. Prima timidamente, poi con sempre maggior decisione, le autorità dei principali paesi hanno parlato di “germogli di ripresa” e i mercati di borsa hanno avviato un rialzo spettacolare, tuttora in corso, con aumenti del 20-40% rispetto ai minimi di inizio marzo (100% addirittura per la Russia). Tutto bene quindi? Ci sono almeno tre motivi per essere prudenti, oltre naturalmente la scaramanzia che in questi casi è d’obbligo.
Il primo è che gli squilibri macroeconomici e finanziari che hanno portato alla crisi non sono stati ancora risolti, tanto che l’ottimismo viene solo dal rallentamento dei segnali negativi (in primis la produzione industriale), piuttosto che da un cambiamento di segno degli indicatori. Come ha detto il presidente della Fed, Ben Bernanke, in una testimonianza al Congresso ai primi di giugno, “le imprese sono ancora molto prudenti e continuano a tagliare posti di lavoro e investimenti”. Ne consegue il rischio concreto di un lungo periodo in cui la crescita può risultare inferiore a quella potenziale. Lo spettro della ‘sindrome giapponese’, in cui la crisi finanziaria ha pesato come un macigno sullo sviluppo economico del paese per oltre un decennio, è tutt’altro che rimosso.
In secondo luogo, le migliaia di miliardi di dollari che i governi hanno impiegato o impegnato sotto forma di ricapitalizzazioni, sussidi e garanzie pubbliche lasceranno un’eredità pesante, di cui è ancora difficile scorgere le implicazioni di lungo periodo. Uno studioso di prestigio come John Taylor, della Stanford University, denuncia preoccupato che “il deficit federale sta esplodendo” (Financial Times del 26 maggio): dal 48% del pil di fine 2008 è previsto dal Congressional Budget Office balzare all’82% in 10 anni e al 100% in altri cinque. La gestione di questa massa enorme di debito aggiuntivo (creata, si badi, per curare l’eccesso di debito privato) sarà estremamente difficile, tanto che i mercati hanno determinato un rialzo significativo dei tassi di interesse a lungo termine.
A questo si aggiunga il problema delle banche centrali, che si sono caricate di titoli rischiosi in quantità assolutamente straordinarie e che, nel caso della Fed e della Bank of England, in base alla strategia di quantitative easing, stanno acquistando a piene mani titoli pubblici a lungo termine. Taylor sostiene che le banche centrali oggi hanno la grande tentazione di lasciare che una grande fiammata inflazionistica riporti debiti pubblici e privati a livelli sostenibili. Si tratterebbe di uno scenario non meno preoccupante di quello giapponese. La testimonianza di Bernanke contiene fra le righe la consapevolezza che le banche centrali, avendo scampato lo scoglio di Scilla dell’implosione del sistema finanziario mondiale, dovranno ora affrontare la Cariddi del controllo del debito pubblico e dell’inflazione.
In Europa, i problemi non sono molto diversi: il Trattato europeo e lo statuto della Bce offrono una difesa in più rispetto agli Stati Uniti e al Regno Unito, ma il recente attacco di Angela Merkel all’istituzione di Francoforte getta ombre inquietanti sull’indipendenza della nostra banca centrale nel prossimo futuro.
Il terzo punto fondamentale è che nel clima di ottimismo si sta allentando la tensione sulla necessità di cambiare le regole del sistema finanziario. Come se quello che abbiamo attraversato fosse un semplice incidente di percorso, sono sempre più diffusi i moniti a evitare costi eccessivi di regolamentazione e, quel che è peggio, aumentano le divergenze sul come garantire il coordinamento dei regolatori a livello globale oppure a realizzare un livello europeo, in particolare all’interno di Eurolandia, di supervisione finanziaria.
In sintesi, l’unica certezza è che il fronte finanziario della crisi è ragionevolmente sotto controllo. Ma si aprono tre fronti non meno delicati sui quali si deciderà la battaglia economica e politica dei prossimi anni. Non è ancora il momento di smobilitare l’esercito e tanto meno di danzare nelle piazze.
Thursday, 2 July 2009
Crisis Won’t End Until Balance Sheets Get Real: Jonathan Weil (bloomberg)
July 2 (Bloomberg) -- Investors are feeling better about financial companies’ balance sheets than they were a few months ago. That’s not to say they have a lot of confidence in them.
Compare, for example, the stock-market value of Regions Financial Corp. with the bank’s reported net worth. At $3.97, the Birmingham, Alabama-based company’s stock is up 69 percent since its February low, giving Regions a $4.5 billion market capitalization. That’s still only a third of the $13.5 billion book value it showed as of March 31. In the market’s view, the bank’s asset values remain grossly overstated.
The same story is playing out across the financial-services industry. Financial stocks in the Standard & Poor’s 500 Index rocketed 35 percent during the second quarter, fueling the index’s biggest quarterly advance since 1998. Yet for hundreds of U.S. banks and insurance companies, a vast credibility gap remains when it comes to their accounts.
As of June 30, there were 336 U.S.-listed financial companies trading for less than 60 percent of their book value, including Citigroup Inc., SunTrust Banks Inc. and Marshall & Ilsley Corp. Together, they had a stock-market value of $233.1 billion, compared with $463.1 billion of book value, or common shareholder equity, according to data compiled by Bloomberg.
When I ran the same stock screen for a column about this same time last year, it turned up 168 companies with a combined $120.3 billion market value and a book value of $270.3 billion. The way the credit crunch was playing out then, market declines were begetting writedowns, leading to more market declines and then more writedowns, and so on. That downward cycle finally has been broken, only nobody knows what will come next.
Pressure on Management
Often when companies see their shares trading at large discounts to the net asset values on their books, their managers will feel pressure to take big writedowns and corresponding charges to earnings, especially for intangible assets such as goodwill leftover from past acquisition sprees.
These are strange times, though. After peaking during the fourth quarter of 2008, writedowns and credit losses at U.S. financial companies fell more than half to $101.8 billion in the first quarter, according to Bloomberg data. That was when financial stocks generally were at or near their lows.
Bank managers may not be any more inclined to cleanse their books now than they were then. Prices and liquidity have improved for many of the mortgage-backed bonds that helped spur the global financial crisis. Loans generally don’t have to be marked down to market values anyway, under the accounting rules.
What’s worrisome about the financial sector’s rally is that it has been government-induced. So far this year, the Federal Reserve has printed lots of money, hyped stress tests for large banks that were hardly stressful, and made clear it won’t let big institutions such as Citigroup die.
‘Green Shoots’
The Treasury Department promised subsidies for buyers of banks’ toxic debt securities, a program now having trouble getting started.
Banks and insurers got Congress to browbeat the Financial Accounting Standards Board into making rule changes that will let them plump earnings and regulatory capital. There also was Fed Chairman Ben Bernanke’s line in March about “green shoots,” which sparked a media epidemic of alleged sightings.
For all this, we still have hundreds of financial companies trading as though the worst of their losses are still to come. Just imagine what their prognosis might be if the government hadn’t pulled out all the stops.
Hidden Losses
Meanwhile, housing prices keep falling. Bank regulators this week said delinquency rates on prime home mortgages more than doubled in the first quarter to 2.9 percent of such loans, up from 1.1 percent a year earlier. The peak of the interest- rate resets on adjustable-rate mortgages won’t hit until 2011, according to analysts at Credit Suisse Group AG. And while there’s a meltdown in commercial real estate, hardly any of the credit losses have shown up on lenders’ financial statements.
Many of the largest banks and insurance companies have taken advantage of the run-up in their stock prices to raise badly needed common equity, including Regions, which had a $1.6 billion stock sale in May. (Its books still show $5.6 billion of goodwill, about $1 billion more than Regions’ market cap.) Most distressed financial companies, however, have been shut out of the capital markets and face dim takeover prospects.
To name a few, Colonial BancGroup Inc., a Montgomery, Alabama-based lender with $26.4billion of assets, is down to a $126 million market cap, or 10 percent of its book value. Flint, Michigan-based Citizens Republic Bancorp Inc., with $13 billion of assets, has a $91 million market value, or 7 percent of book. Austin, Texas-based Guaranty Financial Group Inc., with $15.4 billion of assets, this week said it may not survive and that it may revise its 2008 net loss to $2.2 billion from $444 million.
Truth is, there’s no way to know if the economy has turned the corner, or if last quarter’s market rally will prove sustainable. Yet when this many banks still have balance sheets that defy belief, it means the industry probably hasn’t re- established trust with the investing public.
Trust, you may recall, is the financial system’s most precious asset. On that score, we still have a long way to go before we can say this banking crisis is over.
(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Jonathan Weil in New York at jweil6@bloomberg.net
Last Updated: July 2, 2009 00:01 EDT
Compare, for example, the stock-market value of Regions Financial Corp. with the bank’s reported net worth. At $3.97, the Birmingham, Alabama-based company’s stock is up 69 percent since its February low, giving Regions a $4.5 billion market capitalization. That’s still only a third of the $13.5 billion book value it showed as of March 31. In the market’s view, the bank’s asset values remain grossly overstated.
