If We Are On A Precipice, the Banks Will Be the First To Go… Again

August 10, 2011

Good article from Jonathan Weil from Bloomberg tonight.  How can you expect to solve the crisis without considering the banking system stresses.  Every day for the last few weeks, as I have noted recently the cost to insure bonds of major money center banks has been steadily rising.  While the overnight lending rate has remained steady and low, signaling “all is well here”, the concentration of counterparties may infact make collusion easier, masking the stresses in the system today.  In simpler terms, LIBOR is the rate banks use to lend to one another to shore up their balance sheets over night.  In a world with fewer larger banks, with more at stake individually, it would not be far fetched to presume that they may be colluding to fix LIBOR to disguise the real risks they each face, since in essence they are all now subject to the exact same forces, on a global scale.

In the case of Bank of America, the cost to insure their bonds via Credit Default Swaps have expressly blown out almost to the highest levels seen in 2008.  Today we have less banks, with more concentration, and more inter-connectivity.  The amount of concentration inherently makes the system less stable than it was in 2008.  Consider an internet with fewer servers, and more data running through them than before.  At some point, you can have too few banks (or servers) to the point where the entire system (network) ceases to function, if one node in the network ceases to function.  One of the tail risks today is the possible insolvency of the banking system.  However in this version 2.0 of a global banking crisis, there is only one end in the choose your own adventure.  They will be to big to save because governments are now out of liquidity.

By Jonathan Weil Aug 10, 2011 8:00 PM ET

Weil: Is There Enough Money to Save the Banks?

Enough Money to Save Banks

Illustration by Mark Owens

Forget free-market fundamentals. What matters most to the capital markets now is whether the governments of the U.S. and westernEurope have the will and the wherewithal to save the global financial system from disaster yet again.

A healthy climate for the efficient allocation of capital, this is not.

By pledging to keep its benchmark interest rate near zero through at least mid-2013, the Federal Reserve succeeded (for a couple of hours) in propping up U.S. stock markets after two days of gut-wrenching declines, especially in financial stocks. The news came a day after theEuropean Central Bank embraced the role of savior by buying sovereign debt of Italy and Spain, sending yields on those countries’ bonds plunging and offering respite to financial institutions that hold them.

The notion that the world’s governments won’t permit an economic meltdown seemed to be operative, less than two weeks after the U.S. Congress threatened to torch the nation’s full faith and credit. Then yesterday the equities markets fell out of bed again. The open question is how long investor confidence in the policy makers’ powers can last.

This has added relevance in light of one of the developments that sent Bank of America Corp. (BAC)’s stock down 20 percent Aug. 8 — the news that American International Group Inc. (AIG)had accused the company of securities fraud in a lawsuit seeking more than $10 billion. Naturally the question arises: Didn’t AIG consult with anyone at the Treasury Department, which owns 76.7 percent of AIG, about whether to fire this market- sinking torpedo at a too-big-to-fail bank so soon after Standard & Poor’s downgraded the U.S. credit rating?

Bailouts at War

It would seem not. A Treasury spokesman, Mark Paustenbach, said: “As per our stated principles, Treasury does not interfere with the day-to-day management of the company.” Just when you think the government might have matters under control, we find out it can’t even keep a bailed-out company it controls from trying to blow up Bank of America, which itself needed federal bailout money to stay afloat.

One thing that’s certain is that investors aren’t feeling very good about large financial institutions’ balance sheets. As of yesterday, there were 186 U.S.-based financial-services companies trading for less than 60 percent of their book value, or common shareholder equity, including Bank of America, Citigroup Inc. (C)Morgan Stanley (MS), AIG and SunTrust Banks Inc. (STI) Together they had a stock-market value of $300.5 billion, compared with $686.4 billion of book value, according to data compiled by Bloomberg.

Broken Cycle

When I ran the same stock screen for a June 2008 column, a few months before the financial crisis reached full flower, 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. A year later the cycle broke, thanks to unprecedented government intervention. The largest U.S. banks were reporting quarterly profits again.

Like a Slinky walking down a flight of stairs, though, all it may take is the slightest push for inertial energy to set the writedown cycle in motion again. For instance: Bank of America, at 33 percent of book value, finished yesterday with a $68.6 billion market capitalization. That’s less than the $71.1 billion of goodwill on its June 30 balance sheet. (Goodwill, which isn’t a saleable asset, is the ledger entry a company records when it pays a premium price to buy another).

You Gotta Believe

So, Bank of America would have us believe the goodwill by itself was more valuable than what the market says the entire company is now worth. Investors don’t buy that. They see a company that needs to raise fresh capital, judging by the discount to book value, in spite of the company’s claims it doesn’t need to. The more the stock price falls, the more shares Bank of America would need to issue to appease the markets, leading to fears of even more share dilution.

