Certain Banks Are Still Broke

As I alluded to in a previous column, discerning minds should be paying close attention to the repayment of TARP funds. Additional information since then has come to light in the bank repayment of taxpayer money.

Yesterday Bloomberg reported (JP Morgan, Morgan Stanley Among 10 Banks Repaying TARP Funds):

“These repayments are an encouraging sign of financial repair,” Treasury Secretary Timothy Geithner said in a statement today. “But we still have work to do.”

The decision reflects rising pressure from banks to free themselves of government stakes that left them vulnerable to political interference, following a popular outcry against Wall Street bailouts.

The Treasury didn’t name the banks. In addition to JPMorgan and Morgan Stanley, American Express Co., Bank of New York Mellon Corp., BB&T Corp., Capital One Financial Corp., Northern Trust Corp., State Street Corp. and U.S. Bancorp all said today they are repaying the funds. A spokesman for Goldman Sachs Group Inc., which has demonstrated it can raise funds without federal aid, didn’t return a call seeking comment.

“They’re in some ways picking winners and losers,” said Jennifer Thompson, an analyst at Portales Partners LLC in New York. “There might initially be somewhat of a cloud lifted off the banks that are able to repay TARP.”

A couple of points on this; first off, by what criterion are these banks being allowed to repay TARP monies? This is apparently a good question to be asking, as the Congressional Oversight Panel (ironically “COP”) is calling for a re-run of the now infamous “Stress Tests.”

In its latest report to lawmakers, the Congressional Oversight Panel pointed to the unemployment report for the month of May as a sign that the stress tests were not stressful enough. Even as the pace of job losses slowed during the month, the unemployment rate surged to a 26-year high of 9.4%. Banking regulators that devised the stress tests had said in their most "adverse" case scenario that the jobless rate would hit 8.9% in 2009."The employment numbers for 2009 have already exceeded the harshest scenario considered so far, suggesting that the stress tests should be repeated," the report said.

It seems that Congress has finally realized what I wrote about last month in “Stressed Out”; that the test was useless. At that time I wrote:

The only way the stress test assumptions hold any weight is if the government is correctly calling this (as in right now) the economic bottom. If it is not the bottom, the stress test is utterly useless because it has not considered things getting any worse than they are today. However, what they have done (inadvertently) is finally shown us how weak our banks actually are as of the date the tests were run.

Does Congress now see this? I hope that they do and that they run more stress tests using much more adverse scenarios. If any of them are reading this; try using a scenario that includes “official” unemployment (U3) between 15% and 20% for a worst case scenario. Also consider moving the end of the Great Recession to 2012 or beyond. Heck if we’re going to run a stress test it might as well be stressful right? (No, 15% or 2012 is not out of the realm of possibility.)

The second thing to consider regarding the story about banks paying back TARP is that Wells Fargo (WFC), Citigroup (C), and Bank of America (BAC) are still broke. When I wrote “Wells Fargo Is Broke” I gave you the reasons why I felt that Wells Fargo was improperly assessing its financial condition. On that, look to what I wrote May 11th, 2009:

As of today, Howard Atkins, Wells Fargo's CFO says that the bank "Thinks it already has a lot of capital." This statement, in and of itself, is oxymoronic when one considers the stress test assumptions. Mr. Atkins: What does "a lot" mean to you? I'll tell you what it means to me, "a lot" means Wells does not have enough capital. How do I know this? I know this because the entity that wants to prove Wells has enough capital worse than anyone else, the Federal government, says they need roughly $14 Billion more dollars. I also know this because no bank, including Wells, is likely to repeat their stellar first quarter profits through the remainder of the year to fill any "Gap". But most importantly I know this because the stress test assumptions were anything but stressful and Wells has proven an inability to forecast in the past.

On June 8^th, Wells Fargo, along with the rest of the banks who failed the stress test, will present their long term viability plans to the government. On that day they will no doubt continue to state that they will come up with an additional $13.7 billion through earnings. When they say this don't believe it. Neither Wells, nor the Government, has been able to "anticipate the worst" in the past and this time around will be no exception.

So after re-reading that should you really be surprised to hear (from the Bloomberg article above):

The approved firms didn’t include Bank of America Corp., the biggest U.S. bank by assets, and Citigroup Inc., each of which have accepted $45 billion from the government. Wells Fargo & Co., the nation’s largest mortgage lender and the recipient of $25 billion in government aid, also wasn’t on the list.

I think not.

Ladies and gentlemen, our banks have no clothes. The COP is now telling us this bluntly, but only if we are willing to listen. The stress tests proved that our banks were weak using a worst case scenario that has now passed us by. Furthermore, the original stress test did not take into consideration the impending mortgage meltdown and commercial real estate implosion that is likely to come.

Wells Fargo, Bank of America, and Citigroup are all broke, and the others, while better capitalized, are still operating in a fantasy land. The day of financial reckoning is nearly upon our banks; it would be wise to pay attention to the facts. If ever there was a time to start considering this bull market rally over, that moment, if not already here, is rapidly approaching.