The same story is playing out across the financial-services industry. Financial stocks in the Standard & Poor’s 500 Index rocketed 35 percent during the second quarter, fueling the index’s biggest quarterly advance since 1998. Yet for hundreds of U.S. banks and insurance companies, a vast credibility gap remains when it comes to their accounts.
As of June 30, there were 336 U.S.-listed financial companies trading for less than 60 percent of their book value, including Citigroup Inc., SunTrust Banks Inc. and Marshall & Ilsley Corp. Together, they had a stock-market value of $233.1 billion, compared with $463.1 billion of book value, or common shareholder equity, according to data compiled by Bloomberg.
When I ran the same stock screen for a column about this same time last year, it turned up 168 companies with a combined $120.3 billion market value and a book value of $270.3 billion. The way the credit crunch was playing out then, market declines were begetting writedowns, leading to more market declines and then more writedowns, and so on. That downward cycle finally has been broken, only nobody knows what will come next.
Pressure on Management
Often when companies see their shares trading at large discounts to the net asset values on their books, their managers will feel pressure to take big writedowns and corresponding charges to earnings, especially for intangible assets such as goodwill leftover from past acquisition sprees.
These are strange times, though. After peaking during the fourth quarter of 2008, writedowns and credit losses at U.S. financial companies fell more than half to $101.8 billion in the first quarter, according to Bloomberg data. That was when financial stocks generally were at or near their lows.
Bank managers may not be any more inclined to cleanse their books now than they were then. Prices and liquidity have improved for many of the mortgage-backed bonds that helped spur the global financial crisis. Loans generally don’t have to be marked down to market values anyway, under the accounting rules.
What’s worrisome about the financial sector’s rally is that it has been government-induced. So far this year, the Federal Reserve has printed lots of money, hyped stress tests for large banks that were hardly stressful, and made clear it won’t let big institutions such as Citigroup die.
‘Green Shoots’
The Treasury Department promised subsidies for buyers of banks’ toxic debt securities, a program now having trouble getting started.
Banks and insurers got Congress to browbeat the Financial Accounting Standards Board into making rule changes that will let them plump earnings and regulatory capital. There also was Fed Chairman Ben Bernanke’s line in March about “green shoots,” which sparked a media epidemic of alleged sightings.
For all this, we still have hundreds of financial companies trading as though the worst of their losses are still to come. Just imagine what their prognosis might be if the government hadn’t pulled out all the stops.
Hidden Losses
Meanwhile, housing prices keep falling. Bank regulators this week said delinquency rates on prime home mortgages more than doubled in the first quarter to 2.9 percent of such loans, up from 1.1 percent a year earlier. The peak of the interest- rate resets on adjustable-rate mortgages won’t hit until 2011, according to analysts at Credit Suisse Group AG. And while there’s a meltdown in commercial real estate, hardly any of the credit losses have shown up on lenders’ financial statements.
Many of the largest banks and insurance companies have taken advantage of the run-up in their stock prices to raise badly needed common equity, including Regions, which had a $1.6 billion stock sale in May. (Its books still show $5.6 billion of goodwill, about $1 billion more than Regions’ market cap.) Most distressed financial companies, however, have been shut out of the capital markets and face dim takeover prospects.
To name a few, Colonial BancGroup Inc., a Montgomery, Alabama-based lender with $26.4billion of assets, is down to a $126 million market cap, or 10 percent of its book value. Flint, Michigan-based Citizens Republic Bancorp Inc., with $13 billion of assets, has a $91 million market value, or 7 percent of book. Austin, Texas-based Guaranty Financial Group Inc., with $15.4 billion of assets, this week said it may not survive and that it may revise its 2008 net loss to $2.2 billion from $444 million.
Truth is, there’s no way to know if the economy has turned the corner, or if last quarter’s market rally will prove sustainable. Yet when this many banks still have balance sheets that defy belief, it means the industry probably hasn’t re- established trust with the investing public.
Trust, you may recall, is the financial system’s most precious asset. On that score, we still have a long way to go before we can say this banking crisis is over.
(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Jonathan Weil in New York at jweil6@bloomberg.net
Last Updated: July 2, 2009 00:01 EDT
Fed’s Yellen Says Rates May Stay Near Zero for Years (bloomberg)
July 1 (Bloomberg) -- Federal Reserve Bank of San Francisco President Janet Yellen said the prospect that policy makers will leave the benchmark U.S. interest rate near zero for the next several years is “not outside the realm of possibility.”
“We have a very serious recession, we have a 9.4 percent unemployment rate,” and inflation possibly falling further below the Fed’s preferred level, she told reporters yesterday after a speech in San Francisco. Given the recession’s severity, “we should want to do more. If we were not at zero, we would be lowering the funds rate.”
Yellen’s comments go beyond those made by other policy makers after a June 23-24 meeting, when they said the federal funds rate will likely stay at “exceptionally low levels” for “an extended period.” They have held the rate, also known as the overnight lending rate between banks, at between zero and 0.25 percent since December.
The Fed “did succeed in averting a full-blown meltdown,” Yellen said in the speech to the Commonwealth Club of California. Nevertheless, the threat of another financial shock, such as one from falling commercial real-estate prices, is “high on my worry list.”
Yellen said the U.S. economy may be about to “turn the corner” and reiterated her expectation that the recession will end later this year.
“Right now, we’re like a patient in intensive care whose condition has stabilized and whose fever is just starting to come down,” Yellen said in the speech. “We’re just completing the sixth quarter of recession, but the pace of decline has slowed markedly” and “confidence in the financial system is slowly returning.”
Hundred-Year Flood
The 62-year-old bank chief, who votes on monetary policy this year, compared the financial crisis to “a hundred-year flood: a disaster of the highest order which has put us on continuous emergency footing.”
“I expect that we will turn the growth corner sometime later this year, but I am not optimistic that the economy will spring back to normal anytime soon,” she said. Unemployment will “remain painfully high for several more years.”
The world’s largest economy has lost 6 million jobs since December 2007, the start of the deepest recession in 50 years.
Under Chairman Ben S. Bernanke, the central bank has doubled its balance sheet and created unprecedented emergency programs to unclog credit markets.
Recent Data
While recent data indicate a smaller pace of decline in some areas of the economy, such as housing and new construction, joblessness is climbing and the increasing cost of residential loans is impeding new lending. The unemployment rate reached 9.4 percent in May and new mortgage lending is at a 13-year low.
Rising mortgage rates may “place a drag on a still very sick housing market,” while increasing oil prices may hurt the recovery, Yellen said in her speech. Still, the fiscal stimulus and a rebound in consumer demand and housing construction will probably prompt a revival in economic growth, she said.
“We’ve seen encouraging signs lately that the economy is poised to turn the corner,” the bank president said. “Our major banks have made excellent progress in establishing the capital buffers needed to continue lending even through a downturn that is more serious than we anticipate. But they are still nursing their wounds and credit will remain tight for some time to come.”
Predominant Risk
As for inflation, the “predominant risk” is that it will “be too low, not too high, over the next several years,” Yellen said. Inflation excluding food and energy may fall to about 1 percent over the next year and remain below 2 percent, with an unlikely possibility of turning into deflation if the economy fails to recover soon, she said.
Another Fed district bank president, Charles Evans of Chicago, told reporters in London today that he also sees inflation falling “a bit from where we are now.”
The global financial crisis, which began with the collapse of the U.S. subprime-lending market in 2007, has led to $1.47 trillion of writedowns and credit losses at banks and other financial institutions, according to data compiled by Bloomberg.
The Fed “won’t hesitate” to withdraw the record stimulus it has put in place, when necessary, Yellen said. “If anything, I’m more concerned that we will be tempted to tighten policy too soon, thereby aborting recovery.”
Responding to audience questions after her speech, Yellen said China’s concern about the value of the dollar “is logical” given the country’s holdings in Treasuries.
China’s call for the creation of a reserve currency other than the dollar is “not practical at the current time,” and more of a “long-term” idea, she said.
To contact the reporter on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net
Last Updated: July 1, 2009 14:27 EDT
Monday, 8 June 2009
Pimco’s Gross Says Diversify Dollar Before Central Banks and Sovereign Funds do the same
By Dave Liedtka June 3 (Bloomberg) -- Bill Gross, founder of Pacific Investment Management Co. advised holders of dollars to diversify before central banks and sovereign wealth funds ultimately do the same. Gross made the recommendation in acommentary posted on Pimco’s Website. Bill Gross, founder of Pacific Investment Management Co., advised holders of U.S. dollars to diversify before central banks and sovereign wealth funds ultimately do the same amid concern about surging deficits.