The same story is playing out in Europe, driven by the sovereign-debt crisis. The 32 companies in the Euro Stoxx Banks Index yesterday had a stock-market value of 313.2 billion euros ($444 billion) and a combined book value of 620.5 billion euros. France’s Credit Agricole SA (ACA), the index’s third-largest bank by assets, trades for just 34 percent of book.

Two years ago the central planners convinced investors that the biggest surviving financial institutions would be able to earn their way back to health, in part through low interest rates and taxpayer support. The pressing question soon may be whether there is enough money on the planet to save the system as we know it, and if so, how much longer it will be before a crisis comes along that finally swamps the ability of governments to contain it.

One-hit wonders such as Fed-induced stock-market rallies can induce euphoria momentarily. They don’t fix the big problem.

(Jonathan Weil is a Bloomberg View columnist. The opinions expressed are his own.)

To contact the writer of this article: Jonathan Weil in New York at jweil6@bloomberg.net.

To contact the editor responsible for this article: James Greiff at jgreiff@bloomberg.net.


Debt Forgiveness: Dangerous Trend or Absolute Necessity

August 10, 2011

Debt Forgiveness: Dangerous Trend or Absolute Necessity

Found this paper from 1991!  Its a short paper from what seems to be a Berkeley student who is not surprisingly quite smart.  It may not be the most well written document, but who am I to judge!  In any event the passages are strikingly familiar, and the content terribly relevant.  Certainly supports the quote attributed to Mark Twain that says history does not repeat, but it certainly rhymes.  Download a copy of the entire paper by clicking on the image above or this link Debt Forgiveness: Dangerous Trend or Absolute Necessity   Consider the excerpts below:

…In any case, despite bankers’ claims of careful risk analysis, they have a strong herd instinct. Flush with funds in the 1970s from petro-dollar deposits, banks lent to almost anyone. Interest rate spreads did not reflect the differing risks that banks were taking when making loans. And in 1982, when Mexico began having problems, the banks retrenched en masse, cutting off funding to countries undertaking sound adjustment programs and throwing them into crisis. Today, when asked about their future plans, most bankers recoil from the notion of large-scale lending. They say they won’t resume lending in their lifetime, under any circumstances….

…Second, manufacturers in the developed countries now face a deluge of imports as debtors attempt to service their debts by sharply increasing exports. Because banks insist on complete servicing and repayment of outstanding loans, debtors attempt to export through all possible means, including subsidies, tax incentives, and other strategies that the GATT has been trying to eradicate as unfair trade policy. Recently, Mexico’s largest cement producer paid the U.S. a $10 million fine for dumping. This export drive has encouraged firms in the developed countries to cope with growing competition by reducing their work-force and seeking protection. In the short run, such protection has immediate costs for consumers; in the long run, protectionism creates inefficiencies of resource allocation. One need only recall the 1920s and 1930s when creditors insisted on the deadly policy of full repayment — in a time of growing protectionism. The economic instability this provoked in Germany helped pave the way for fascism….

…On the whole, then, history provides no evidence that debt reduction hurts countries’ ability to borrow in the future, especially if reduction is achieved through negotiations….

…The upshot is that prospects are dim for large transfers of capital to needy borrowers — even those pursuing sound macroeconomic policies. Those who have been faithfully repaying their debts have not significantly benefitted: regardless of their diligence, they have not been able to raise much capital at favorable rates….

…Banks have been engaging in narrow calculations of interest for over two centuries. In the past, they have left economic disaster in their wake. At this point, the debt crisis is too important to be left to bankers….


If Capitol Hill Was On Mainstreet

July 29, 2011

Since it’s likely we won’t raise the debt limit in time, and as a result we won’t have enough money to pay all our bills, why don’t we make the first cuts to Capital Hill executive leadership and staffers?

Why should they get paid to fuck everything up while honest, hard working Americans will be told the check is not in the mail because your representative is a complete fucking nitwit who cannot do his job effectively. At the end of the day our representative’s job is to negotiate not to stonewall on our behalf. Their job is to fix our problems with our best interests in mind. This bag of cats in Washington is just making things worse.

As I type markets are just plain crazy. The VIX is up, stocks are flat, bonds are rallying, gold is supported but other commodities are falling. None of these relationships make any sense other than they prove that our entire sense of “Risk Free” is about to be turned upside down.

I would bet the farm that if Capital Hill salaries were on the line, we’d have a deal. But Capital Hill like Wall Street is quite far from Main Street.

