'U.S. Banking System Is Effectively Insolvent' - Soros 54 comments
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Investor George Soros sees the economy possibly recovering in 2010, he tells Reuters Financial Television (2:08).
A roundtable of Reuters Staff interviews Investor George Soros, Chairman of Soros Fund Management and author of "The Crash of 2008 and What it Means." (13:25)
Soros sat down today with Reuters Television and Bloomberg News.
From Bloomberg:
Billionaire George Soros said the change to fair-value accounting rules will keep troubled banks in business, stalling a recovery of the U.S. economy.
“This is part of the muddling through scenario where we are going to keep zombie banks alive,” Soros, 78, said today in an interview with Bloomberg Television. “It’s going to sap the energies of the economy.”
The Financial Accounting Standards Board last week relaxed so-called mark-to-market rules, allowing banks to use “significant” judgment in gauging prices of some investments on their books. While analysts said the measure may reduce writedowns and boost net income, investor advocates and accounting-industry groups said it will help financial institutions hide their true health.
Soros said that banking system is “seriously under water” with banks on “life support.” U.S. stocks fell for the first time in five days today on concern that government measures to shore up banks may not help as much as expected and loan losses will exceed levels from the Great Depression.
“They are weighed down by a lot of bad assets, which are still declining in value,” he said. “The amount is difficult to estimate, but I think it’s in the region of maybe a trillion- and-a-half dollars.”
Soros said there is a risk the U.S. economy will fall into a depression if nations don’t act collectively to solve the economic crisis.
From Reuters:
The U.S. economy is in for a "lasting slowdown" and could face a Japanese-style period of relatively low growth with the added problem of high inflation, billionaire investor George Soros said on Monday.
Soros told Reuters Financial Television that rescuing U.S. banks could turn them into "zombies" that suck the lifeblood of the economy, prolonging the economic slowdown.
"I don't expect the U.S. economy to recover in the third or fourth quarter so I think we are in for a pretty lasting slowdown," Soros said, adding that in 2010 there might be "something" in terms of U.S. growth.
Most economists expect the U.S. economy to stop contracting in the third quarter and resume growing in the fourth quarter, according to a latest monthly poll of forecasts by Reuters.
The recovery will look like "an inverted square root sign," Soros said: "You hit bottom and you automatically rebound some, but then you don't come out of it in a V-shape recovery or anything like that. You settle down -- step down."
In the fourth quarter, the U.S. economy contracted at a 6.3 percent annualized rate, and economists think the first quarter's slide will be at least as severe, if not worse.
Healing the banking system, which is "basically insolvent," and housing markets is crucial to recovery, Soros said.
The public-private investment funds -- unveiled by the Treasury last month to get bad debts off bank balance sheets -- are going to work but won't be enough to recapitalize the banks so they are able to or willing to provide credit, he said.
Even a steep yield curve won't generate enough profits to keep the banks out of their vulnerable situation.
"What we have created now is a situation where the banks who will be able to earn their way out of a hole, but by doing that, they are going to weigh on the economy.
"Instead of stimulating the economy, they will draw the lifeblood, so to speak, of profits away from the real economy in order to keep themselves alive."
Soros said the "stress tests" of banks being conducted by Treasury, to determine their financial resilience, could be a precursor to a more successful recapitalization of the banks.
"Being the main issuer of international currency, we have been exempt and we have abused that because we have effectively consumed 6.5 percent more than we have produced. That is now coming to an end."
China recently proposed greater use of Special Drawing Rights, possibly as an eventual global reserve currency.
"In the long run, having an international accounting unit rather than the dollar may, in fact, be to our advantage so we can't splurge -- you know, it felt very good for 25 years but now we are paying a very heavy price," Soros said.
China will be the first country to emerge from recession, probably this year, and will spearhead global growth in 2010, Soros said. He said world policymakers are "actually beginning to catch up" with the crisis and efforts to fix structural problems in the financial system.
The system was "fundamentally flawed, and there is no returning to where we came from," he said.
EURO ZONE NOT IN DANGER
In Europe, he said the crisis provides an incentive for countries that use the euro to remain inside the monetary union, though countries on the periphery still face serious problems.
The euro has been "a tremendous advantage" to countries that use it, adding there's "no question of a weaker country dropping out," Soros said.
While additional resources for the International Monetary Fund will help it stabilize struggling Eastern Europe, he said the Baltic states still face "serious problems" and Ukraine is not far from default.
Widespread use of credit default swaps has worsened the risks for Europe, he said, though he added that Germany, the euro zone's biggest economy, is becoming more open to offering help. "Germany, which has been the most reserved about being the deep pocket of the rest of Europe, has recognized that it too has a responsibility toward the new member states."
Germany has been one of the most reluctant major economies to meet U.S. calls for more fiscal stimulus spending to boost the global economy and fight the financial crisis.
Soros tells Bloomberg and Reuters today that the "US banking sytem is effectively insolvent" and that new "mark-to-market accounting rules keep zombie banks alive."
He continued his subtle push for a new world reserve currency, mentioning the IMF Special Drawing Rights currency basket as an alternative.