Treasury Secretary Timothy Geithner’s plan to bring the budget back into balance won’t be successful as consumers shrink spending and the U.S. growth rate slows, Gross said in a Bloomberg Radio interview today. The budget deficit will be narrowed to “roughly” 3 percent of GDP from a projected 12.9 percent this year, Geithner said June 1.
“I think he’ll fail at pulling a balanced rabbit out of a hat,” Gross said from Pimco’s headquarters in Newport Beach, California. “They are talking about -- once the economy in the U.S. renormalizes -- the move back toward balance or much less of a deficit. I suspect that will be hard to do.”
Higher savings rates and an increase in the cost to service the national debt will drag on the U.S. economy, likely meaning “trillion-dollar deficits are here to stay,” Gross wrote in his June investment outlook posted today on the firm’s Web site.
Gross, manager of the world’s biggest bond fund, said on May 21 the U.S. will “eventually” lose its AAA credit rating after Standard & Poor’s lowered its outlook on the U.K.’s AAA to “negative” from “stable” amid an escalating ratio of debt- to-gross domestic product. While U.S. marketable debt is at about 45 percent of GDP, annual deficits of 10 percent will push the amount to 100 percent within five years, a level that rating companies and markets view as a “point of no return,” he wrote.
‘Years to Come’
Government spending will push the budget deficit to $1.845 trillion in the year ending Sept. 30, according to the Congressional Budget Office.
Federal Reserve Chairman Ben S. Bernanke said today that large U.S. budget deficits threaten financial stability and the government can’t continue indefinitely to borrow at the current rate to finance the shortfall.
The U.S. growth rate “requires a government checkbook for years to come,” Gross wrote. Coupled with Medicare and Social Security entitlements, government borrowing could reach 300 percent of GDP, meaning “the Chinese and other surplus nations cannot fund the deficit even if they were fully on board,” he wrote.
China, the largest U.S. creditor, with $767.9 billion of debt, has shifted purchases of Treasuries into shorter-maturity securities amid concern about unprecedented debt sales.
Yield Curve
Geithner, speaking yesterday in an interview in Beijing with Chinese state media outlets, said he has “found a lot of confidence” in the U.S. economy during his trip to China.
Investors should position themselves in the front end of the yield curve as long-term Treasury yields likely move higher, steepening the so-called yield curve, Gross wrote.
Gross reduced his holdings of government-related bonds in the $150 billion Total Return Fund in April for the first time since January, according to company data. In addition to Treasuries, the government debt category can include inflation- linked Treasuries, so-called agency debt, interest-rate derivatives and bank debt backed by the FDIC.
Yields on benchmark 10-year notes climbed as high as 3.75 percent on May 28, the most since November, rising from a record low of 2.04 percent on Dec. 18. the 10-year yield dropped three basis points today to 3.59 percent today.
Currency Diversification
The dollar weakened beyond $1.43 against the euro yesterday for the first time in 2009 on bets record U.S. borrowing will undermine the greenback, prompting nations to consider alternatives to the world’s main reserve currency.
Russian President Dmitry Medvedev may discuss his proposal to create a new world currency when he meets counterparts from Brazil, India and China this month, Natalya Timakova, a spokeswoman for the president, told reporters yesterday. Russia’s proposals for the Group of 20 meeting in London in April included studying a supranational currency.
The U.S. currency climbed 0.9 percent to $1.4177 per euro at 11:15 a.m. in New York, from $1.4303 yesterday, in the biggest intraday advance since May 27. The dollar traded at 95.75 yen, compared with 95.76.
The government has pledged $12.8 trillion to open credit markets and snap the longest U.S. economic slump since the 1930s. The Fed will buy as much as $1.75 trillion in Treasuries and housing-related debt to drive down consumer borrowing costs. That could have “inflationary implications,” Gross said.
No Exit
“Our expectation is the government won’t be able to exit” from those positions, Gross said in an interview on Bloomberg Radio today. The programs “will be semi-permanent positions on their balance sheets.”
For all the hand-wringing over the dollar’s slide, expanding deficits and declining credit ratings, the bond market shows international demand for American financial assets is as high as ever. The Federal Reserve’s holdings of Treasuries on behalf of central banks and institutions from China to Norway rose by $68.8 billion, or 3.3 percent, in May, the third most on record, data compiled by Bloomberg show.
The Total Return Fund rose 4.8 percent in 2008, beating 93 percent of its peers, data compiled by Bloomberg show. The fund has returned 1.5 percent this year, according to Pimco data.
Treasury Secretary Timothy Geithner’s plan to bring the budget back into balance won’t be successful as consumers shrink spending and the U.S. growth rate slows, Gross said in a Bloomberg Radio interview today. The budget deficit will be narrowed to “roughly” 3 percent of GDP from a projected 12.9 percent this year, Geithner said June 1.
“I think he’ll fail at pulling a balanced rabbit out of a hat,” Gross said from Pimco’s headquarters in Newport Beach, California. “They are talking about -- once the economy in the U.S. renormalizes -- the move back toward balance or much less of a deficit. I suspect that will be hard to do.”
Higher savings rates and an increase in the cost to service the national debt will drag on the U.S. economy, likely meaning “trillion-dollar deficits are here to stay,” Gross wrote in his June investment outlook posted today on the firm’s Web site.
Gross, manager of the world’s biggest bond fund, said on May 21 the U.S. will “eventually” lose its AAA credit rating after Standard & Poor’s lowered its outlook on the U.K.’s AAA to “negative” from “stable” amid an escalating ratio of debt- to-gross domestic product. While U.S. marketable debt is at about 45 percent of GDP, annual deficits of 10 percent will push the amount to 100 percent within five years, a level that rating companies and markets view as a “point of no return,” he wrote.
‘Years to Come’
Government spending will push the budget deficit to $1.845 trillion in the year ending Sept. 30, according to the Congressional Budget Office.
Federal Reserve Chairman Ben S. Bernanke said today that large U.S. budget deficits threaten financial stability and the government can’t continue indefinitely to borrow at the current rate to finance the shortfall.
The U.S. growth rate “requires a government checkbook for years to come,” Gross wrote. Coupled with Medicare and Social Security entitlements, government borrowing could reach 300 percent of GDP, meaning “the Chinese and other surplus nations cannot fund the deficit even if they were fully on board,” he wrote.
China, the largest U.S. creditor, with $767.9 billion of debt, has shifted purchases of Treasuries into shorter-maturity securities amid concern about unprecedented debt sales.
Yield Curve
Geithner, speaking yesterday in an interview in Beijing with Chinese state media outlets, said he has “found a lot of confidence” in the U.S. economy during his trip to China.
Investors should position themselves in the front end of the yield curve as long-term Treasury yields likely move higher, steepening the so-called yield curve, Gross wrote.
Gross reduced his holdings of government-related bonds in the $150 billion Total Return Fund in April for the first time since January, according to company data. In addition to Treasuries, the government debt category can include inflation- linked Treasuries, so-called agency debt, interest-rate derivatives and bank debt backed by the FDIC.
Yields on benchmark 10-year notes climbed as high as 3.75 percent on May 28, the most since November, rising from a record low of 2.04 percent on Dec. 18. the 10-year yield dropped three basis points today to 3.59 percent today.
Currency Diversification
The dollar weakened beyond $1.43 against the euro yesterday for the first time in 2009 on bets record U.S. borrowing will undermine the greenback, prompting nations to consider alternatives to the world’s main reserve currency.
Russian President Dmitry Medvedev may discuss his proposal to create a new world currency when he meets counterparts from Brazil, India and China this month, Natalya Timakova, a spokeswoman for the president, told reporters yesterday. Russia’s proposals for the Group of 20 meeting in London in April included studying a supranational currency.
The U.S. currency climbed 0.9 percent to $1.4177 per euro at 11:15 a.m. in New York, from $1.4303 yesterday, in the biggest intraday advance since May 27. The dollar traded at 95.75 yen, compared with 95.76.
The government has pledged $12.8 trillion to open credit markets and snap the longest U.S. economic slump since the 1930s. The Fed will buy as much as $1.75 trillion in Treasuries and housing-related debt to drive down consumer borrowing costs. That could have “inflationary implications,” Gross said.
No Exit
“Our expectation is the government won’t be able to exit” from those positions, Gross said in an interview on Bloomberg Radio today. The programs “will be semi-permanent positions on their balance sheets.”
For all the hand-wringing over the dollar’s slide, expanding deficits and declining credit ratings, the bond market shows international demand for American financial assets is as high as ever. The Federal Reserve’s holdings of Treasuries on behalf of central banks and institutions from China to Norway rose by $68.8 billion, or 3.3 percent, in May, the third most on record, data compiled by Bloomberg show.
The Total Return Fund rose 4.8 percent in 2008, beating 93 percent of its peers, data compiled by Bloomberg show. The fund has returned 1.5 percent this year, according to Pimco data.