(BN) Republicans Back Short-Term Debt-Limit Agreement, Risking Veto From Obama

July 24, 2011

This is like watching a car crash in slow motion, before the event happens. This is beyond preposterous. The Republicans want to put Obama in a dammed if he does and dammed if he doesn’t situation. By passing a smaller limit increase and forcing Obama to revisit the debt ceiling again in an election year they seem to feel that they put Obama in a compromising position. If Obama passes the measure he is neither acting in the best interest of the country or his own politics and markets likely tumble on the poor result and immovable will for the US to get on the right path. If he vetoes the measure as he has said he would, he risks falling on the sward for a default scenario. The republican plan serves absolutely no interests except their misguided perception that the GOP wins a stalemate either way and maybe improves their chance in the White House in 2012. I believe Americans are smart enough to see this and blame all bad outcomes on the Tea Party and a fragmented GOP. The result of a default scenario will only strengthen Obamas power with voters and ultimately help pass a more democratic agenda. The question is whether he is willing to let the clock run down to prove this point. I can’t see any reason why the US will avoid a downgrade by at least one rating agency. Regardless of the outcome here, that is what the stakes are for and sadly no one in Washington gets it.

Our political system is now officially broken and in dire need of a reboot.

Boehner Pressing Ahead With Short-Term Debt Limit Increase

July 24 (Bloomberg) — House Speaker John Boehner plans to press ahead with a shorter-term increase in the U.S. debt limit than President Barack Obama has requested, he told lawmakers today, defying a veto threat and signaling continued stalemate in the U.S. Congress as time runs short for a deal.

Boehner told rank-and-file Republicans during a conference call this afternoon that they needed to pull together as a team to block Obama, who has asked for a $2.4 trillion borrowing boost in the $14.3 trillion debt ceiling, from obtaining the money all at once, without any guarantees of spending cuts. His remarks were described on condition of anonymity by a person familiar with the discussion.

The speaker said that no one is willing to default on the full faith and credit of the U.S., according to the person.

The comments indicated that Boehner plans to force action on his plan to provide only a temporary borrowing boost of about $1 trillion accompanied by spending cuts of at least as much, tying the remainder of the debt-ceiling increase Obama has requested to further cuts in the future. The White House says Obama would veto such a measure.

U.S. stock futures fell, indicating the Standard & Poor’s 500 Index will slump after rallying within 1.4 percent of a three-year high, as failure to raise the federal debt limit intensified concern of a default.

The contract on the S&P 500 Index expiring in September declined 1.2 percent to 1,325.50 at 7:01 a.m. in Tokyo. The U.S. dollar fell against the euro, yen and Swiss franc.

Upfront Authority

Boehner told Republicans Obama wants the borrowing authority all upfront so lawmakers don’t have to deal with this again until after the next election, the person familiar with the comments said. To stop him, Boehner said, Republicans need a vehicle that can pass in both houses. Speaking to a group that includes a large proportion of Tea Party-backed freshmen intent on slashing spending, Boehner said the path forward might require some of them to make sacrifices to maximize their leverage.

Yesterday, Boehner told his members that he wanted to send markets a positive sign by the time Asian markets began opening this afternoon that Congress would strike a deal to break the impasse over raising the $14.3 trillion borrowing limit.

With no evidence that such compromise has been reached, President Barack Obama is meeting at the White House with Senate Majority Leader Harry Reid and House Minority Leader Nancy Pelosi.

The dollar weakened to $1.4390 per euro as of 6:01 a.m. in Tokyo from $1.4360 in New York at the end of last week. The greenback fell to 78.35 yen, and touched a four-month low of 78.12 yen, from 78.54 on July 22. It fetched 81.17 Swiss centimes from 81.92 last week after reaching a record low 80.33 on July 18. The yen traded at 112.75 per euro from 112.77.

To contact the reporter on this story: Julie Hirschfeld Davis in Washington at or Jdavis159 .

To contact the editor responsible for this story: Mark Silva at msilva

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Tea Party = American Taliban

July 24, 2011

How much ineptitude does it require for the Tea Party to realize that their current stonewalling will create far greater economic harm to both their constituents and the US economy than raising taxes would?

We are past the point of economic theory on marginal receipts and marginal tax increases.

We are at the brink of a major abyss and a handful of thirty-something year old morons who know less about economics and markets than they do about politics are playing Russian roulette with our financial system.

We should have known that a group of new politicians who were so dogmatic to project images of sleeping in their offices to reduce spending had more in common with the Taliban living in caves than with our way of life. Dogma is a great platform to win an election, it’s a terrible platform for serving meaningful reform to a system built on different principles embedded with massive inertia.

It boils down to a simple analogy. Any company that is so heavily indebted that it may no longer be solvent must raise prices at the expense of fewer sales. It must restructure it balance sheet quickly through a combination of severe cost cutting and raising it’s receipts. It must divest non core operating activities by selling bits of itself off, particularly those pieces that it cannot operate profitably, and it must charge more for those services in which it has a competitive advantage.

