If Asset Prices Are Dropping, Why Are Bank Stocks Rising? 40 comments
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My favorite indicator of bank portfolio quality, the traded price of riskier assets (in this case securities backed by subprime mortgages issued in the middle of 2007), has taken a big dip during the past couple of weeks (click to enlarge):
That should be a surprise given 1) rising default rates, 2) poorer consumer performance and 3) more loan modifications with uncertain implications for bond holders. I’ve been calling attention to the cognitive dissonance between the jump in asset prices (mainly due to so-called Public-Private Investment Partnerships funded by the government with cheap leverage and an asset price put) and the underlying deterioration of asset quality.
There was something of a mini-bubble in distressed asset prices driven by PPIP demand that seems to be abating. But what of bank stocks? WSJ this morning cites the failure of numerous regional banks who hold these securities.
U.S. banks have been dying at the fastest rate since 1992, mainly because of bad loans they made. Now the banking crisis is entering a new stage, as lenders succumb to large amounts of toxic loans and securities they bought from other banks.
Federal officials on Thursday were poised to seize Guaranty Financial Group Inc., in what would be the 10th-largest bank failure in U.S. history, and broker a sale of the Texas bank to Banco Bilbao Vizcaya Argentaria SA of Spain. Guaranty’s woes were caused by its investment portfolio, stuffed with deteriorating securities created from pools of mortgages originated by some of the nation’s worst lenders.
The large banks own the same toxic waste. I have argued all year that they can squeeze out enough cash flow to keep one nostril above water, and that Citi (C) (for example) should trade around $4 a share just in terms of option value on a possible future recovery. But options can go wrong as well: we simply don’t know how bad things are in the Citi portfolio.
Bank stocks have rallied well past the level at which I am comfortable. I took profits too early, but there is a big enough risk of a relapse to keep me on the sidelines.
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Even after the recent rally, virtually any rated class of bank (and other financials) debt assets are still being priced in the market at values that bear little resemblance to the actual performance of those assets, based on cash flows and valuations based on discounting those cash flows. That's why no banks, rightfully, are in any hurry to disgorge these loans at suicidal prices to lurking predators, who would happily lap them up at giveaway prices.
The foregoing is why one needs to focus on cashflows, not the paper-solvency debate. And, if one spends any time examining bank cashflows, they'll discover that the banks, due to their portfolios and the large interest-rate spreads, have been enjoying ever-expanding cashflows, resulting in record liquidty, as of now. This is a far better indicator of bank health than the endless debate over "paper" values, all of which are whimsical and will prove transient over time.
Also, contrary to popular belief, lending is not crippled because of some refusal to lend, as the media would have everyone believe with its parade of "rejected" borrowers. Lending is curtailed because consumers and businesses have been paying down debt, reducing demand, not increasing it. It's simply mathematically impossible for the banks to expand lending ratios in a declining-demand envronment.
The good news is that as the economy stabilizes, and consumers and businesses regain some confidence, demand will increase, and the banks are well positioned wit their current liquidity to service that demand.
Folks. This dude understands the banking business. Read and learn.
On Aug 22 11:16 AM Tack wrote:
> As long as the focus remains on distorted mark-to-market asset values,
> rather than the actual cash flows thrown off by loan portfolios,
> the wrong conclusions will be reached, again and again.
>
> Even after the recent rally, virtually any rated class of bank (and
> other financials) debt assets are still being priced in the market
> at values that bear little resemblance to the actual performance
> of those assets, based on cash flows and valuations based on discounting
> those cash flows. That's why no banks, rightfully, are in any hurry
> to disgorge these loans at suicidal prices to lurking predators,
> who would happily lap them up at giveaway prices.
>
> The foregoing is why one needs to focus on cashflows, not the paper-solvency
> debate. And, if one spends any time examining bank cashflows, they'll
> discover that the banks, due to their portfolios and the large interest-rate
> spreads, have been enjoying ever-expanding cashflows, resulting in
> record liquidty, as of now. This is a far better indicator of bank
> health than the endless debate over "paper" values, all of which
> are whimsical and will prove transient over time.