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This article has 54 comments:
The end of this era and start of a new one will be a very bloody affair indeed. Look at the U.S. too-big-to-fail banking power and there struggle to retain there position. They will be broken up and restructured, there spending the last massive gobs of taxpayer money to hang onto there failed models and positions to squeeze the broken sponge (that's the 300 M U.S. citizenship) is a disgrace and to me, treason.
On Apr 07 11:59 AM Jason Rines (iThinkBig) wrote:
> Agree with Soros, all except international monetary currency. Central
> Banking/Frac Lending on it's last legs as a model, Internet being
> the permanent disruptor. The U.S. should issue greenbacks and we
> can go back to globalization attempts in another 30-40 years when
> the world has matured and has a new lending model that is not subject
> to impulsive perversions of frail human nature.
>
> The end of this era and start of a new one will be a very bloody
> affair indeed. Look at the U.S. too-big-to-fail banking power and
> there struggle to retain there position. They will be broken up and
> restructured, there spending the last massive gobs of taxpayer money
> to hang onto there failed models and positions to squeeze the broken
> sponge (that's the 300 M U.S. citizenship) is a disgrace and to me,
> treason.
Letting those banks fail, allowing healthier banks to pick up pieces (not the entire entities) at bargain prices, and letting stockholders and bondholders take their losses, will get the mess behind us faster and get the recovery moving quicker.
It will also cost the taxpayers a lot less.
On Apr 07 01:13 PM William Cowie wrote:
> A bit of needed perspective: not all banks are insolvent, it's mainly
> the "too big to fail" banks. And they ARE insolvent.
>
> Letting those banks fail, allowing healthier banks to pick up pieces
> (not the entire entities) at bargain prices, and letting stockholders
> and bondholders take their losses, will get the mess behind us faster
> and get the recovery moving quicker.
>
> It will also cost the taxpayers a lot less.
Think about it, this whole thing is stuck exactly because of CDSs. No CDS, then individual entities failing doesn't do the system any harm -- merely ripples in the pond and only hurting the companies in direct dealings with the failed entity.
Not sure why Tim and Ben don't want to deal with the CDS issues. The CDSs are like webs spun by the banks to tie their company's existence with the whole system. It's their weapon of mass destruction used to threaten the US govt. Take those away, and they're powerless.
Force CDS to be surrendered to a single govt clearinghouse by a certain date, or be rendered null and void. Create a moratorium on the creation of new CDSs. *THEN* let any insolvent banks die. The remaining system will clean itself up.
I'd much rather hear what a guy like Mike Stathis has to say.
Oh Mike?
On Apr 07 02:49 PM waf76 wrote:
> My friend, what you describe is something they used to call capitalism.
> Those days are over. Obamanomics...
The problem is deflation and economic contraction, not insolvent banks.
If stocks REALLY tank, and I'm talking about a drop in value of 75% or more, real estate (including commercial real estate) drops another 50% and the GDP drops by 10% per year for a few years, then banks will necessarily fail and (probably) be nationalized.
Banks are, by their very nature, dependent on the confidence of depositors, which is dependent on steady jobs and a growing economy.
No amount of insurance can save depositors from banks that fail because 1) they have (legally) loaned out far more money than is deposited, because 2) serious deflation has deeply discounted the value of the their assets and 3) because an economic depression has compromised the ability of their customers to repay their loans.
That is why the United States government is doing everything possible to bring back inflation and why talk of depression is (secretly) considered close to treasonous.
We need to 'get real' and stop the knee-jerk hyping and advertising of ourselves and our opinions.
The underlying economic realities are not that difficult to grasp even if the solutions are far from obvious and even more difficult to agree on.
Bottom line is that the fractional banking system has always been insolvent. Soros is just gaming the system because we may see this rally loose steam in the next week. He does know when to show up on TV. . .
The level of discourse is getting bad on the site. I have reached the point where I thnk banks are paying people to post on this thing because so many of the posts appear divorced from reality. If you can't argue agains the data just call him a commie or socialist, or use some other stupid smear tactic.
Hey,lets blame obama for everything and everyone will forget the causes of this crisis started years ago. It is like taking a line from the bush administration. If you say something over and over on TV and media people will believe you even if it is false. Well I would like to think that we have woekn up to the Karl Rove methods.
As for capitalism and communism. A trait of communism is to manipulate and censor the media of critism of the governemt by intimidation. It is also a trait is fascism. Has anyone read 1984?
I think he does, indeed, need a white cat with a diamond necklace..... He can stroke it while he sticks his pinky finger on the side of his lips as he says, "A hundred billion dollars....." All the while, he's shorting the USD.
Government-owned bonds and equity in sick banks will eventually be sold back to the markets - or perhaps to the "healthier banks" you speak of. The previous stockholders and bondholders have already been all but wiped out or diluted in Fannie, Freddie, C, BAC, and AIG - another of your suggestions. Overall, it sounds like you should be supporting the government's efforts - although you would perhaps prefer the banks to have different brand names when they are resold!
On Apr 07 01:13 PM William Cowie wrote:
> A bit of needed perspective: not all banks are insolvent, it's mainly
> the "too big to fail" banks. And they ARE insolvent.
>
> Letting those banks fail, allowing healthier banks to pick up pieces
> (not the entire entities) at bargain prices, and letting stockholders
> and bondholders take their losses, will get the mess behind us faster
> and get the recovery moving quicker.
