Preview from Europe: Fresh Fears of Bank Nationalization

Another white knuckle ride yesterday as stocks slumped back to within spitting distance of the November ‘08 lows as fears of impending nationalisation came back to haunt the financials. When you get reports of Republicans supporting bank nationalisations, you know the whole sector is in the cross wires. Note the performance of American Express (AXP) yesterday, down 11.3% on news of soaring late payments. And all on the day when Obama signed away his stimulus plan. Seems the next stop for the S&P 500 may be around the 660 level. Fear dominates and gold and volatility (VIX) are soaring.

Today’s Market Moving Stories

• It seems that famed billionaire and self publicist (Sir) Allen Stanford defrauded investors in an $8 billion scheme based in Antigua. As the SEC said, his company “perpetrated a massive fraud based on false promises and fabricated historical return data to prey on investors.” Never trust a Knight! Just shows yet again that running a massive financial scam in a bull market is not particularly difficult with the SEC asleep at the wheel. It’s only when real people want their money back or the market goes pear shaped that these frauds seem to be uncovered.
• Fears of a collapse of Eastern Europe intensified yesterday, which led to a flight into the dollar, which rose to $1.25 against the euro, and triggered sharp falls in global equities.
• Always one for the dramatic statement, the Daily Telegraph has warned on the loss of AAA status for the UK. GBP has weakened sharply on this news but it is highly unlikely at present that the UK will lose AAA.
• Moody’s has downgraded the long-term bank deposit rating and the senior debt rating of Irish Life & Permanent a notch to A1 from Aa3 and they have been left on negative watch. Moody’s review will focus on the bank’s corporate governance “in light of the manner in which funding was provided to Anglo Irish Bank (AIB).”
• A glimmer of encouragement came from a report from Morgan Stanley that HSBC (HBC) will need less new capital than they had previously estimated.
• General Motors (GM) (whose stock stands at $2.14) wants another $16.6bn of Uncle Sam’s money but is still going to axe 47k jobs. Its fellow Detroit basket case Chrysler wants another $5bn from the kitty.
• Trump Entertainment Resorts (TRMP) has filed for Chapter 11 bankruptcy protection. The firm had accumulated debts of more than $1.7 billion as of the end of last year, as casino revenues were curbed by the recession. Seems Wall-Mart (WMT) is the only safe stock in these troubled times.

EU Willing To Bail Out Its Members?
Sovereign risk continues to deteriorate in Europe, with Ireland’s 5 year CDS now flirting with 400bp. Austria has just broken through 200bp, now above Italy. Germany’s 5 year CDS rose by another 10bp yesterday, and is likely to head further north this morning as German Chancellor Angela Merkel throws the towel in and admits that the government has no choice but to nationalise Hypo Real Estate bank.

Fortunately governments are starting to show some intellectual flexibility. Who would have thought, just a year ago, that the German Finance Minister would be publicly discussing ways of getting around the ‘no-bailout’ clause in the Maastricht Treaty. “The euro-region treaties don’t foresee any help for insolvent countries, but in reality the other states would have to rescue those running into difficulty,” Steinbrueck admitted yesterday. His statement suggests that the EU actually has a secret bailout plan, which it will produce immediately once a crisis happens.

Note that the hugely over-hyped chance of Ireland defaulting on its debts is “remote,” according to US rating agency Moody’s said. “Our rating and outlook on Ireland remain appropriate” and “Ireland remains a creditworthy issuer.”

Earnings Reports Released

• Heineken (HINKY.PK) don’t do markets but sadly they don’t seem to do profits either nowadays. Due to massive write offs on the ill timed forays into Russia, India and the UK pub portfolio, their profits are down 74%. Their arch rival Carlsberg (CGBWF.PK) is up strongly this morning (7.3%) on increased profits.
• French bank Soc Gen (SCGLY.PK) warned of a tough 2009, but stock up 5%.
• Commerzbank (CRZBY.PK) posted a loss of €809m and their stock is also up 5.3%.
• Dutch bank ING (ING) came in with red ink to the tune of € 3.71bn but, believe it or not, these numbers were actually a shade better than analysts' expectations.

Data And Earnings Today
From the US we have weekly mortgage applications, housing starts (529k), import/export prices, industrial production (-1.5%) and Federal Reserve minutes.

To add to that lot, Fed chairman Ben Bernanke and regional Fed Presidents Pianalto and Evans all speak.

Earnings from HP (HPQ) (expected EPS $0.93), Goodyear Tire (GT) (-$0.97), Playboy (PLA) (-$0.05) and Analog Devices (ADI) ($0.16).

And Finally… The Elephant Is Still In The Room

Disclosures: None

Comments

[thevoice@vo...:]

Do not nationalize the banks stupid!

After having already spent 350bn via Tarp funds the idea of nationalizing banks should not even be a consideration for the government. Have we not seen the nationalization effects from other countries that chose to go down this path, how is Japan doing? France?India? The US banking industry today is one of the most regulated in the country, the housing bubble was caused largely by the government forcing banks to increase lending to the sub prime population. Once a bank is nationalized all decisions on investments must be approved by the government, there is no way that anyone in office can decide which investment is good and which is not. These decisions will most likely be made based on political influence, whoever lobbies most will get the prize. That is probably not a good idea for the future entrepreneurs of America nor any small business.