>
> Also, contrary to popular belief, lending is not crippled because
> of some refusal to lend, as the media would have everyone believe
> with its parade of "rejected" borrowers. Lending is curtailed because
> consumers and businesses have been paying down debt, reducing demand,
> not increasing it. It's simply mathematically impossible for the
> banks to expand lending ratios in a declining-demand envronment.
>
>
> The good news is that as the economy stabilizes, and consumers and
> businesses regain some confidence, demand will increase, and the
> banks are well positioned wit their current liquidity to service
> that demand.
I agree, big government has likely saved the big banks, and if his loan modifications actually work the banks will be able to survive by just kicking the can down the road and letting the huge profits they are making off the credit spread keep them above water as they write off the bad assets over time.
But what does that do for the consumer? They are ones that own these underwater houses and lost their jobs which are not coming back due to offshoring? Some one has to pay for all the bailouts, even if they get a smaller mortgage payment, they are not going to have a positive home equity for a long time. The consumer is tapped out and no one is bailing them out, in fact they are being asked to take on more debt via cash for clunkers, the housing rebate and soon cash for appliances. Of course that will be the only way to spur demand because without a government subsidy who will want to take on more debt? Oh then add in the triple specters of increased taxation, inflation and devaluation of the dollar and where does that leave the 90%? INSOLVENT.
But I expect to continue rallying so long as the government is supplying copious amounts of monetary lubricant to an economic engine that has a major oil leak.
Good Luck all
I agree with some of what you're saying, but I'm going to throw out a few counter arguments, mostly because I'm curious what you think about them
1) You can have positive cash flow and still be insolvent. General Growth Properties has cash flow but is mired in debt. Bernie Madoff had cash flow (!) These aren't banks of course, but the point is the same. Don't you think that BOTH cash flow and value of assets are important? I agree that valuing performing loans should not be at fire-sale prices. But we do need to account for how some of these loans may not perform so well into the future. This has been a huge recession after all. It's not a stretch to think past performance does not guarantee future returns.
2) Some of the lending has been curtailed by reduced demand. But it is undeniable that banks have tightened their lending standards. At least that is what they say they are doing with mortgages and car loans (and it is about time frankly). It is also undeniable that many credit limits are being scaled back by the banks and this is a way of curtailing lending. Both the supply and demand sides of this equation are in play, it's not all simply that there is less demand for financing.
The bottom line is that some banks are going to get through this fine and they will play a role in the recovery. But that doesn't convince me that many of these banks are ready for what happens if a new wave of defaults hits their books (as may be coming if the recovery proves slower and more uneven than some folks assume).
On Aug 22 11:16 AM Tack wrote:
> As long as the focus remains on distorted mark-to-market asset values,
> rather than the actual cash flows thrown off by loan portfolios,
> the wrong conclusions will be reached, again and again.
>
> Even after the recent rally, virtually any rated class of bank (and
> other financials) debt assets are still being priced in the market
> at values that bear little resemblance to the actual performance
> of those assets, based on cash flows and valuations based on discounting
> those cash flows. That's why no banks, rightfully, are in any hurry
> to disgorge these loans at suicidal prices to lurking predators,
> who would happily lap them up at giveaway prices.
>
> The foregoing is why one needs to focus on cashflows, not the paper-solvency
> debate. And, if one spends any time examining bank cashflows, they'll
> discover that the banks, due to their portfolios and the large interest-rate
> spreads, have been enjoying ever-expanding cashflows, resulting in
> record liquidty, as of now. This is a far better indicator of bank
> health than the endless debate over "paper" values, all of which
> are whimsical and will prove transient over time.
>
> Also, contrary to popular belief, lending is not crippled because
> of some refusal to lend, as the media would have everyone believe
> with its parade of "rejected" borrowers. Lending is curtailed because
> consumers and businesses have been paying down debt, reducing demand,
> not increasing it. It's simply mathematically impossible for the
> banks to expand lending ratios in a declining-demand envronment.
>
>
> The good news is that as the economy stabilizes, and consumers and
> businesses regain some confidence, demand will increase, and the
> banks are well positioned wit their current liquidity to service
> that demand.