>
> It will also cost the taxpayers a lot less.
Whether Soros is accurate in his pronouncements or not is a moot point and time will tell; but one thing is beyond dispute. He gains from the banks going down.
As my Mexican colleague would say, "ees a bad man".
"No, I expect you to die, Mr. Dollar."
We have to clean the system of bad apples- bad banks and their managements must go. Capitalism, free markets, accountability and moral hazard must be restored. Until that happens – the cronies like Goldman etc will game the system – country and the populace will get nowhere.
If Wagoner can be fired, why can’t Ken Lewis, Blankfein, and likes be fired. There are plenty of capable people around, likely currently unemployed, who can take over these banks.
You may want to restore capitalism, free markets and accountability, but moral hazard is generally defined as the antithesis of these, i.e., the condition where the party that takes the risk and benefits if it is successful is not the same party that pays for the risk when it doesn't work out. I'm not sure you meant to say that.
1. The entire GDP of the US is about USD 14 trillion.
2. The entire US money supply is also about USD 15 trillion.
3. The GDP of the entire world is USD 50 trillion.
USD 1,144 trillion is 22 times the GDP of the
whole world.
4. The real estate of the entire world is valued at
about USD 75 trillion.
5. The world stock and bond markets are valued at about
USD 100 trillion.
6. The big banks alone own about USD 140 trillion
in derivatives.
7. Bear Stearns had USD 13+ trillion in derivatives
and went bankrupt in March. Freddie Mac, Fannie Mae,
Lehman Brothers and AIG have all 'collapsed' because
of complex securities and derivatives exposures in
September.
8. The population of the whole planet is about 6 billion
people. So the derivatives market alone represents about
USD 190,000 per person on the planet.
seekingalpha.com/insta...
that contains the backup for my response, which is:
1. In the Depression it was hundreds of small banks going under. This time, the smaller banks are the healthy ones. We're only talking about four or five big banks.
2. Letting banks fail should come in two parts. The first is splitting off the viable business units they contain. It's been done before, quite successfully, and can be done again.
3. The remaining carcasses will be much smaller than what we see today. We had a successful approach to mass bank failures just over 10 years ago. If we follow the same plan, we should achieve similar results. The core of the plan is something like the RTC.
4. The taxpayer would be on the hook for (a) loans to buyers of the viable business units and (b) RTC funding. Both are clearly geared to repayment, leaving the US taxpayer with minimal exposure.
The two core elements, split up and RTC, have both been done before. Both worked. Both ended up with minimal bills to the taxpayer. While simple, the plan is NOT simplistic.
The Depression is not the only example of a recession, nor even of massive bank failures. While we need to heed those lessons, there are others to learn from, too. We saw what didn't work - let's also look at what did work.
On Apr 07 04:47 PM Chris B wrote:
> "Letting those banks fail..." is the simplistic attitude that got
> us into the great depression, which cost the taxpayers plenty. Yes,
> it would "cost the taxpayers a lot less" to pay zero taxes when they're
> unemployed and making zero money, but I'd take having a job and paying
> taxes over soup lines any day! Let's ignore the human suffering /
> foreign policy effects of repeating the depression and just consider
> the effect on government revenues and debt. Tax revenue would drop
> faster than spending, which would inflate the national debt by perhaps
> 70 additional percent of GDP, as occurred during the depression.
> I assume that repeating the depression is not one of your suggestions,
> so perhaps you are supporting a different plan.
>
> Government-owned bonds and equity in sick banks will eventually be
> sold back to the markets - or perhaps to the "healthier banks" you
> speak of. The previous stockholders and bondholders have already
> been all but wiped out or diluted in Fannie, Freddie, C, BAC, and
> AIG - another of your suggestions. Overall, it sounds like you should
> be supporting the government's efforts - although you would perhaps
> prefer the banks to have different brand names when they are resold!
>
Now you have a few options. You can find another insurer. They're out there. They'll charge more, sure, but still not the value of the entire asset. Or you can go naked, uninsured, and take your chances and manage your asset so the damage is less than the higher premium.
Bottom line: the cancellation of your house policy shouldn't bankrupt you. Likewise, if CDS's just got declared unenforceable, there would be howls of pain, but the actual cash damage wouldn't be near the value of the assets, and should not cause unrecoverable harm to the financial system.
The actual damage that would result from the cancellation of CDS's is less than what Wall Street wants us to believe - they just want that hi-flow hose from our wallets to their bonus accounts to keep pumping.
On Apr 07 02:50 PM Consider_this wrote:
> The CDS mess must be cleaned up, then the too big to fail entities
> can be allowed to fail.
>
> Think about it, this whole thing is stuck exactly because of CDS's.
> No CDS, then individual entities failing doesn't do the system any
> harm -- merely ripples in the pond and only hurting the companies
> in direct dealings with the failed entity.
>
> Not sure why Tim and Ben don't want to deal with the CDS issues.
> The CDSs are like webs spun by the banks to tie their company's existence
> with the whole system. It's their weapon of mass destruction used
> to threaten the US govt. Take those away, and they're powerless.