Atlanta Fed President Lockhart says today the Fed should not wait too long to tighten monetary policy
June 05 2009 - LOCKHART ON FED TIGHTENING Atlanta Fed President Lockhart says today the Fed should not wait too long to tighten monetary policy, though"we're not there yet". He says that boosting the Fed's purchase of Treasury securities is an option, but could have drawbacks. He also says the Fed could raise rates while maintaining expansionary quantitative policies.
His comments were made to Market News. Note that adjustingrates is less problematic for the Fed than selling off its portfolio of assets, since rate adjustment is routine for the Fed.
The combination of the possibility of increased Treasury purchases and hiking rates before selling off balance sheet assets sounds like a policy of curve flattening
ECB : Central Banks Need to Raise Rates Quickly at Crisis End
Central Banks Need to Raise Rates Quickly at Crisis End: Quaden
By Sandrine Rastello May 29 (Bloomberg)
The European Central Bank’s GuyQuaden said central banks will need to raise interest ratesquickly and strongly at the first signs of a sustainableeconomic recovery.Speaking at a conference in Morocco today, Quaden saidgovernments will also need to change direction on fiscalpolicies.
*TRICHETS SAYS ECB MUST `REINFORCE' ECONOMIC RESILIENCE
*TRICHETS SAYS ECB'S ACTIONS MAKE IT CREDIBLE IN THE LONG TERM
Wednesday, 20 May 2009
Writedowns past and present - FT
Published: May 13 2009How severe is the state of Europe’s banks? The answer depends on the losses the banks have yet to recognise in their accounts and the amount of profit they can generate in coming years to absorb those losses. In the absence of other data, the most credible estimate of future losses so far has come from the IMF, which set out detailed forecasts in its global financial stability report, published last month.
Monday, 18 May 2009
Smaller US banks need an additional $24bln capital - FT
STILL STRESS TESTING the system, research done for the FT has revealed that smaller and mid sized US BANKS may require an additional Usd 24bln in capital, when applying the standards set by the govt in its recent stress tests of the US's 19 largest institutions. The deficits amt to Usd 16.2bln for the next 200 largest banks after the top 19 banks thatwere already examined and $7.8bln for the remaining 7,700 banks. The US Tsy has said that it does not intend to extend the stress tests beyond the19 top institutions. However news of the potential capital shortfall may well increase pressure on many of the 7,900 US banks that form the backbone of the US financial system; resulting in a wave of takeovers and consolidation in the industry.
Friday, 15 May 2009
Fed's Fisher: US Recovery Will Be a 'very Slow Slog'
FED'S FISHER SAYS U.S. RECOVERY LIKELY TO BE A `VERY SLOW SLOG' FED'S FISHER The Dallas Fed chief is speaking to a Texas bankers group, saying the Fed's action has brought the economy back from the"abyss", with signs now emerging that worst of decline is easing. But hecautious that economy apt to bounce along the bottom "for a while", with recovery to be a very slow slog, not a V-shaped snapback, nor even a U-shaped one. Moreover, he thinks price pressures will be "meek" with riskon the deflationary side.
Thursday, 14 May 2009
Greenspan Sees ‘Seeds of a Bottoming’ in U.S. Housing - Bloomberg
By Vivien Lou Chen and Dawn KopeckiMay 12 (Bloomberg)
Former Federal Reserve Chairman AlanGreenspan said that the decline in the U.S. housing market maybe bottoming and it’s “very easy to see” financial marketscontinuing to improve.“We are finally beginning to see the seeds of abottoming” in the housing industry, Greenspan said today duringa conference of the National Association of Realtors inWashington. The U.S. is “at the edge of a major liquidation”in the stock of unsold properties, which may help to stabilizeprices, Greenspan said.Home-sales figures in recent weeks have shown a slower paceof decline, and the slide in property prices has eased,according to gauges including the S&P/Case-Shiller index.The former Fed chief, who was among the first prominenteconomists to warn about the risk of a recession in 2007, saidhousing prices could fall another 5 percent without putting toomuch strain on the economy.“We run into trouble if it’s very significantly more thanthat,” Greenspan said. Housing prices remain “the criticalAchilles’ heel” of the economy.While the housing bottom may not be obvious in prices, itis becoming clear in “significant regional differences,” wheresome of the hardest-hit areas are starting to show signs ofimprovement, he said.Greenspan said in congressional testimony in October that“a flaw” in his free-market ideology contributed to the“once-in-a-century” credit crisis.
Less Trouble
Today, Greenspan said companies are having less troubleraising money. U.S. firms have sold bonds at a record pace sofar this year, including a $3.75 billion offering today fromMicrosoft Corp., the world’s largest software maker.Wells Fargo & Co. and Morgan Stanley raised $16.6 billionin stock and bond sales on May 8, just a day after thegovernment ordered them to raise capital, becoming the firstbanks to respond to the government’s mandate.“Company after company has been raising capital and theyare getting far more than they expected,” said Greenspan, 83,who left the Fed in January 2006 after almost two decades at thehelm and has returned to his former role as a private economicforecaster. With the expansion in market liquidity, “you begin to see,as we are seeing today, a very significant rise in theavailability of money,” Greenspan said. As markets improve,“it’s very easy to see that it’s going to continue for anindefinite period,” he said.
Prices Fell
U.S. home prices fell the most on record during the firstquarter from the prior year as banks sold seized homes andforeclosures persisted at a high rate in California and Florida.The median U.S. housing price fell 14 percent during the quarterto $169,000 year-over-year, the National Association of Realtorssaid earlier today.U.S. banks held $26.6 billion of repossessed real estate atthe end of 2008, more than doubling from a year earlier,according to the Federal Deposit Insurance Corp. in Washington.Greenspan’s decisions as a central banker have come underscrutiny in recent years after the fall in home prices triggereda collapse in mortgage financing and other credit.Under Greenspan’s leadership, the Fed left the overnightlending rate between banks at 1 percent from June 2003 untilJune 2004. Regional Fed presidents such as Gary Stern ofMinneapolis and Janet Yellen of San Francisco have publiclyquestioned the Fed’s hands-off approach toward asset bubbleslike the one that emerged in house prices during Greenspan’stenure.
Kept Rates Low
Former Fed Vice Chairman Alan Blinder, Stanford Universityprofessor John Taylor and other economists say Greenspan’sapproach of keeping rates low for an extended period helped tofoster the housing bubble.“I’ve always argued going back many decades that you donot capitalize a piece of real estate with overnight interestrates,” the former chairman said today in response to anaudience question.The housing market is instead fueled by a decline in long-term interest rates, which started a full year before the Fedbegan cutting the federal funds rate, Greenspan said.“I think there is a recalibration of financial historythat I find very puzzling,” he said.Referring to his critics, he said, “I can say that Irespectfully disagree. They’re wrong.”
Wednesday, 13 May 2009
La crise et Bâle II pèsent lourd sur les fonds propres en Europe - Les Echos
Elsa Conesa - 13 mai 2009
La dégradation de la qualité du crédit ainsi que l'accroissement des risques de marché constatés à la fin 2008 provoquent une surconsommation de fonds propres calculés selon les critères imposés par Bâle II à laquelle les banques américaines ne sont pas soumises.
Pour les banques européennes, la crise a un double effet ravageur. Elle affecte évidemment les revenus et la qualité des actifs mais, en plus, ses effets sont amplifiés par les règles de solvabilité liées à Bâle II qu'elles appliquent depuis début 2008.
Une double peine à laquelle les banques américaines, qui n'appliquent pas encore ces nouvelles normes, ne sont pas soumises. A l'origine, les règles prudentielles de Bâle II devaient permettre aux banques d'affiner leur mesure du risque en prenant en compte non seulement le risque de crédit mais aussi le risque de marché et le risque opérationnel dans le calcul des encours pondérés. Ces mesures devaient symétriquement permettre de mieux évaluer la consommation de fonds propres alloués et d'obtenir in fine des ratios de solvabilité Tier-1 plus fidèles à la réalité. Les banques françaises ayant en outre opté pour la méthode dite avancée, elles calculent elles-mêmes leurs risques de crédit.
Avec Bâle II, la dégradation de la situation financière des entreprises et l'accroissement de la volatilité sur les marchés coûtent très cher en fonds propres. L'abaissement de la note d'un client provoque, par exemple, si une provision est constatée, une surconsommation de fonds propres qui n'existait pas avec Bâle I. Certains l'évaluent entre 15 % et 50 % de plus par rapport à Bâle I. Les banques, qui gèrent leur capital au plus près, tendent alors à reporter les provisions.
« Elles préfèrent attendre la situation de défaut et traiter les dossiers au cas par cas », dit un banquier. Une attitude qui se ressent dans le traitement de la dette LBO. « Au cours du ecycle précédent, les banques anticipaient les défauts et passaient des provisions, ce qui leur permettait de lisser les résultats. Avec Bâle II, cela consomme trop de fonds propres, elles font tout pour différer le traitement des dossiers problématiques. La démarche s'est jusqu'à présent révélée payante car aucun gros dossier de LBO n'a fait défaut pour l'instant. »
Répercussions sur la VaR
Les effets cumulés de la crise et de Bâle II vont en outre se ressentir dans les risques de marché. La forte volatilité de la fin 2008 s'est répercutée sur la VaR (« value at risk »). Cet indicateur, qui mesure les risques de marché constatés au cours des 250 derniers jours, entre dans le calcul des risques de marché. Au dernier trimestre, la VaR des établissements qui ont des activités de marché a bondi, doublant même chez certains.