Add to these the mountain of additional foreclosures, credit card defaults, auto loan defaults, and the commercial real estate refinancing that is suppose to flood these banks!!!!
Lets see, my business is worth $130 billion but I don't have to show you that I have $45 billion of bad loans!! What is my market value?????
I sure would like to know the actual unmanipulated value of all the major institutions so I would know which one is safe to invest in. Until that time, the entire market is nothing but a day trade toy!!!
Yes banks will be hit even more in the next round with CMBSs, Fed is rapidly buying all the toxic stuff last count $666B, they will keep buying PPIP, TALF, and rest of the alphabet soup.
You of course can sell more homes and cars with cash rebates – earlier the manufacturers did it themselves - went bankrupt. Now Govt. is decided to get into the game – where will the Govt end up – of course in the very same place bankruptcy. Lot of states are already there- biggest California.
Not only these stimulus programs world over will end sometime soon, after that you have to pay for them- higher taxes, lower entitlements - we will see the other side of all this pretty soon.
BHO who was promising to balance the budget in 4 years is now guaranteeing quadrupling the deficit in 8 years. 1 Trillion stimulus 'unemployment will be kept under 8%', changes to 2 Trillion to keep the unemployment under 10% - so it goes.
You're too logical for the other conspiracy filled posters here, FB.
The rate spreads are enormous - banks will do very well going forward with their new emphasis on risk analysis (finally).
Roubini,Rosenberg,Whit... and on want to play the same tune....
On Aug 22 03:55 AM Dialectical Materialist wrote:
> I read a lot that "bears are just upset because they missed the rally."
> But when the weatherman tells me that we had 2 inches of rain and
> that we have more on the way and a tornado watch to boot, I don't
> assume he's just bitter because he's trapped inside all day. The
> reality is that a lot of bears HAVE participated in this rally. Like
> me they have held their nose and bought in, at least a little. You
> have to go where the market is moving if you want to make money.
> That doesn't mean you have to believe that the sun is shining and
> all is well. I am not bitter about this rally. I am, like so many
> others, simply incredulous. And I am constantly scoping out the nearest
> chair for a place to sit when the music stops.
>
> On Aug 21 05:25 PM bbro wrote:
1) Paper solvency is only an issue if you're a third-party lender that has short-term maturing debt that needs to be rolled over and your creditors are either a) scared to death and want to take their money and run, or b) opportunistic predators, who wish to drive you into bankruptcy and/or deeding vastly-undervalued assets to them to satisfy your debt, so they can make the big money in the recovery phase. That's precisely what happened to leveraged outfits, like Thornburg Mortgage, etc., in the early going of this panic.
That phase of the panic is over, now, and the commercial banks are not going to face a "covenant call" on their debt unless one is contrived for them by the predatory forces. (That's precisly why we still see opining and lobbying to have Washington force the banks, by law, to sell all their distorted-market-value debt assets at what would be insane prices. The same entities that shorted all this stuff to death, now want Congress to giftwrap it for them so they can make the huge money on the upswing, too.)
2) Sure, there are tighter lending standards in play. For heaven's sake, let's hope so. The 125%, no-docs loans to people who couldn't have paid back 50% loans are how we got here. I do not in any way think the economy is being constrained at this point by inadequate loan supply; it's being limited by caution on borrowers' parts and by inadequate confidence being restored, as a whole, to the public. We're in the "early-adopters" phase of the recovery (where the big money is always made), and the general public will follow, gradually, as a lagging indicator, just like employment. It may be gradual, rather than sharp, but it's the direction that matters.
Regarding banks "getting through this," they are now at record levels of liquidity and deposits --absolutely huge amounts never before seen, en toto. The banks, also, despite all the fear whipped up about commercial realty, have already built up very large reserves, and continue to add, to deal with continued weakness in the commercial sector. They will not be caught off guard, as they were with the residential-writedown panic.
I continue to believe the banks are well positioned, presently, for returning profits and, especially, for growing cashflows.
In my own view, the only things that could upset the apple cart would be if:
1) Washington changed the rules and forced banks, against all logic, to sell their assets at firesale prices. For the moment, I'm betting that enough saner minds remain that this will not happen. However, if it did, it would have catastrophic consequences to our economy, the financial system, stock markets and any hope for world recovery.