>
>
> Force CDS to be surrendered to a single govt clearinghouse by a certain
> date, or be rendered null and void. Create a moratorium on the creation
> of new CDSs. *THEN* let any insolvent banks die. The remaining system
> will clean itself up.
The smaller banks would have grown swiftly and safely as they would not have to change anyhting. They already had good policies in place and plenty of funds to provide the lending needed to do business as usual. If you don't qualify under their lenidng rules you would be screwed. Better you than me. The by product would have been a drop in housing prices that the Gov. is trying to avoid. In so doing they will prolong the process. My guess another 2 years of the same crap. I saw a bumper sticker today all it said was "1/20/13 " ........
We got change and we like it so much we want more change at Mid term and then 2012. I can't wait.
www.bloomberg.com/apps...
www.wealthalchemist.co.../
On Apr 07 03:03 PM dcb wrote:
> I forgot how bush let them fail. this isn't a republican or democrat
> issue. it is an issue of big business paying for and getting what
> they want regardless of party.
By Laurence Kotlikoff and Jeffrey Sachs
Published: April 7 2009 03:00 | Last updated: April 7 2009 03:00
Economists' Forum (Laurence Kotlikoff, professor of economics at Boston University, and Jeffrey Sachs, professor of economics at Columbia University and director of the Earth Institute): The Geithner-and-Summers Plan (Gasp) to buy toxic assets from the banks is rightly scorned as an unnecessary give-away by virtually every independent economist who has looked at it. Its only friends are the Wall Street firms it is designed to bail out. In an article in the FT, one of us (Sachs, March 23) described the systematic overbidding entailed by the proposal. Others have since made similar calculations, including Joseph Stiglitz and Peyton Young.
The situation is even worse than it looks, however, since the Gasp can be gamed by the banks that own the toxic assets to boost the purchase prices for their bad assets even higher than has been suggested to date.
Suppose that Citibank holds $1bn face value of toxic assets that will pay $1bn with 20 per cent probability and $200m with 80 per cent. The market value is $360m. The Gasp calls on investors to establish a public/private investment fund (PPIF) to bid for the toxic assets. For each $1 that a private investor brings in equity to the PPIF, the Treasury will put in another $1, and then the Federal Deposit Insurance Corporation (FDIC) will leverage the $2 in equity with $12 of non-recourse loans (6-to-1 leverage).
It's easy to show that a risk-neutral and arm's-length PPIF will bid $636m, financed with an FDIC loan of $545m, Treasury equity of $45m and private equity of $45m. (The expected profit to the private investor is a half of 20 per cent of $1bn minus $545m, or $45m. The private investor therefore has a net expected profit of zero.) The PPIF overpays by $276m, which equals the expected loss to the Treasury. The ultimate beneficiaries are Citibank's shareholders and bondholders, whose net worth rises by $276m at the taxpayers' expense. But the outcome could be even more outrageous than this. Citibank can arrange to receive even more than $636m for its assets by setting up its own Citibank PPIF (CPPIF) to bid for its bad assets. The CPPIF will bid the full $1bn in face value for its own toxic assets!
To see this, note that on a bid of $1bn by the CPPIF, Citibank would finance $71m in equity of the CPPIF, the Treasury would add another $71m in equity, and the FDIC would add $857m in loans to the CPPIF. The CPPIF will either break even (20 per cent of the time), or go bankrupt (80 per cent of the time). The CPPIF is therefore a wash-out - with no chance of profits, yet also zero liability.
On the other hand, Citibank gets a sure boost of $1bn minus $360m, or $640m in net worth, for which it pays $71m. Citibank's gain from the CPPIF's overbidding is $569m, which exactly equals the taxpayer's expected loss that is incurred by the FDIC loan and Treasury equity. The real icing on the cake is that Citibank still ends up owning the toxic assets even after the assets are "auctioned", but this time in an off-balance-sheet structured investment vehicle called the CPPIF. The toxic assets revert to the FDIC when the CPPIF goes bankrupt.
It's possible that some fine print of the Gasp would try to preclude explicit hyper-self-dealing of the type just described. But when there is free money on the ground, Wall Street will figure out ways to pick it up. For example, Citibank could arrange to overpay Bank of America for some unrelated securities in exchange for having Bank of America do its bidding at the auction. Indeed, Citibank, Bank of America and other toxic asset owners might join together in a consortium to finance an "arm's-length" PPIF on favourable terms, with the proviso that the PPIF bid for the toxic assets of the consortium. BusinessWeek has reported that "administration officials confirm Treasury may allow such seller financing".
The sad part of all this is that there are excellent alternatives to the Gasp that are vastly more transparent and cheaper for the taxpayers.
The best of these involves separating a weak bank such as Citibank into a "Good Citibank" that holds Citibank's good assets and its deposits, and a "Bad Citibank" that holds the toxic assets, the bondholder debt and the shares of the Good Citibank. The Good Citibank returns quickly to normal business, while the Bad Citibank is eventually liquidated under bankruptcy, with the bondholders and other uninsured claimants getting partial repayments depending on their priority under bankruptcy. The best description of this approach is by Jeremy Bulow and Paul Klemperer.