During the 1990s banks were encouraged to loosen lending by the strengthening of the CRA act, this enabled individuals with insufficient funds to attain mortgages. Fast forward to today and we have the end result of reckless lending for nearly a decade.

Still this could have all been prevented if not for the issuance of FAS157 effective November 15,2007 by the SEC and FASB . For those unaware fair value was redefined. This rule requires banks to mark to market instead of mark to model as previously calculated since the inception of FASB. Pre FAS 157 when an investment vehicle trades thinly (such as mortgage backed securities) the underlying holder of the investment is allowed to use its own assumptions on fair value, today it must be valued based on what it can be sold at in the open market. If I'm a bank and expecting to receive future cash flow of $1000 a month over the next 30 years on an loan of 200K for a total payment of 360k, based on todays fair market value and panic in the market the underlying issue has been written down to 40 cents on the dollar or approximately 80k and this is a conservative figure. This past October the FASB began tracking the effects of this rule to determine if any amendments are needed, a little too late in my opinion.

Back to our banks, in the current market it would not be wise to sell any of the troubled assets based on fair market valuation as there are not enough buyers which drastically reduces the price of the asset.These assets should be removed from balance sheets, by creating a bad bank and transferring assets for 90 cents on the dollar although these assets may very well be valued at 50 or 40 cents on the dollar. By allowing banks to transfer these assets it will improve transparency and most importantly make them investable again. No more capital injections! This move only deters private investors from investing in equity. The higher the purchase price of these assets the higher the relief on the balance sheet of the banks. This would without a doubt improve overall economic conditions at a faster rate than any other solution and also affords the government the opportunity of this plan to cost taxpayers very little or possibly nothing. First, all loans should be returned back to the government which so far has amounted to 350bn. Next step would be for the "bad bank" formation and transferring all troubled assets here. An extra step here could be the banks that transfer assets are also forced to invest in the bad bank and in essence recoup a percentage of the losses but not to profit. A step further would be the government selling a portion of the bad banks to private investors sometime down the road.

If it was my decision I would choose to do nothing and let the game play out the way it should. Many banks would fail, lending would only get tighter and a global recession would still last shorter than nationalizing. Once all the failing players are held accountable and become extinct only healthy banks are left with real balance sheets and the recovery may begin, lending will loosen and so forth begins the next expansion cycle.

While this is not a quick fix lets not forget we are already in this mess and the best solution to minimize the effect of these troubled assets to the economy would be to have them removed from the balance sheet. I don't believe a full recovery is likely in the event of this transfer to the "bad bank," but unless there can be another accounting method to accrue troubled assets only when they mature it's a start to the end of this mess and lets not forget the person asking for the loan is just as responsible as the one providing it.
[e-mail]/...

Feb 18 08:16 AM

[investor88:]

Agree next stop sp500 around the 660 level when it will be time for at least a trading buy.

Feb 18 08:40 AM

[johnny inca:]

NVTL is the other safe stock to own. Actually, it's one of the few stocks going up besides the ultrashort ETF's.

Feb 18 08:48 AM

[kelm:]

We can be pretty certain I feel that there is a next major leg down in US equities. Whether it is 600, 500,100 who knows. As the article clearly the worsening condition globally probably ensures that this crisis lasts a lot longer than most are forecasting.

A note on bank nationalization though: nationalization is a process for taking over, restructuring or killing off, and then re-privatizing.

Finally, I'm really not sure where the comment above regarding Japan, France, and India came from. I've been to India, they have multiple independent commercial banks. So does France, so does Japan.

Feb 18 09:34 AM

[Mad Hedge F...:]

Eastern Europe has the world’s worst performing stock markets so far this year. After a year when investors thought things couldn’t get worse, they did, with shares in Poland, the Czech Republic, and Hungary down 15%. Soaring current account deficits have knocked their currencies down another 12%. Companies from the old East Bloc are more leveraged than most, and those that borrowed in dollars or Swiss Francs are in especially bad shape.

Feb 18 12:04 PM

[Atypical:]

Voice

The government "forcing banks to loan to subprime population" - not true.

ECONOMY -- FORMER HOUSING CEOS: POOR PEOPLE DID NOT CAUSE CURRENT FINANCIAL CRISIS: Yesterday, four former CEOs of Fannie Mae and Freddie Mac testified on how their companies' actions may have "contributed to the ongoing crisis." Blaming Fannie, Freddie, the Community Reinvestment Act (CRA), and low-income people is one of conservatives' favorite talking points, as The Progress Report has documented. But at the beginning of the hearing, Chairman Henry Waxman (D-CA) said that 400,000 documents amassed by the committee showed that the right-wing claim is nothing more than a myth. Furthermore, later in the hearing, Rep. Edolphus Towns (D-NY) asked the CEOs whether poor people caused the current financial crisis. All said "no." Congress passed the Community Reinvestment Act in 1977, requiring banks "to lend throughout the communities they serve." In the 1990s, greater mortgage lending to lower-income households by CRA-covered banks increased the homeownership rate for lower-income and minority families. As the Center for American Progress's Tim Westrich has written, "The real culprits in the mortgage mess are non-bank mortgage companies -- not covered by CRA -- that originated the lion's share of bad mortgages at the heart of the crisis. They made an estimated 50 percent of subprime loans in 2005."