Cet accroissement brutal va perdurer dans le calcul des VaR moyennes jusqu'à la fin de l'année. « Entre janvier 2008 et janvier 2009, la même position de marché consommait 2,5 fois plus de VaR », constate un dirigeant de banque d'investissement. En d'autres termes, il faut 2,5 fois plus de fonds propres en ce début d'année pour la même position de marché qu'il y a un an.
Moody’s says spending threatens US rating
By Francesco Guerrera, Aline van Duyn and Daniel Pimlott in New York
Published: January 10 2008
Published: January 10 2008
The US is at risk of losing its top-notch triple-A credit rating within a decade unless it takes radical action to curb soaring healthcare and social security spending, Moody’s, the credit rating agency, said on Thursday.
The warning over the future of the triple-A rating – granted to US government debt since it was first assessed in 1917 – reflects growing concerns over the country’s ability to retain its financial and economic supremacy.
It could also put further pressure on candidates from both the Republican and Democratic parties to sharpen their focus on healthcare and pensions in the run-up to November’s presidential elections.
Most analysts expect future governments to deal with the costs of healthcare and social security and there is no reflection of any long-term concern about the US financial health in the value of its debt.
But Moody’s warning comes at a time when US confidence in its economic prowess has been challenged by the rising threat of a recession, a weak dollar and the credit crunch.
In its annual report on the US, Moody’s signalled increased concern that rapid rises in Medicare and Medicaid – the government-funded healthcare programmes for the old and the poor – would “cause major fiscal pressures” in years to come.
Unlike Moody’s previous assessment of US government debt in 2005, Thursday’s report specifically links rises in healthcare and social security spending to the credit rating.
“The combination of the medical programmes and social security is the most important threat to the triple-A rating over the long term,” it said.
Steven Hess, Moody’s lead analyst for the US, told the Financial Times that in order to protect the country’s top rating, future administrations would have to rein in healthcare and social security costs.
“If no policy changes are made, in 10 years from now we would have to look very seriously at whether the US is still a triple-A credit,” he said.
Mr Hess said any downgrade in the US rating would have serious consequences on the global economy. “The US rating is the anchor of the world’s financial system. If you have a downgrade, you have a problem,” he said.
Moody’s did once threaten to cut the rating of some of the US Treasury’s debt when Congress refused to pass the president’s budget in the mid-1990s.
Most analysts expect future governments to deal with the costs of healthcare and social security and there is no reflection of any long-term concern about the US financial health in the value of its debt.
But Moody’s warning comes at a time when US confidence in its economic prowess has been challenged by the rising threat of a recession, a weak dollar and the credit crunch.
In its annual report on the US, Moody’s signalled increased concern that rapid rises in Medicare and Medicaid – the government-funded healthcare programmes for the old and the poor – would “cause major fiscal pressures” in years to come.
Unlike Moody’s previous assessment of US government debt in 2005, Thursday’s report specifically links rises in healthcare and social security spending to the credit rating.
“The combination of the medical programmes and social security is the most important threat to the triple-A rating over the long term,” it said.
Steven Hess, Moody’s lead analyst for the US, told the Financial Times that in order to protect the country’s top rating, future administrations would have to rein in healthcare and social security costs.
“If no policy changes are made, in 10 years from now we would have to look very seriously at whether the US is still a triple-A credit,” he said.
Mr Hess said any downgrade in the US rating would have serious consequences on the global economy. “The US rating is the anchor of the world’s financial system. If you have a downgrade, you have a problem,” he said.
Moody’s did once threaten to cut the rating of some of the US Treasury’s debt when Congress refused to pass the president’s budget in the mid-1990s.
America’s triple A rating is at risk - FT
By David Walker - Published: May 12 2009 20:06
Long before the current financial crisis, nearly two years ago, a little-noticed cloud darkened the horizon for the US government. It was ignored. But now that shadow, in the form of a warning from a top credit rating agency that the nation risked losing its triple A rating if it did not start putting its finances in order, is coming back to haunt us.
That warning from Moody’s focused on the exploding healthcare and Social Security costs that threaten to engulf the federal government in debt over coming decades. The facts show we’re in even worse shape now, and there are signs that confidence in America’s ability to control its finances is eroding.
Prices have risen on credit default insurance on US government bonds, meaning it costs investors more to protect their investment in Treasury bonds against default than before the crisis hit. It even, briefly, cost more to buy protection on US government debt than on debt issued by McDonald’s. Another warning sign has come from across the Pacific, where the Chinese premier and the head of the People’s Bank of China have expressed concern about America’s longer-term credit worthiness and the value of the dollar.
The US, despite the downturn, has the resources, expertise and resilience to restore its economy and meet its obligations. Moreover, many of the trillions of dollars recently funnelled into the financial system will hopefully rescue it and stimulate our economy.
The US government has had a triple A credit rating since 1917, but it is unclear how long this will continue to be the case. In my view, either one of two developments could be enough to cause us to lose our top rating.
First, while comprehensive healthcare reform is needed, it must not further harm our nation’s financial condition. Doing so would send a signal that fiscal prudence is being ignored in the drive to meet societal wants, further mortgaging the country’s future.
Second, failure by the federal government to create a process that would enable tough spending, tax and budget control choices to be made after we turn the corner on the economy would send a signal that our political system is not up to the task of addressing the large, known and growing structural imbalances confronting us.
For too long, the US has delayed making the tough but necessary choices needed to reverse its deteriorating financial condition. One could even argue that our government does not deserve a triple A credit rating based on our current financial condition, structural fiscal imbalances and political stalemate. The credit rating agencies have been wildly wrong before, not least with mortgage-backed securities.
How can one justify bestowing a triple A rating on an entity with an accumulated negative net worth of more than $11,000bn (€8,000bn, £7,000bn) and additional off-balance sheet obligations of $45,000bn? An entity that is set to run a $1,800bn-plus deficit for the current year and trillion dollar-plus deficits for years to come?
I have fought on the front lines of the war for fiscal responsibility for almost six years. We should have been more wary of tax cuts in 2001 without matching spending cuts that would have prevented the budget going deeply into deficit. That mistake was compounded in 2003, when President George W. Bush proposed expanding Medicare to include a prescription drug benefit. We must learn from past mistakes.
Fiscal irresponsibility comes in two primary forms – acts of commission and of omission. Both are in danger of undermining our future.
First, Washington is about to embark on another major healthcare reform debate, this time over the need for comprehensive healthcare reform. The debate is driven, in large part, by the recognition that healthcare costs are the single largest contributor to our nation’s fiscal imbalance. It also recognises that the US is the only large industrialised nation without some level of guaranteed health coverage.
There is no question that this nation needs to pursue comprehensive healthcare reform that should address the important dimensions of coverage, cost, quality and personal responsibility. But while comprehensive reform is called for and some basic level of universal coverage is appropriate, it is critically important that we not shoot ourselves again. Comprehensive healthcare reform should significantly reduce the huge unfunded healthcare promises we already have (over $36,000bn for Medicare alone as of last September), as well as the large and growing structural deficits that threaten our future.
One way out of these problems is for the president and Congress to create a “fiscal future commission” where everything is on the table, including budget controls, entitlement programme reforms and tax increases. This commission should venture beyond Washington’s Beltway to engage the American people, using digital technologies in an unparalleled manner. If it can achieve a predetermined super-majority vote on a package of recommendations, they should be guaranteed a vote in Congress.
Recent research conducted for the Peterson Foundation shows that 90 per cent of Americans want the federal government to put its own financial house in order. It also shows that the public supports the creation of a fiscal commission by a two-to-one margin. Yet Washington still sleeps, and it is clear that we cannot count on politicians to make tough transformational changes on multiple fronts using the regular legislative process. We have to act before we face a much larger economic crisis. Let’s not wait until a credit rating downgrade. The time for Washington to wake up is now.
Long before the current financial crisis, nearly two years ago, a little-noticed cloud darkened the horizon for the US government. It was ignored. But now that shadow, in the form of a warning from a top credit rating agency that the nation risked losing its triple A rating if it did not start putting its finances in order, is coming back to haunt us.
That warning from Moody’s focused on the exploding healthcare and Social Security costs that threaten to engulf the federal government in debt over coming decades. The facts show we’re in even worse shape now, and there are signs that confidence in America’s ability to control its finances is eroding.
Prices have risen on credit default insurance on US government bonds, meaning it costs investors more to protect their investment in Treasury bonds against default than before the crisis hit. It even, briefly, cost more to buy protection on US government debt than on debt issued by McDonald’s. Another warning sign has come from across the Pacific, where the Chinese premier and the head of the People’s Bank of China have expressed concern about America’s longer-term credit worthiness and the value of the dollar.