Over time, we should consider more fundamental reforms, including the idea of establishing limited purpose banking, in which the liquidity services provided by banks are undertaken by institutions with 100 per cent reserve requirements and which, therefore, are immune from runs, panics and reckless gambles. It would be absurd and self-defeating to bear the enormous social costs of the current financial crisis, only to return to the same kind of flawed banking institutions that got us into this mess.
The Geithner-and-Summers Plan should be scrapped. Mr Obama should ask his advisers to canvass the economics and legal community to hear the much better ideas that are in wide circulation.
ft.com/economistsforum
Copyright The Financial Times Limited 2009
By James Baker
Published: March 2 2009 02:00 | Last updated: March 2 2009 02:00
Beginning in 1990, Japan suffered a collapse in real estate and stock market prices that pushed major banks into insolvency. Rather than follow America's tough recommendation - and close or recapitalise these banks - Japan took an easier approach. It kept banks marginally functional through explicit or implicit guarantees and piecemeal government bail-outs. The resulting "zombie banks" - neither alive nor dead - could not support economic growth.
A period of feeble economic performance called Japan's "lost decade" resulted.
Unfortunately, the US may be repeating Japan's mistake by viewing our current banking crisis as one of liquidity and not solvency. Most proposals advanced thus far assume that, once confidence in financial markets is restored, banks will recover.
But if their assumption is wrong, we risk perpetuating US zombie banks and suffering a lost American decade.
Evidence - a mountain of toxic assets, housing market declines, a sharp economic recession, rising unemployment and increasing taxpayer exposure through guarantees, loans, and infusion of capital - strongly suggests that some American banks face a solvency problem and not merely a liquidity one.
We should act decisively. First, we need to understand the scope of the problem. The Treasury department - working with the Federal Reserve - must swiftly analyse the solvency of big US banks. Treasury secretary Timothy Geithner's proposed "stress tests" may work. Any analyses, however, should include worst-case scenarios. We can hope for the best but should be prepared for the worst.
Next, we should divide the banks into three groups: the healthy, the hopeless and the needy. Leave the healthy alone and quickly close the hopeless. The needy should be reorganised and recapitalised, preferably through private investment or debt-to-equity swaps but, if necessary, through public funds. It is time for triage.
To prevent a bank run, all depositors of recapitalised banks should be fully guaranteed, even if their deposit exceeds the Federal Deposit Insurance Corporation maximum of $250,000 (€197,000, £175,000). But bank boards of directors and senior management should be replaced and, unfortunately, shareholders will lose their investment. Optimally, bondholders would be wiped out, too. But the risk of a crash in the bond market means that bondholders may receive only a haircut. All of this is harsh, but required if we are ultimately to return market discipline to our financial sector.
This is not a call for nationalisation but rather for a temporary injection of public funds to clean up problem banks and return them to private ownership as soon as possible. As president Ronald Reagan's secretary of the Treasury, I abhor the idea of government ownership - either partial or full - even if only temporary. Unfortunately, we may have no choice. But we must be very careful. The government should hold equity no longer than necessary to restructure the banks, resume normal lending and recoup at least a portion of taxpayer investment.
After replacing bank management with new private managers, the government should have no say in banks' day-to-day operations.
The FDIC can assist. Just this year, it has placed over a dozen American banks - admittedly all small - into receivership. We might also consider setting up something akin to the Resolution Trust Corporation, created in 1989 to liquidate the assets of failed savings and loans. The RTC eventually disposed of nearly $400bn in assets of more than 700 insolvent thrifts.
To avoid bank runs and contain market disruption, the Treasury should announce its decisions at one time. Washington will also need to co-ordinate its actions with other major capitals, especially in western Europe and east Asia. At best, this will encourage other countries to take similar steps with their own banking systems. At a minimum, other governments can prepare for the financial turmoil associated with the announcement.
This approach is not pretty or easy. It will cost a lot of money, with the lion's share coming from US taxpayers, at least in the short to medium term. But the alternative - a piecemeal pumping of more public money into insolvent banks in the vague hope that things will improve down the road - could truly be historic folly.
Eventually our banks and economy will start to recover. When they do, we would be wise to avoid another Japanese mistake - raising taxes. To counter mounting debt created by government stimulus packages, Japan increased taxes in 1997. Consumption dropped and the country's economy collapsed.
Our ad hoc approach to the banking crisis has helped financial institutions conceal losses, favoured shareholders over taxpayers, and protected senior bank managers from the consequences of their mistakes. Worst of all, it has crippled our credit system just at a time when the US and the world need to see it healthy.
Many are to blame for the current situation. But we have no time for finger-pointing or partisan posturing. This crisis demands a pragmatic, comprehensive plan. We simply cannot continue to muddle through it with a Band-Aid approach.
During the 1990s, American officials routinely urged their Japanese counterparts to kill their zombie banks before they could do more damage to Japan's economy. Today, it would be irresponsible if we did not heed our own advice.
James A. Baker III was chief of staff and Treasury secretary for President Ronald Reagan and secretary of State for President George H.W. Bush
Copyright The Financial Times Limited 2009
UPDATE 1-US to delay bank test results for earnings-source
Tue Apr 7, 2009 1:09pm EDT
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* Delay would avoid 1st quarter results period
* Source: Treasury still mulling stress test disclosure (Adds details on stress tests, byline)
By Karey Wutkowski
WASHINGTON, April 7 (Reuters) - The U.S. Treasury Department is planning to delay the release of any completed bank stress test results until after the first-quarter earnings season to avoid complicating stock market reaction, a source familiar with Treasury's discussions said on Tuesday.