This Tea Party stonewalling has already had irreversible consequences. Our political system has been valued as a function of our capitalistic economy because we generally make the right choices in the end. This Tea Party movement is dangerously close to pulling the rug out of any confidence people place in our will to get things right.

Those who dogmatically support the efforts to cap tax increases are going to sustain far greater impairment in their life savings than they ever would in their income. We are beyond rational politics, we are in radical land.

Balance Sheet of the Federal Reserve Bank and the M1 Multiplier Ratio

March 23, 2011

Balance Sheet of the Federal Reserve Bank and the M1 Multiplier Ratio

Thanks Carl Levin

May 29, 2010

Bloomberg is reporting that the Treasury is looking to pick a lead banker to sell GM back to the public out of conservatorship.  Wonder how the conversations are going around considering Goldman as advisor to sell GM and simultaneously hanging them for allegations of fraud.  Would have been smarter to have waited until they sold all their private assets before the US Government went on a rampage to persecute the folks affecting the transactions.  Goldman was probably one of the best suited to value a transaction of this nature.  I imagine hiring them would be riddled with too many conflicts and public backlash.  Then again, why would we expect the government to have any business acumen. What a boondoggle.  I suppose this would help drive the urgency for a settlement from the government’s point of view.  The full article is pasted below.

Treasury Said to Pick Lead Bank for GM IPO as Soon as Next Week

By Serena Saitto and David Welch

May 29 (Bloomberg) — The U.S. Treasury and General Motors Co. may choose a lead underwriter for the automaker’s initial public offering as soon as next week, two people familiar with the matter said yesterday.

GM, 61 percent owned by the U.S., must decide soon on an underwriter in order to sell shares publicly by the fourth quarter, said the people, who asked not to be identified revealing private information. The Treasury, which helped pay for the automaker’s restructuring last year, probably will have more say than the automaker in the selection, the people said.

Chief Executive Officer Ed Whitacre, appointed chairman when GM emerged from bankruptcy in July, has said the automaker may sell shares to the public as early as this year. GM needs to begin shortly to sell stock before the Nov. 2 congressional elections, said Joe Phillippi, president of AutoTrends Consulting in Short Hills, New Jersey.

“If they want to get it done in the fourth quarter, they have to start now,” he said yesterday in an interview. “This isn’t some little tech company. It’s a big story. This will be a global road show.”

Randy Arickx, a GM spokesman, said yesterday that he wasn’t aware of any imminent decision. Andrew Williams, a spokesman at the Treasury Department, didn’t return telephone calls or an e- mail request seeking comment yesterday before the Memorial Day holiday weekend.

GM and Treasury officials met with senior executives from Goldman Sachs Group Inc., Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Morgan Stanley this month in Washington about hiring a lead underwriter, said one of the people.

Strategy Questions

Banks were asked questions on their strategy for the IPO, including how much stock they recommend selling, how much GM may be worth and what obstacles may emerge along the way, one of the people said.

Whitacre wants to secure an automotive lending unit before a public offering in the fourth quarter, people familiar with the plan have said. Detroit-based GM hasn’t had such a subsidiary since former CEO Rick Wagoner sold 51% of GMAC to private-equity firm Cerberus Capital Management LP in 2006.

Whitacre was installed as chairman by President Barack Obama’s automotive task force when it replaced more than half of the directors in July.

Choosing a lead underwriter in the next week or two would allow GM to file an S-1 initial registration form by July and sell shares in October or early November, one of the people said.

Treasury Stake

The Treasury has hired Lazard Ltd. for $500,000 a month to advise on selling its stake, according to a document on the Treasury’s website. The Treasury Department has about $40 billion of its $50 billion investment in GM tied up in the company’s equity.

Ron Bloom, who took over as chief of the U.S. autos task force after Steven Rattner stepped down last year, is a former Lazard vice president.

GM Chief Financial Officer Chris Liddell said May 17 the automaker’s $865 million first-quarter net profit, the first since 2007, was a “good, useful step” on the way to an initial public offering that may come this year.

He also said at the time that it wouldn’t be necessary to have an automotive financing unit before going public.

GM management has been preparing for an IPO so they will be ready whenever the timing is right, said a GM executive who asked not to be identified discussing internal matters.

To contact the reporters on this story: David Welch in Southfield, Michigan, at dwelch12@bloomberg.net; Serena Saitto in New York at ssaitto@bloomberg.net.

Last Updated: May 29, 2010 00:01 EDT (http://www.bloomberg.com/apps/news?pid=20601087&sid=a.OcyrpilM9c&pos=2#)