The US, despite the downturn, has the resources, expertise and resilience to restore its economy and meet its obligations. Moreover, many of the trillions of dollars recently funnelled into the financial system will hopefully rescue it and stimulate our economy.
The US government has had a triple A credit rating since 1917, but it is unclear how long this will continue to be the case. In my view, either one of two developments could be enough to cause us to lose our top rating.
First, while comprehensive healthcare reform is needed, it must not further harm our nation’s financial condition. Doing so would send a signal that fiscal prudence is being ignored in the drive to meet societal wants, further mortgaging the country’s future.
Second, failure by the federal government to create a process that would enable tough spending, tax and budget control choices to be made after we turn the corner on the economy would send a signal that our political system is not up to the task of addressing the large, known and growing structural imbalances confronting us.
For too long, the US has delayed making the tough but necessary choices needed to reverse its deteriorating financial condition. One could even argue that our government does not deserve a triple A credit rating based on our current financial condition, structural fiscal imbalances and political stalemate. The credit rating agencies have been wildly wrong before, not least with mortgage-backed securities.
How can one justify bestowing a triple A rating on an entity with an accumulated negative net worth of more than $11,000bn (€8,000bn, £7,000bn) and additional off-balance sheet obligations of $45,000bn? An entity that is set to run a $1,800bn-plus deficit for the current year and trillion dollar-plus deficits for years to come?
I have fought on the front lines of the war for fiscal responsibility for almost six years. We should have been more wary of tax cuts in 2001 without matching spending cuts that would have prevented the budget going deeply into deficit. That mistake was compounded in 2003, when President George W. Bush proposed expanding Medicare to include a prescription drug benefit. We must learn from past mistakes.
Fiscal irresponsibility comes in two primary forms – acts of commission and of omission. Both are in danger of undermining our future.
First, Washington is about to embark on another major healthcare reform debate, this time over the need for comprehensive healthcare reform. The debate is driven, in large part, by the recognition that healthcare costs are the single largest contributor to our nation’s fiscal imbalance. It also recognises that the US is the only large industrialised nation without some level of guaranteed health coverage.
There is no question that this nation needs to pursue comprehensive healthcare reform that should address the important dimensions of coverage, cost, quality and personal responsibility. But while comprehensive reform is called for and some basic level of universal coverage is appropriate, it is critically important that we not shoot ourselves again. Comprehensive healthcare reform should significantly reduce the huge unfunded healthcare promises we already have (over $36,000bn for Medicare alone as of last September), as well as the large and growing structural deficits that threaten our future.
One way out of these problems is for the president and Congress to create a “fiscal future commission” where everything is on the table, including budget controls, entitlement programme reforms and tax increases. This commission should venture beyond Washington’s Beltway to engage the American people, using digital technologies in an unparalleled manner. If it can achieve a predetermined super-majority vote on a package of recommendations, they should be guaranteed a vote in Congress.
Recent research conducted for the Peterson Foundation shows that 90 per cent of Americans want the federal government to put its own financial house in order. It also shows that the public supports the creation of a fiscal commission by a two-to-one margin. Yet Washington still sleeps, and it is clear that we cannot count on politicians to make tough transformational changes on multiple fronts using the regular legislative process. We have to act before we face a much larger economic crisis. Let’s not wait until a credit rating downgrade. The time for Washington to wake up is now.
David Walker is chief executive of the Peter G. Peterson Foundation and former comptroller general of the US
US belatedly learns to listen to the lesson from Japan - FT
By Gillian Tett - Published: May 9 2009
In recent months, Japan's sorry banking history has provided the world with plenty of reasons to worry about America. Now, however, it might offer a crumb of comfort, too.
The reason? In part, it lies with those stress tests which Washington has just conducted on its largest 19 banks.
During most of the past two years, the American leadership has been in a state of procrastination and denial in relation to its banking woes: first it tried to pretend that the financial woes were not too serious, since they were "contained". Then it insisted that free market pressures would be enough to force the banks to come clean about their mess - without the need for the government to act.
In reality, the Americans were not at all unusual in taking that stance: when Japan's banks first became plagued with bad loans in the early 1990s, the government in Tokyo took an identical stance - and continued denying the scale of woes for almost a decade.
But precisely because the Japanese were such past masters of procrastination - and learnt the hard way what that can do - they have been quietly dubious about much of what Washington has said about the banking woes in the past two years.
As long ago as the autumn of 2007, for example, Daisuke Kotegawa, a canny former financial bureaucrat who was central to Japan's own banking clean up, pointed out to me that what was missing from the American debate was any effort to conduct an audit of Western banks.
For Kotegawa is convinced that it was only when the Japanese government finally went into its banks and did a thorough, independent review of their operations - and then published the collective bad loan estimate and forced the banks to plug any capital gaps - that the Tokyo financial dramas started to heal.
The point is: if you let banks themselves count their bad loans, not only are they apt to lie - but investors will disbelieve anything they say, even if they do tell the truth. "What is needed [to solve the credit crisis] is not [just] cash but wiping out widespread mistrust," Kotegawa observed back then.
Now, at last, it would seem that men such as Tim Geithner are finally - belatedly - learning that lesson too (and Mr Geithner is a man who knows this Japanese tale only too well since he worked there himself in the 1990s).
You can argue at length about whether the stress tests are completely "correct" or not. But what is undisputable is that they have taken place in a fairly thorough manner. In a world that has been marked by cognitive fog, in other words, investors now have something tangible to cling to. At last, there is a sense that someone is in charge - and a bottomless pit might not be so bottomless after all.
That is potentially very important for sentiment. Back in the 1990s, when Japan's government was procrastinating and fudging, there seemed to be no limit to just how big the estimates of bad loan numbers could become: they started the decade at around $50bn, but then rose to over $1,000bn (and Goldman Sachs even slated in a $2,000bn, which back then seemed unimaginably large).
But when the Japanese finally performed their own versions of a stress test, those ever-rising projections suddenly stopped growing, not least because confidence started to return - and the wider economy picked up. These days, economists now guess that Japanese credit losses were actually around $800bn - which is very large, but less frightening than $2,000bn.
There is, of course, no guarantee that America can repeat exactly that trick. One crucial difference is that men such as Kotegawa only had the Japanese banks to worry about. Mr Geithner does not share that luxury: irrespective of whether he has measured bad loans at American banks correctly, who knows what is sitting in European banks now?
Nor does America have the luxury of sitting in a world where there are other export markets that are booming - a sharp contrast to Japan, which started to enjoy an economic uplift when Chinese demand boomed soon after it reformed its banks.
Moreover, another reason for feeling cautious is that the slant of American policy still appears to be more focused on avoiding damaging bank collapses rather than trying to build truly vibrant institutions that could lend money again. Simply removing the patient from the critical list, in other words, does not make him truly healthy again - let alone ensure that the economy will properly heal. Recapitalisation is a necessary not sufficient condition for recovery, as the history of Japan shows.
Yet, even with those caveats, the fact that the stress tests have now taken place is certainly reason to cheer. The only crying shame is that it took such a ridiculously long time for the American administration to listen to that lesson from Japan - while many of Mr Geithner's counterparts in Europe continue to ignore it, even today.
In recent months, Japan's sorry banking history has provided the world with plenty of reasons to worry about America. Now, however, it might offer a crumb of comfort, too.
The reason? In part, it lies with those stress tests which Washington has just conducted on its largest 19 banks.
During most of the past two years, the American leadership has been in a state of procrastination and denial in relation to its banking woes: first it tried to pretend that the financial woes were not too serious, since they were "contained". Then it insisted that free market pressures would be enough to force the banks to come clean about their mess - without the need for the government to act.
In reality, the Americans were not at all unusual in taking that stance: when Japan's banks first became plagued with bad loans in the early 1990s, the government in Tokyo took an identical stance - and continued denying the scale of woes for almost a decade.
But precisely because the Japanese were such past masters of procrastination - and learnt the hard way what that can do - they have been quietly dubious about much of what Washington has said about the banking woes in the past two years.
As long ago as the autumn of 2007, for example, Daisuke Kotegawa, a canny former financial bureaucrat who was central to Japan's own banking clean up, pointed out to me that what was missing from the American debate was any effort to conduct an audit of Western banks.
For Kotegawa is convinced that it was only when the Japanese government finally went into its banks and did a thorough, independent review of their operations - and then published the collective bad loan estimate and forced the banks to plug any capital gaps - that the Tokyo financial dramas started to heal.
The point is: if you let banks themselves count their bad loans, not only are they apt to lie - but investors will disbelieve anything they say, even if they do tell the truth. "What is needed [to solve the credit crisis] is not [just] cash but wiping out widespread mistrust," Kotegawa observed back then.