The Treasury is still talking about how results of the regulatory stress tests on the 19 largest U.S. banks will be released, and may disclose them as summary results that are not institution-specific, the source said.
The government is testing how the largest banks would fare under more adverse economic conditions than are expected in an attempt to assess the firms' capital needs. The tests are due to be completed by the end of April, but Treasury has said they may be finished before then.
The source, speaking anonymously because the Treasury has not made a final decision on what to disclose, said officials do not want any test results released before the earnings season wraps up for most U.S. banks on April 24.
Treasury did not immediately respond to a request for comment.
U.S. regulators have reached the closing phase of the stress tests, with many of the top banks having already turned in their internal versions of the test to officials. Bank of America Corp (BAC.N) Chief Executive Kenneth Lewis said last Thursday that his bank has already completed its test.
Bank regulators are at the stage of reconciling their own versions of the results with the banks' internal assessments.
Officials realize it may be hard to keep the results under wraps, and they are looking for ways the banks could disclose some details without unduly disturbing the markets. They are also looking at providing some summary information about how the banks fared.
"There will be definitely be some information that will be provided at the end of it, but exactly what that will be, and when it will be provided, will come forth later," Comptroller of the Currency John Dugan, who supervises some of the nation's largest banks, said last week.
The stress tests at the biggest banks are part of a wide-ranging effort to restore stability to a sector hit by huge mortgage-related losses.
The tests are designed to determine the depth of banks' capital holes if conditions deteriorate further. After the tests are completed, the banks will have six months to either raise private capital to compensate, or accept government funds.
But officials are worried about how the market will react to the stress test results if there is not a clear recovery path for a bank that is deemed to have a large capital need.
The last thing Treasury wants to do is set off a panic, the source said. (Reporting by Karey Wutkowski, additional reporting by Glenn Somerville; Editing by Tim Dobbyn)
© Thomson Reuters 2009 All rights reserved
from our own seeking alpha team.
our own credit market is priced for insolvency. look at LQD, the NAV and look at cds spreads. the market always goes up until forced to go down. that is they way the market works.
By Lynn Thomasson and Thomas R. Keene
April 8 (Bloomberg) -- Bank takeovers worsened the financial crisis by making firms that were already too big even bigger, said Nouriel Roubini, the New York University professor who predicted the financial crisis.
“The institutions are insolvent,” Roubini said in a Bloomberg Radio interview. “You have to take them over and you have to split them up into three or four national banks, rather than having a humongous monster that is too big to fail.”
JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. in March 2008, with help from the Federal Reserve, while Bank of America Corp. purchased Merrill Lynch & Co. Wells Fargo & Co. took control of Wachovia Corp. and PNC Financial Services Group Inc. got National City Corp.
Banks around the world have reported $1.29 trillion in credit losses tied to the housing market collapse since 2007. The deficits, which spurred the first simultaneous recessions in the U.S., Europe and Japan since World War II, pushed the American government to pledge $12.8 trillion to stabilize the banking system and revive economic growth. That figure amounts to $42,105 for every man, woman and child in the country.
The Standard & Poor’s 500 Index, which tumbled 38 percent in 2008, has rallied 22 percent after sinking to a 12-year low on March 9. Roubini said in a Bloomberg interview that day that the S&P 500 is likely to drop to 600 or lower this year as the global recession intensifies.
In the fourth quarter, the U.S. economy contracted at a 6.3 percent annualized rate, and economists think the first quarter's slide will be at least as severe, if not worse."
This is exactly what happened to tech after the dot-com bust.
Why should one listen to someone who led the coup d'etat?
On Apr 08 02:15 PM dcb wrote:
> How Washington can prevent 'zombie banks'
>
> By James Baker
>
> Published: March 2 2009 02:00 | Last updated: March 2 2009 02:00
>
>
> Beginning in 1990, Japan suffered a collapse in real estate and stock
> market prices that pushed major banks into insolvency. Rather than
> follow America's tough recommendation - and close or recapitalise
> these banks - Japan took an easier approach. It kept banks marginally
> functional through explicit or implicit guarantees and piecemeal
> government bail-outs. The resulting "zombie banks" - neither alive
> nor dead - could not support economic growth.
>
> A period of feeble economic performance called Japan's "lost decade"
> resulted.
>
> Unfortunately, the US may be repeating Japan's mistake by viewing
> our current banking crisis as one of liquidity and not solvency.
> Most proposals advanced thus far assume that, once confidence in
> financial markets is restored, banks will recover.
>
> But if their assumption is wrong, we risk perpetuating US zombie
> banks and suffering a lost American decade.
>
> Evidence - a mountain of toxic assets, housing market declines, a
> sharp economic recession, rising unemployment and increasing taxpayer
> exposure through guarantees, loans, and infusion of capital - strongly
> suggests that some American banks face a solvency problem and not
> merely a liquidity one.