Disclosure: No positions in any financial stocks, banks or U.S. equities.

Comments

[Dave Wrixon:]

Without the changes to accounting rules and various other bits of subterfuge most of the Banks are still broke. And we all now know that the stress tests were a complete and utter farce.

Jun 10 06:07 AM

[punditobserver:]

Bank critic crackpots keep going just like the energizer bunny.

The words you jokers use dont have standard meanings anymore. "Broke" means not being able to pay bills or payroll ore debts or continue as a going concern in the real world. "Broke" becomes a meaningless epithet when used by a bank critic crackpot.

Jun 10 06:39 AM

[ebschor:]

punditobserver: At least he didn't say Nationalization. I guess "broke" is the new "nationalization" for the bank critic crackpot. Maybe Roubini will start using the term "broke" on CNBC and provide a new definition for it?

Jun 10 06:53 AM

[conceptwizard:]

If the mark to market rules had not been changed allowing the banks to remove these negative assets from their balance sheets, they would be insolvent by any standard. In fact they are still insolvent technically. The reason for the Share prices expanding is the fact that the Government elimated all risk by stating that they would never let the banks fail. By changing the mark to market rules this effectively removed any chance of the financial institutions participating in the Toxic Assets buyback plan, as they would of had to value these assets. This is a complete failure by the Obama Administration, these assets have to be dealt with before we can move forward and 9 months later we are still in the same pickle.

Jun 10 07:03 AM

[punditobserver:]

ebschor: or the ever handy "Insolvent" or "unsolvent by any measure"

A lot of the people who bought this story went long FAZ at $200, now at $4.30, FAZ holders have lapsed into delusional paranoia at on the FAZ yahoo message board.

It seems the true unemployment rate is 30%, banks are $7 trillion underwater, Home prices will go to zero and the government is perpetrating a conspiracy in collusion with the banking "oligarchy" to hide all this from the american people so they can somehow control us and take away our rights.

Fractional Reserve Banking is not an innovation that is taught at ll universities and makes possible modern market economies: it is a secret plot of bankers to enslave everyone in debt, grab dictatorial power and own everything that exists.

Jun 10 08:14 AM

[Perry B:]

To concept wizard. Had previous administrations not manipulated the mark to market rules, To accomadate their own agenda's. America, would not be in this mess. Obama inherited a mess of financial greed that the past three administrations have rode hard. The Obama administration has played the banks hand very well in my opinion. I read an article where Obama's team was going to make the banks auction off their so called toxic mortgages to the hedge funders. Since No other Country wanted to touch anything American. So in theory using current Mark to Market accounting rules. These hedge funders could have conceivably purchased at auction $100,000 mortgages for say 60,000. This made the banks have to rethink the wheel and all at once the Federal handout money wasnt so interesting. Thus forcing them to give the money back or lose real money. Some are still truly broke. But the others were just bilking the taxpayers, buying banks that did not have enough political clout. Going on junkets and doing buisness as usual. I think we should applaud the Obama team's very shrewd and tactful efforts in the face of years of Governmnet corruption and laws written to protect crooks. Laws written by our corrupt State Legislators and Corrupt Congress. I am particularly glad Obama is beginning the lengthy process of restoring free enterprise by changing anti trust laws. This recovery will take time, I hope many heads roll. Beginning with the above mentioned corrupt legislators and Congress.

Jun 10 11:36 AM

[Perry B:]

Consider this three months ago these ten banks that are now repaying al this Federal money were broke. Now we have a higher unemployment rate, lower consumer spending. Fewer mortgage apps.And higher Commercial bankruptcy filings. So how in these market conditions can these banks, in three months all at once be flush with solvency. It was a scam they got caught. We are moving ahead at a pretty quick pace. Compared to nine months ago.

Jun 10 11:49 AM

[DannyBoy153:]

WFC, BAC, and C will survive. C will be smaller with major dilution to current shareholders. WFC and BAC made BILLIONS last year and in the first quarter. These two bank's earning power has grown (along with JPM but JPM seems to be getting by with little press).

Jun 10 02:39 PM

[David Ristau:]

I think what will be interesting to see is this earnings season. After companies can't use their toxic assets to balloon earnings, will they be hit hard? How much would that affect this stock market rally?

Companies to be careful with going into this earnings season would be the big C and BAC, but also, the smaller FITB, HUNB, and other regional banks.

theoxengroup.com

Jun 10 03:30 PM

[six:]

Gee... ya think? Wow I can hardly believe it, the banks are broke and going to get broker... Deflationary Debt Destruction- Hello Prime Mortages Foreclosure, Credit Card Defaults and worst of all Commercial Loan Defaults. The rally in the market was and is baloney. Less people working, making less money and those that are working are spending less. And the market is up... That dog don't hunt.
To all of you that bought too much house, charged too much crap and can't pay your bills I hope you are happy. The American consumer can't do basic math.

Jun 10 03:50 PM

[PainfullyAware:]

Perry B - To Assume Benevolence IS Foolish.