Now, at last, it would seem that men such as Tim Geithner are finally - belatedly - learning that lesson too (and Mr Geithner is a man who knows this Japanese tale only too well since he worked there himself in the 1990s).
You can argue at length about whether the stress tests are completely "correct" or not. But what is undisputable is that they have taken place in a fairly thorough manner. In a world that has been marked by cognitive fog, in other words, investors now have something tangible to cling to. At last, there is a sense that someone is in charge - and a bottomless pit might not be so bottomless after all.
That is potentially very important for sentiment. Back in the 1990s, when Japan's government was procrastinating and fudging, there seemed to be no limit to just how big the estimates of bad loan numbers could become: they started the decade at around $50bn, but then rose to over $1,000bn (and Goldman Sachs even slated in a $2,000bn, which back then seemed unimaginably large).
But when the Japanese finally performed their own versions of a stress test, those ever-rising projections suddenly stopped growing, not least because confidence started to return - and the wider economy picked up. These days, economists now guess that Japanese credit losses were actually around $800bn - which is very large, but less frightening than $2,000bn.
There is, of course, no guarantee that America can repeat exactly that trick. One crucial difference is that men such as Kotegawa only had the Japanese banks to worry about. Mr Geithner does not share that luxury: irrespective of whether he has measured bad loans at American banks correctly, who knows what is sitting in European banks now?
Nor does America have the luxury of sitting in a world where there are other export markets that are booming - a sharp contrast to Japan, which started to enjoy an economic uplift when Chinese demand boomed soon after it reformed its banks.
Moreover, another reason for feeling cautious is that the slant of American policy still appears to be more focused on avoiding damaging bank collapses rather than trying to build truly vibrant institutions that could lend money again. Simply removing the patient from the critical list, in other words, does not make him truly healthy again - let alone ensure that the economy will properly heal. Recapitalisation is a necessary not sufficient condition for recovery, as the history of Japan shows.
Yet, even with those caveats, the fact that the stress tests have now taken place is certainly reason to cheer. The only crying shame is that it took such a ridiculously long time for the American administration to listen to that lesson from Japan - while many of Mr Geithner's counterparts in Europe continue to ignore it, even today.
gillian.tett@ft.com
Tuesday, 12 May 2009
Beware the seductive appeal of the sucker's rally - FT
By Spencer Jakab Published: May 9 2009
The market is a cruel mistress indeed. Compounding the pain of big swoons, it kicks investors when they are down by luring them into sucker's rallies - typically sharp but fleeting bounces in the middle of a bear market.
The current recovery has propelled the S&P 500 a third above its March low in just 60 days, convincing many sceptics that a new bull market has begun. Noted bear Doug Kass of Seabreeze Partners said the recent nadir may be a "generational low" and strategist Tobias Levkovich of Citigroup claimed many large investors who had feared another bear market rally may soon capitulate, pushing markets higher.
The Bull Market Express may really be pulling out of the station, but Wall Street's trains have a nasty tendency to derail just as passengers jostle for seats. Most recently, the S&P 500 soared 24 per cent over seven weeks ending in early January, only to plunge to a new low. It was a fairly typical sucker's rally and bear markets often need more than one to create sufficient disillusionment for a definitive bottom.
The 2000-2002 bear market had three, with average gains of 21 per cent in the Dow Jones Industrials over 45 days.
The granddaddy of all bear markets, 1929 -1932, had six false alarms with an average gain of 47 per cent. And Japan's ongoing bear saw the Nikkei rise by at least a third four times in its first four years with 10 more false dawns since then.
Bear markets typically end with a whimper rather than a bang, casting doubt on the latest recovery according to Hussman Econometrics, which analysed numerous US market bottoms and bear market rallies. With the exception of the 1987 crash, the month before the lowest point of a downturn saw a gradual descent. By contrast, bear market rallies were preceded by steeper declines and had sharper rebounds.
Another characteristic of bear market rallies has been modest volume on the rebound compared to the decline. The current recovery fits the pattern of bear market rallies in terms of volume and the "V" shape of the trough. Analysts at Bespoke Investment Group noted that there have been only seven other periods in the past 110 years with rallies of similar magnitude for the Dow. Three preceded the Great Depression, three came during the Depression and one in 1982.
That last example is a hopeful one as it kicked off the greatest bull market of all time. Expectations of a sustainable rebound have been helped by the fact that US stocks touched a 13-year low in March. But this was also the case in 1974, the start of a long rally - technically a bull market - that lost steam after a 73 per cent gain in two years. It would take four more years to reach the 1973 high and two more, the start of the 1982 bull market, to break decisively higher.
An authority on bear market bottoms, Russell Napier of CLSA sees a 1974-1976 scenario unfolding followed by an even worse slump. In Anatomy of the Bear , he scanned media coverage around the bottoms of 1921, 1932, 1949 and 1982 and does not see the apathy that characterised those turning points.
"For the great bear market bottoms, you need a society-wide revulsion with equities," he said. "It just doesn't smell like the big one yet."
Stocks also become incredibly cheap before major bull markets begin. Yale University Professor Robert Shiller notes that all four big bubbles of the 20th century saw stocks exceed 25 times cyclically-adjusted earnings and trough between 5 and 8 times. On this measure, the 2000 bubble never fully deflated and even the recent low did not breach 11 times.
For what it is worth, the US market's best-informed participants do not find valuations compelling. April saw the lowest level of insider buying (by people associated with the company) ever recorded by research group TrimTabs, with insider selling 14 times as high. Likewise, companies sold 64 per cent more shares than they bought in April.
This last point though may be a contrarian indicator of a true bull market. Corporate America hardly displayed prescience prior to the bust, after all.
The market is a cruel mistress indeed. Compounding the pain of big swoons, it kicks investors when they are down by luring them into sucker's rallies - typically sharp but fleeting bounces in the middle of a bear market.
The current recovery has propelled the S&P 500 a third above its March low in just 60 days, convincing many sceptics that a new bull market has begun. Noted bear Doug Kass of Seabreeze Partners said the recent nadir may be a "generational low" and strategist Tobias Levkovich of Citigroup claimed many large investors who had feared another bear market rally may soon capitulate, pushing markets higher.
The Bull Market Express may really be pulling out of the station, but Wall Street's trains have a nasty tendency to derail just as passengers jostle for seats. Most recently, the S&P 500 soared 24 per cent over seven weeks ending in early January, only to plunge to a new low. It was a fairly typical sucker's rally and bear markets often need more than one to create sufficient disillusionment for a definitive bottom.
The 2000-2002 bear market had three, with average gains of 21 per cent in the Dow Jones Industrials over 45 days.
The granddaddy of all bear markets, 1929 -1932, had six false alarms with an average gain of 47 per cent. And Japan's ongoing bear saw the Nikkei rise by at least a third four times in its first four years with 10 more false dawns since then.
Bear markets typically end with a whimper rather than a bang, casting doubt on the latest recovery according to Hussman Econometrics, which analysed numerous US market bottoms and bear market rallies. With the exception of the 1987 crash, the month before the lowest point of a downturn saw a gradual descent. By contrast, bear market rallies were preceded by steeper declines and had sharper rebounds.
Another characteristic of bear market rallies has been modest volume on the rebound compared to the decline. The current recovery fits the pattern of bear market rallies in terms of volume and the "V" shape of the trough. Analysts at Bespoke Investment Group noted that there have been only seven other periods in the past 110 years with rallies of similar magnitude for the Dow. Three preceded the Great Depression, three came during the Depression and one in 1982.
That last example is a hopeful one as it kicked off the greatest bull market of all time. Expectations of a sustainable rebound have been helped by the fact that US stocks touched a 13-year low in March. But this was also the case in 1974, the start of a long rally - technically a bull market - that lost steam after a 73 per cent gain in two years. It would take four more years to reach the 1973 high and two more, the start of the 1982 bull market, to break decisively higher.
An authority on bear market bottoms, Russell Napier of CLSA sees a 1974-1976 scenario unfolding followed by an even worse slump. In Anatomy of the Bear , he scanned media coverage around the bottoms of 1921, 1932, 1949 and 1982 and does not see the apathy that characterised those turning points.
"For the great bear market bottoms, you need a society-wide revulsion with equities," he said. "It just doesn't smell like the big one yet."
Stocks also become incredibly cheap before major bull markets begin. Yale University Professor Robert Shiller notes that all four big bubbles of the 20th century saw stocks exceed 25 times cyclically-adjusted earnings and trough between 5 and 8 times. On this measure, the 2000 bubble never fully deflated and even the recent low did not breach 11 times.
For what it is worth, the US market's best-informed participants do not find valuations compelling. April saw the lowest level of insider buying (by people associated with the company) ever recorded by research group TrimTabs, with insider selling 14 times as high. Likewise, companies sold 64 per cent more shares than they bought in April.