>
> We should act decisively. First, we need to understand the scope
> of the problem. The Treasury department - working with the Federal
> Reserve - must swiftly analyse the solvency of big US banks. Treasury
> secretary Timothy Geithner's proposed "stress tests" may work. Any
> analyses, however, should include worst-case scenarios. We can hope
> for the best but should be prepared for the worst.
>
> Next, we should divide the banks into three groups: the healthy,
> the hopeless and the needy. Leave the healthy alone and quickly close
> the hopeless. The needy should be reorganised and recapitalised,
> preferably through private investment or debt-to-equity swaps but,
> if necessary, through public funds. It is time for triage.
>
> To prevent a bank run, all depositors of recapitalised banks should
> be fully guaranteed, even if their deposit exceeds the Federal Deposit
> Insurance Corporation maximum of $250,000 (€197,000, £175,000). But
> bank boards of directors and senior management should be replaced
> and, unfortunately, shareholders will lose their investment. Optimally,
> bondholders would be wiped out, too. But the risk of a crash in the
> bond market means that bondholders may receive only a haircut. All
> of this is harsh, but required if we are ultimately to return market
> discipline to our financial sector.
>
> This is not a call for nationalisation but rather for a temporary
> injection of public funds to clean up problem banks and return them
> to private ownership as soon as possible. As president Ronald Reagan's
> secretary of the Treasury, I abhor the idea of government ownership
> - either partial or full - even if only temporary. Unfortunately,
> we may have no choice. But we must be very careful. The government
> should hold equity no longer than necessary to restructure the banks,
> resume normal lending and recoup at least a portion of taxpayer investment.
>
>
> After replacing bank management with new private managers, the government
> should have no say in banks' day-to-day operations.
>
> The FDIC can assist. Just this year, it has placed over a dozen American
> banks - admittedly all small - into receivership. We might also consider
> setting up something akin to the Resolution Trust Corporation, created
> in 1989 to liquidate the assets of failed savings and loans. The
> RTC eventually disposed of nearly $400bn in assets of more than 700
> insolvent thrifts.
>
> To avoid bank runs and contain market disruption, the Treasury should
> announce its decisions at one time. Washington will also need to
> co-ordinate its actions with other major capitals, especially in
> western Europe and east Asia. At best, this will encourage other
> countries to take similar steps with their own banking systems. At
> a minimum, other governments can prepare for the financial turmoil
> associated with the announcement.
>
> This approach is not pretty or easy. It will cost a lot of money,
> with the lion's share coming from US taxpayers, at least in the short
> to medium term. But the alternative - a piecemeal pumping of more
> public money into insolvent banks in the vague hope that things will
> improve down the road - could truly be historic folly.
>
> Eventually our banks and economy will start to recover. When they
> do, we would be wise to avoid another Japanese mistake - raising
> taxes. To counter mounting debt created by government stimulus packages,
> Japan increased taxes in 1997. Consumption dropped and the country's
> economy collapsed.
>
> Our ad hoc approach to the banking crisis has helped financial institutions
> conceal losses, favoured shareholders over taxpayers, and protected
> senior bank managers from the consequences of their mistakes. Worst
> of all, it has crippled our credit system just at a time when the
> US and the world need to see it healthy.
>
> Many are to blame for the current situation. But we have no time
> for finger-pointing or partisan posturing. This crisis demands a
> pragmatic, comprehensive plan. We simply cannot continue to muddle
> through it with a Band-Aid approach.
>
> During the 1990s, American officials routinely urged their Japanese
> counterparts to kill their zombie banks before they could do more
> damage to Japan's economy. Today, it would be irresponsible if we
> did not heed our own advice.
>
> James A. Baker III was chief of staff and Treasury secretary for
> President Ronald Reagan and secretary of State for President George
> H.W. Bush
>
> Copyright The Financial Times Limited 2009
To Professional Gringo.......
You got it right my friend. You cannot listen to anyone in the media because they all have their own agendas. While I did not watch the video, I will say that, yes of course the banks are insolvent and have been for almost a year. This is no news - unless of course Soros, Buffett or the other investment "Gods" say so (sarcasm).
However, this does not matter from the banks' standpoint because the Fed will keep printing money - something UK and Europe cannot do since they do not have the universal currency. Check in my archives what I said about the dollar-oil link, as this presents some interesting scenarios which, alone could lead to war.
I think it should be fairly obvious what is likely for the dollar. It will remain strong, but only as a safe haven. Once the global economy becomes more stable, the dollar will falter.
As for Soros' prediction of a recovery in 2010, like others, he simply does not understand the full magnitude of America's problems. There will be a phantom recovery which will not persist. It is likely that we will see the same boom-bust cycle repeat within the next few years.
On Apr 07 02:57 PM Professional Gringo wrote:
> So is Soros on a media tour to promote a bet against the dollar or
> is this a political ploy?
>
> I'd much rather hear what a guy like Mike Stathis has to say. <br/>
>
> Oh Mike?
Even prior to this economic depression, I have always felt that the Euro would not persist. There are too many issues. Surely Soros is not that stupid. I would say either he is trying to manipulate the Euro so he can make more money when he decides to short it before the breakup, or else he has placed too much confidence in the elitest groups (of which he belongs) that advocate a global order.
On Apr 08 11:39 PM Mike Stathis wrote:
>
> To Professional Gringo.......