I fear that you are not paying attention to "Details or Actions". The same abhorrent actions still continue. What is happening now is no different than recent history in action, only it has been brought to greater light by calamity.

The Complexity Of Corruption IS Vast And Is Not Contained In Within Easily Labeled "Clubs".

I fear that you do not understand the long term implications of recent actions.

Are You Comfortable With The Fact That Congress, Nor B. Obama, Had Time To Read The Second Bailout Bill Before They Passed It Into Law? This is just one example of many that is Nefarious in recent history.

I do not care the affiliation of those who hold office or how long they have been there - I Do Care About The Policies They Enact.

Things Are Not Well And The Propaganda Is Disturbing.

Jun 10 04:01 PM

[Koudos:]

On the last line of the article, you said "If ever there was a time to start considering this bull market rally over". Did you actually mean "bear market rally"?

Jun 10 04:33 PM

[Moon Kil Woong:]

We don't need a stress test. All we need is transparency. As mentioned before, let the Fed and Treasury disclose what bonds and debt instruments they were forced to buy and are guaranteeing and you will see, all the banks trying to repay the debt are still relying on the government to prop them up. Thus, they are not solvent enough.

Furthermore, require banks to show all their off balance sheet accounting and derivatives. If that doesn't make you blanche I guess you don't own any bank stock or have any deposits in their banks. The gall in saying they are solvent is astounding. The belief they can survive further downturns without secretly asking for government assistance is pure unadulterated rubbish.

If they want out from under TARP rules then don't take any government assistance nor ask the government to buy their debt instruments or back stop them. And stop asking for even more lenient accounting rules. If accounting rules were on the up and up, they would have gone bankrupt long before they became too big to fail.

Jun 10 10:57 PM

[Steve W fro...:]

So the author presents no evidence of his assertion WFC is "broke". He just makes a statement like it is obvious. Meanwhile Warren Buffet is adding more to his already large position in WFC. Hmm, why would Buffet throw good money after bad? Gee who to believe? Think I'll go with Buffet.

Jun 11 12:38 AM

[Matevski:]

Actually, all commercial banks are inherently broke and bankrupt.

You should pick up "The Mystery of Banking" writen by Mr. Murray N. Rothbard.

Jun 11 08:55 AM

[yank:]

Steve:
Before you "jump in bed" with Buffett consider that his portfolio lost 38% last year and his BERK-A shares are trading at a 10 year low.


On Jun 11 12:38 AM Steve W from Ford wrote:

> So the author presents no evidence of his assertion WFC is "broke".
> He just makes a statement like it is obvious. Meanwhile Warren Buffet
> is adding more to his already large position in WFC. Hmm, why would
> Buffet throw good money after bad? Gee who to believe? Think I'll
> go with Buffet.

Jun 11 09:48 AM

[DannyBoy153:]

Like I say, WFC and BAC made BILLIONS last year and in the first quarter. These two bank's earning power has grown. Their stock will follow.

Brk.a is trading at the same level as 2006. No where near it's 10 year low. I'm serious, do people check facts before they write anything?

Jun 11 09:58 AM

[Harry Tuttle:]

Any bank can make money with a steep yield curve....provided that they have no history.

The problem with the banks is that they have so many ways to present their results that they render them meaningless.

Merrill Lynch, for instance, used to be very profitable. Until one day people discovered their past profits were more than offset by their hidden losses.

Jun 11 10:04 AM

[DannyBoy153:]

Any bank? Please clarify some more. C didn't make any money for it's common shareholders. And how about all the failed banks? In this environment of steep yield curve, how can a bank make money if it's not in business? It takes a lot more than a steep yield curve to make money.

Mer added $3billion in the first quarter to BAC's bottom line and they'll add more earnings in the future.

Jun 11 11:39 AM

[PainfullyAware:]

"Value As You See Fit" accounting is in effect and you believe the "Profit Statements"? Not the wisest action.

Unfortunately it is very difficult to gauge the exposure of banks to the "Off Balance Sheet Assets" - Because They Are Hidden By Being Off Balance Sheet. However - When Default Is "Re- mediated" one can no longer "Mark To Myth" and loss will have to be accounted for. The next logical conclusion for "Forestalling The Inevitable" that our Governments are currently pursuing would be to let the banks become Real Estate Holding Companies as well. Currently there are low limits on this action with stiff penalties. If this Mandate is removed then the banks can take the defaults and continue the shenanigans.

Based upon what I have been exposed to Wells Fargo is one of the "Best" of the "Worst". They did not get as crazy as some.

There Is More To Know Than Can Be Known.

You can come to any conclusion if you limit the data to only that which supports your paradigm.


On Jun 11 11:39 AM DannyBoy153 wrote:

> Any bank? Please clarify some more. C didn't make any money for
> it's common shareholders. And how about all the failed banks? In
> this environment of steep yield curve, how can a bank make money
> if it's not in business? It takes a lot more than a steep yield
> curve to make money.
>
> Mer added $3billion in the first quarter to BAC's bottom line and
> they'll add more earnings in the future.

Jun 16 03:26 PM