This last point though may be a contrarian indicator of a true bull market. Corporate America hardly displayed prescience prior to the bust, after all.
spencer.jakab@ft.com
Stress test wasn’t that comforting
By Gretchen Morgenson - May 10 2009
The beginning of the end of the banking crisis or merely the end of the beginning? That is what inquiring people want to know after the pronouncement last week that 10 of the biggest U.S. banks must raise $75 billion by November if regulators are going to give them a clean bill of health.Bank of America, Wells Fargo, GMAC and Citigroup are the neediest institutions, said government stress testers. Nine others, including Bank of New York Mellon, American Express and U.S. Bancorp, were deemed healthy.‘‘The results released today should provide considerable comfort to investors and the public,’’ Ben S.Bernanke, chairman of the Federal Reserve Board, said Thursday in a statement when his office released the Supervisory Capital Assessment Program.He added that nearly all the tested banks had enough capital to absorb the higher losses the Fed expected under its ‘‘hypothetical adverse scenario.’’ With almost 40 pages of charts, graphs and scenarios, the program was a ‘‘deliberately stringent test,’’ its authors said. Clearly, the message they want to send is that the banking mess we have endured for the last two years is finally becoming manageable.All is under control. Nothing to see here, folks. Move along.Much as it would be a relief to move on, anyone in search of reality cannot yet conclude that the big banks are out of the woods. The government tests were, in truth, not exceedingly tough.And some of the program’s ‘‘adverse’’ scenarios look more like a day at the beach.reserve bill will have ended. Then, you’ll know you are done.’’ In the meantime, U.S. taxpayer subsidies to banks will help offset some of the losses, he said. But keeping interest rates in the cellar to revive banks has significant costs, Mr. Whalen said. For example, institutions that have agreed to pay out interest on investments that are higher than prevailing rates— think insurance companies and pension plans—are getting killed. ‘‘The Fed can’t do this for much longer,’’ he said.What’s more, banks’ costs for working out bad loans—whether mortgages or credit card debt—are rising, Mr. Whalen said. In previous downturns, for example, investors would step up and buy bad credit card debt from banks. Yes, the prices they paid were discounted, but at least the banks could write off the loans and move on.Now, though, buyers for these ‘‘Let’s not call it a stress test,’’ said Janet Tavakoli, founder of Tavakoli Structured Finance, a consulting firm in Chicago. ‘‘This was a test to try to get a measure of capital adequacy, using broad-brush percentages. I think what they are hoping is that the banks are going to be able to earn their way out of this.’’ Some might be able to do that, given the immense taxpayer subsidies they are receiving. Cheap money from government programs translates to delightfully low expenses and the potential for profits where there might otherwise be only losses.But not all banks will be able to earn enough to see them through. And while no one knows how long our economy will remain under pressure, Ms.Tavakoli said she was certain that the stress tests’ assumptions on worstcase losses at banks were too rosy.Under the government’s so-called adverse scenario, for instance, banks may experience losses of 8.8 percent over the next two years on the first mortgages they hold. A more likely figure, Ms. Tavakoli says, is 10 percent.‘‘Given what has happened with the economy and unemployment, they are in massive denial,’’ she said. Losses recently seen in Fannie Mae’s portfolio support this view. In the first quarter, its subprime loans had average losses of about 68 percent; the Fed expects twoyear losses in subprime to be, at worst, 28 percent.For investors interested in a stress test that is free of government spin, Institutional Risk Analytics, a bank analysis and risk management firm, published its own assessment of financial institution soundness last week.Using first-quarter 2009 reports on 7,600 institutions from the Federal Deposit Insurance Corp., the analysis showed that banks were under increasing pressure.Christopher Whalen, the editor of Institutional Risk Analyst, said that the data told him that bank losses would not peak until the end of the year; before he combed through the figures, he had thought losses would hit their highs in the second quarter.Mr. Whalen said he pushed back his estimate for peak losses because banks continued to provision more for loan losses — the reserves bankers set aside for future damage — than they were actually writing off. ‘‘We don’t see charge-offs yet,’’ he said. ‘‘When you see banks charging things off, the hobbled portfolios are so rare, and the prices they will pay so low, that banks are hiring their own workout specialists to recover what they can from troubled borrowers. That costs.It is good that the stress test circus is over. But two lessons remain. First, the effects of a debt binge like the one we have just experienced cannot be worked off either quickly or painlessly.Second, there is the matter of the government’s credibility deficit. Maybe $75 billion will be enough to pull the big banks through this woeful period. But weren’t some of the folks providing these estimates also those who assured us subprime would not be a problem? That, in fact, it would be ‘‘contained’’? Yes, indeed.
The beginning of the end of the banking crisis or merely the end of the beginning? That is what inquiring people want to know after the pronouncement last week that 10 of the biggest U.S. banks must raise $75 billion by November if regulators are going to give them a clean bill of health.Bank of America, Wells Fargo, GMAC and Citigroup are the neediest institutions, said government stress testers. Nine others, including Bank of New York Mellon, American Express and U.S. Bancorp, were deemed healthy.‘‘The results released today should provide considerable comfort to investors and the public,’’ Ben S.Bernanke, chairman of the Federal Reserve Board, said Thursday in a statement when his office released the Supervisory Capital Assessment Program.He added that nearly all the tested banks had enough capital to absorb the higher losses the Fed expected under its ‘‘hypothetical adverse scenario.’’ With almost 40 pages of charts, graphs and scenarios, the program was a ‘‘deliberately stringent test,’’ its authors said. Clearly, the message they want to send is that the banking mess we have endured for the last two years is finally becoming manageable.All is under control. Nothing to see here, folks. Move along.Much as it would be a relief to move on, anyone in search of reality cannot yet conclude that the big banks are out of the woods. The government tests were, in truth, not exceedingly tough.And some of the program’s ‘‘adverse’’ scenarios look more like a day at the beach.reserve bill will have ended. Then, you’ll know you are done.’’ In the meantime, U.S. taxpayer subsidies to banks will help offset some of the losses, he said. But keeping interest rates in the cellar to revive banks has significant costs, Mr. Whalen said. For example, institutions that have agreed to pay out interest on investments that are higher than prevailing rates— think insurance companies and pension plans—are getting killed. ‘‘The Fed can’t do this for much longer,’’ he said.What’s more, banks’ costs for working out bad loans—whether mortgages or credit card debt—are rising, Mr. Whalen said. In previous downturns, for example, investors would step up and buy bad credit card debt from banks. Yes, the prices they paid were discounted, but at least the banks could write off the loans and move on.Now, though, buyers for these ‘‘Let’s not call it a stress test,’’ said Janet Tavakoli, founder of Tavakoli Structured Finance, a consulting firm in Chicago. ‘‘This was a test to try to get a measure of capital adequacy, using broad-brush percentages. I think what they are hoping is that the banks are going to be able to earn their way out of this.’’ Some might be able to do that, given the immense taxpayer subsidies they are receiving. Cheap money from government programs translates to delightfully low expenses and the potential for profits where there might otherwise be only losses.But not all banks will be able to earn enough to see them through. And while no one knows how long our economy will remain under pressure, Ms.Tavakoli said she was certain that the stress tests’ assumptions on worstcase losses at banks were too rosy.Under the government’s so-called adverse scenario, for instance, banks may experience losses of 8.8 percent over the next two years on the first mortgages they hold. A more likely figure, Ms. Tavakoli says, is 10 percent.‘‘Given what has happened with the economy and unemployment, they are in massive denial,’’ she said. Losses recently seen in Fannie Mae’s portfolio support this view. In the first quarter, its subprime loans had average losses of about 68 percent; the Fed expects twoyear losses in subprime to be, at worst, 28 percent.For investors interested in a stress test that is free of government spin, Institutional Risk Analytics, a bank analysis and risk management firm, published its own assessment of financial institution soundness last week.Using first-quarter 2009 reports on 7,600 institutions from the Federal Deposit Insurance Corp., the analysis showed that banks were under increasing pressure.Christopher Whalen, the editor of Institutional Risk Analyst, said that the data told him that bank losses would not peak until the end of the year; before he combed through the figures, he had thought losses would hit their highs in the second quarter.Mr. Whalen said he pushed back his estimate for peak losses because banks continued to provision more for loan losses — the reserves bankers set aside for future damage — than they were actually writing off. ‘‘We don’t see charge-offs yet,’’ he said. ‘‘When you see banks charging things off, the hobbled portfolios are so rare, and the prices they will pay so low, that banks are hiring their own workout specialists to recover what they can from troubled borrowers. That costs.It is good that the stress test circus is over. But two lessons remain. First, the effects of a debt binge like the one we have just experienced cannot be worked off either quickly or painlessly.Second, there is the matter of the government’s credibility deficit. Maybe $75 billion will be enough to pull the big banks through this woeful period. But weren’t some of the folks providing these estimates also those who assured us subprime would not be a problem? That, in fact, it would be ‘‘contained’’? Yes, indeed.
Sunday, 3 May 2009
Saturday, 2 May 2009
Subscribe to:
Posts (Atom)