>
> You got it right my friend. You cannot listen to anyone in the media
> because they all have their own agendas. While I did not watch the
> video, I will say that, yes of course the banks are insolvent and
> have been for almost a year. This is no news - unless of course Soros,
> Buffett or the other investment "Gods" say so (sarcasm).
>
> However, this does not matter from the banks' standpoint because
> the Fed will keep printing money - something UK and Europe cannot
> do since they do not have the universal currency. Check in my archives
> what I said about the dollar-oil link, as this presents some interesting
> scenarios which, alone could lead to war.
>
> I think it should be fairly obvious what is likely for the dollar.
> It will remain strong, but only as a safe haven. Once the global
> economy becomes more stable, the dollar will falter.
>
> As for Soros' prediction of a recovery in 2010, like others, he simply
> does not understand the full magnitude of America's problems. There
> will be a phantom recovery which will not persist. It is likely that
> we will see the same boom-bust cycle repeat within the next few years.
>
>
> On Apr 07 02:57 PM Professional Gringo wrote:
The FDIC's Electric Kool-Aid Acid Test: Sheila Bair Has Lost Her Mind
dailybail.com/home/the...
The pictures themselves are interesting.
While I may not agree on this individuals ideology, you must be a bit more consistent with your comments. You can't advocate tough love, but at the same time think it is OK to keep pumping money at failing banks. The two do not go together.
If you look at the comments of Soros and Jim Rogers they are essentially the same. The solutions differ though. Listen to the message not the person saying it and tou will learn a thing or two.
When two people of apparently different ideologies say the same thing there is a good chance it is right and shouldn't be dismissed.
It is the same thing as saying there are terrorist nukes around the US. If the American people knew we don't have a banking system there would be bank runs, people wouldn't go to work, etc. That's what is going on.
Early accounts of the results of the stress tests, apparently reaching the level of "fit to print" as determined by one news outlet in particular, are decidedly upbeat in nature. We are told that, in general, the nation's banks seem to be holding up quite well under the pressure of these tests. These rosy assertions are of course disclaimed by the caveat that the Banks "May Still Need Aid". Obviously, each Bank will possess a slightly different set of circumstances that correspond to a particular amount of additional capital needed by that Institution(at this one point in time). However, an analysis of the rhetoric that has emanated from Geithner and company would suggest that the Government's objective is to create at least one "fall guy" from the stress test process.
It has grown increasingly apparent that the motivation behind Treasury's stress tests is not to conduct a wholehearted investigation of the financial sector's future viability, but rather to instill confidence in the system in general. Granted, a small army of Bespectacled Bank Examiners are in fact sifting through the sewerage on Bank's balance sheets, proving that Geithner understands the need to provide this little exercise with the illusion of legitimacy.
Assuming that Mr. Geithner fully comprehends the need for a show of legitimacy(and we think he does), he in turn understands that some Bank(s) must take the fall for the good of the others. While we can assert with confidence that Goldman Sachs will NOT be one to take the fall, we are not able to say with certainty who exactly will. Likely, whichever Bank is least adept at behind the scenes chicanery will be punished accordingly. In any event, we expect these distinctions to materialize in short order. Sunday night has become an exceedingly popular time slot for this sort of announcement, however, we would be hesitant to put our money on any Government action these days.
TheValueatRisk.blogspo...
us what Gold is going to do.
Bill
Wake me up when the future earnings of banks becomes 0, because when that happens we're in trouble.
If I have a house on day 1 valued at $1000 and borrow $500 against the value of my house. Well house prices go down on day 2 and my $1000 house is now worth $100. Oh shite, I'm insolvent. But each day I earnings $10. So guess what, unless my earnings go to 0 eventually I can become UN-insolvent.
I must have missed the email that the US needs to settle up its debts in the next couple days.
How many individuals whining and complaining live their lives the same way and are insolvent(not talking about people who have lost their job)...how would you like it if the MAN showed up at your house and said, "we know your loan isn't due today, but we're calling it and you're insolvent, so we're going to break your knees".
We are in the midst of a serious recession. So, is this a bear market rally. I suspect it is.
But, yesterday's rally is putting a nail in my suspicion this cannot be sustained. We just keep seeing those green shoots shooting up. Wells Fargo, for example. The market seems to take off on any shred of good news.
One might figure housing must stabilize, jobless claims have to begin falling, and the banks need to ween off government money before we would call a recovery...and any sustainable rally...possible.
On Apr 07 11:20 PM John Sky wrote:
> Soros has been right on the money with some of his calls. I don't
> understand why he favors the Euro over the dollar. The Eurozone has
> its own problems and has potentially more toxic debt than the US.
> I can't take everything he is saying too seriously though. I mean
> come on! The guy is bias. I'll give him credit for making great points.
On Apr 07 01:13 PM William Cowie wrote:
> A bit of needed perspective: not all banks are insolvent, it's mainly
> the "too big to fail" banks. And they ARE insolvent.
>
> Letting those banks fail, allowing healthier banks to pick up pieces
> (not the entire entities) at bargain prices, and letting stockholders
> and bondholders take their losses, will get the mess behind us faster
> and get the recovery moving quicker.
>
> It will also cost the taxpayers a lot less.