Banking industry one of the most regulated. What? Does the name Phil Gramm resonate with you? Have you heard knowledgeable people say the ratings agencies had a huge part in this debacle. What about salesmen that misrepresented deals to borrowers. That was just on television recently.

Your ideological points are absurd.


On Feb 18 08:16 AM [e-mail] wrote:

> Do not nationalize the banks stupid!
>
> After having already spent 350bn via Tarp funds the idea of nationalizing
> banks should not even be a consideration for the government. Have
> we not seen the nationalization effects from other countries that
> chose to go down this path, how is Japan doing? France?India? The
> US banking industry today is one of the most regulated in the country,
> the housing bubble was caused largely by the government forcing banks
> to increase lending to the sub prime population. Once a bank is nationalized
> all decisions on investments must be approved by the government,
> there is no way that anyone in office can decide which investment
> is good and which is not. These decisions will most likely be made
> based on political influence, whoever lobbies most will get the prize.
> That is probably not a good idea for the future entrepreneurs of
> America nor any small business.
>
> During the 1990s banks were encouraged to loosen lending by the strengthening
> of the CRA act, this enabled individuals with insufficient funds
> to attain mortgages. Fast forward to today and we have the end result
> of reckless lending for nearly a decade.
>
> Still this could have all been prevented if not for the issuance
> of FAS157 effective November 15,2007 by the SEC and FASB . For those
> unaware fair value was redefined. This rule requires banks to mark
> to market instead of mark to model as previously calculated since
> the inception of FASB. Pre FAS 157 when an investment vehicle trades
> thinly (such as mortgage backed securities) the underlying holder
> of the investment is allowed to use its own assumptions on fair value,
> today it must be valued based on what it can be sold at in the open
> market. If I'm a bank and expecting to receive future cash flow of
> $1000 a month over the next 30 years on an loan of 200K for a total
> payment of 360k, based on todays fair market value and panic in the
> market the underlying issue has been written down to 40 cents on
> the dollar or approximately 80k and this is a conservative figure.
> This past October the FASB began tracking the effects of this rule
> to determine if any amendments are needed, a little too late in my
> opinion.
>
> Back to our banks, in the current market it would not be wise to
> sell any of the troubled assets based on fair market valuation as
> there are not enough buyers which drastically reduces the price of
> the asset.These assets should be removed from balance sheets, by
> creating a bad bank and transferring assets for 90 cents on the dollar
> although these assets may very well be valued at 50 or 40 cents on
> the dollar. By allowing banks to transfer these assets it will improve
> transparency and most importantly make them investable again. No
> more capital injections! This move only deters private investors
> from investing in equity. The higher the purchase price of these
> assets the higher the relief on the balance sheet of the banks. This
> would without a doubt improve overall economic conditions at a faster
> rate than any other solution and also affords the government the
> opportunity of this plan to cost taxpayers very little or possibly
> nothing. First, all loans should be returned back to the government
> which so far has amounted to 350bn. Next step would be for the "bad
> bank" formation and transferring all troubled assets here. An extra
> step here could be the banks that transfer assets are also forced
> to invest in the bad bank and in essence recoup a percentage of the
> losses but not to profit. A step further would be the government
> selling a portion of the bad banks to private investors sometime
> down the road.
>
> If it was my decision I would choose to do nothing and let the game
> play out the way it should. Many banks would fail, lending would
> only get tighter and a global recession would still last shorter
> than nationalizing. Once all the failing players are held accountable
> and become extinct only healthy banks are left with real balance
> sheets and the recovery may begin, lending will loosen and so forth
> begins the next expansion cycle.
>
> While this is not a quick fix lets not forget we are already in this
> mess and the best solution to minimize the effect of these troubled
> assets to the economy would be to have them removed from the balance
> sheet. I don't believe a full recovery is likely in the event of
> this transfer to the "bad bank," but unless there can be another
> accounting method to accrue troubled assets only when they mature
> it's a start to the end of this mess and lets not forget the person
> asking for the loan is just as responsible as the one providing it.
>
> [e-mail]/...

Feb 18 02:18 PM

[vaughn:]

Let us challenge Senator Dudd (pun intended) to nationalize the big four (BAC, WFC, JPM and C) and to realize circa 200 billion preferred loss for the treasury (sorry, that's u), not to mention the nationalization will also trigger CDS and complicate the circa 150 trillion derivative contracts written by big four which will definitely cause the chain events of bank failures around the world which will eventually bring down the USA itself.

Let us agree what the nationalization of banks means: It means the total wipe out of equity interest, including preferred.

Treasury will not nationalize banks which received Tarp preferred investment. Remember, those banks are deemed good banks or too big to fail banks.

Longs will soon realize the nationalization cannot and will not be used by treasury to deal with banks with Tarp preferred.

Feb 21 05:34 PM