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Tag >> Banks
We knew that the Fed has been taking dodgy collateral in return for loans it extended to troubled financial institutions, ever since the central bank said it would accept non-investment grade securities in return during the height of the credit crisis last fall.
But we didn't know those included the equities of bankrupt companies until the Lehman bankruptcy recently disclosed the specific securities the Fed was bankrolling before the investment bank was allowed to fail.
If it's Friday, it must be bank failure day. As we watch and wait for number 100 (another psychological milestone!), it's worth pausing to appreciate what a great job the FDIC has done so many weekends this year, in making these failing institutions almost magically disappear. No sturm, no drang, just a little burp.
They've done such a great job, in fact, that the Fed is eyeing the system with envy. As Ben Bernanke said today in his speech in Boston:
"A new resolution regime for nonbanks, analogous to the regime currently used by the Federal Deposit Insurance Corporation for banks, would permit the government to wind down a failing systemically important firm in a way that reduces the risks to financial stability and the economy. Importantly, to restore a meaningful degree of market discipline and to address the too-big-to-fail problem, it is essential that there be a credible process for imposing losses on the shareholders and creditors of the firm. Any resolution costs incurred by the government should be paid through an assessment on the financial industry and not borne by the taxpayers."
Curbs on bankers' pay will cause them to lose talent?
Good, because that means they will pose less systemic risk, says Simon Johnson. And therein, he insists, lays the genius of the Fed's plan.
Ron Chernow's piece on Friday on the 1929 Crash and its aftermath stresses the differences between that financial crisis and the current one. But I find the similarities more remarkable. Sure, things back in the day seemed simpler and more-clear than they are now, and so more amenable to remediation.
But certain features bear a remarkable resemblance. For one thing, government-fueled happy talk from market participants abounded then as now. "The future appears to be brilliant," announced Thomas Lamont, the head of J.P. Morgan, at the urging of President Hoover after early signs of trouble but only five days before Black Thursday.
To Matt Quinn's point today about pernicious problems in the banking sector, Hudson City Bancorp, one of Jim Cramer's darlings, is one example.
The holding company for Hudson City Savings Bank, based in Paramus, NJ, beat Wall Street's expectations when it released earnings yesterday, and Cramer, true to form, continued to recommend the stock on his show last night, saying the company is as "good as gold."
And, indeed, Hudson City has been seen as a better bet in the banking sector, since it avoided the subprime mess, and it's based in the Tri-State area of New York, New Jersey, and Connecticut, a wealthier part of the country. It originates only 1 to 4-family jumbo loans, and funds them with retail deposits and FHLB borrowings. Cramer likes to say that it's what a bank should be.
But although low short-term interest rates helped its margin and thus its earnings, Hudson had to boost its loan-loss provision by $82 million in the first three quarters of this year, to $92.5 million. Just the third quarter alone contributed over 40% of that total, as the loan-loss provision for the period jumped to $40 million, compared with $5 million at the end of September 2008. The ratio of non-performing loans to total loans was 1.66% at September 30, 2009 compared with just 0.74% at December 31, 2008, the company said.
You think the worst is behind banks? Financial institutions may not say so outwardly, but their numbers would beg to differ.
Let's face it, the U.S. is an economy built on credit, whether it be for consumers or for businesses. Banks know this. That's how they make their money. Or at least that's how they should be making their money.
And even though many banks are back to posting profits, it's not necessarily in ways that should make you feel good about the economic outlook. J.P. Morgan Chase has been killing it in investment banking and slogging through on the retail and consumer side. Wells Fargo beat earnings estimates, but nearly a third of its pretax quarterly profits came from its hedges on mortgage-servicing rights. Chase also had more than $400 million in net gains on its MSRs through hedges. Not exactly a sustainable revenue source.
But back to loans.
Say what you want about the limitations of restoring Glass-Steagall and the fact that Paul Volcker may not be as influential as he should be.
It's very interesting that the head of the U.K. central bank is much more explicit about the problem with banks that are too big to fail, and not just in comparison to Volcker.
Will wonders ever cease? Instead of pushing the Financial Accounting Standards Board to postpone its rules banning banks' off-balance-sheet vehicles for yet another year, as they seemed inclined to do, bank regulators are proposing to ease their capital reserve requirements to mitigate the impact of the rules.
(Oh, and we must also note that JP Morgan Chase has joined Citigroup and Wells Fargo in complaining about that impact despite its more impressive earnings. Guess JPM still has a ton of dodgy assets that are hidden from investors' view in so-called qualified special purpose entities.)
Sorry to spoil the party, but revenues at leading technology bellwethers Intel and IBM aren't signaling as strong a recovery as the articles ballyhooing their improvement would suggest.
Ignore earnings entirely because better- than-expected profits are too often achieved by cost cuts, which are unsustainable. And while Q3 revenues for the two tech giants also beat expectations, they were still down from a year earlier.
Goldman Sachs' CFO David Viniar insisted on Thursday that the bank doesn't have a guarantee from the government. "We operate as an independent financial institution that stands on our own two feet," he said during a conference call with reporters. "We don't think we have a guarantee."
Think again, David. Or just look at your own website, where Goldman explains in its discussion of liquidity risk that it still depends on government support, at least temporarily, to finance its operations.