2) Some new scare develops or is conjured up, which sends business and the public into a deeper retreat that reverses the initial positive news and emerging fledgling confidence we're beginning to see, now.
On Aug 22 01:30 PM Dialectical Materialist wrote:
> Tack,
>
> I agree with some of what you're saying, but I'm going to throw out
> a few counter arguments, mostly because I'm curious what you think
> about them
>
> 1) You can have positive cash flow and still be insolvent. General
> Growth Properties has cash flow but is mired in debt. Bernie Madoff
> had cash flow (!) These aren't banks of course, but the point is
> the same. Don't you think that BOTH cash flow and value of assets
> are important? I agree that valuing performing loans should not be
> at fire-sale prices. But we do need to account for how some of these
> loans may not perform so well into the future. This has been a huge
> recession after all. It's not a stretch to think past performance
> does not guarantee future returns.
>
> 2) Some of the lending has been curtailed by reduced demand. But
> it is undeniable that banks have tightened their lending standards.
> At least that is what they say they are doing with mortgages and
> car loans (and it is about time frankly). It is also undeniable that
> many credit limits are being scaled back by the banks and this is
> a way of curtailing lending. Both the supply and demand sides of
> this equation are in play, it's not all simply that there is less
> demand for financing.
>
> The bottom line is that some banks are going to get through this
> fine and they will play a role in the recovery. But that doesn't
> convince me that many of these banks are ready for what happens if
> a new wave of defaults hits their books (as may be coming if the
> recovery proves slower and more uneven than some folks assume).<br/>
What bank do you/your spouse work for?
Wany to brink a smile to everyone's face?
Trying claiming you don't work for one
"upset the apple cart"
Give me my 700 billion apples back!!!!
On Aug 22 06:39 PM Tack wrote:
> In response to your post:
>
> 1) Paper solvency is only an issue if you're a third-party lender
> that has short-term maturing debt that needs to be rolled over and
> your creditors are either a) scared to death and want to take their
> money and run, or b) opportunistic predators, who wish to drive you
> into bankruptcy and/or deeding vastly-undervalued assets to them
> to satisfy your debt, so they can make the big money in the recovery
> phase. That's precisely what happened to leveraged outfits, like
> Thornburg Mortgage, etc., in the early going of this panic.
>
> That phase of the panic is over, now, and the commercial banks are
> not going to face a "covenant call" on their debt unless one is contrived
> for them by the predatory forces. (That's precisly why we still see
> opining and lobbying to have Washington force the banks, by law,
> to sell all their distorted-market-value debt assets at what would
> be insane prices. The same entities that shorted all this stuff to
> death, now want Congress to giftwrap it for them so they can make
> the huge money on the upswing, too.)
>
> 2) Sure, there are tighter lending standards in play. For heaven's
> sake, let's hope so. The 125%, no-docs loans to people who couldn't
> have paid back 50% loans are how we got here. I do not in any way
> think the economy is being constrained at this point by inadequate
> loan supply; it's being limited by caution on borrowers' parts and
> by inadequate confidence being restored, as a whole, to the public.
> We're in the "early-adopters" phase of the recovery (where the big
> money is always made), and the general public will follow, gradually,
> as a lagging indicator, just like employment. It may be gradual,
> rather than sharp, but it's the direction that matters.
>
> Regarding banks "getting through this," they are now at record levels
> of liquidity and deposits --absolutely huge amounts never before
> seen, en toto. The banks, also, despite all the fear whipped up about
> commercial realty, have already built up very large reserves, and
> continue to add, to deal with continued weakness in the commercial
> sector. They will not be caught off guard, as they were with the
> residential-writedown panic.
>
> I continue to believe the banks are well positioned, presently, for
> returning profits and, especially, for growing cashflows.
>
> In my own view, the only things that could upset the apple cart would
> be if:
>
> 1) Washington changed the rules and forced banks, against all logic,
> to sell their assets at firesale prices. For the moment, I'm betting
> that enough saner minds remain that this will not happen. However,
> if it did, it would have catastrophic consequences to our economy,
> the financial system, stock markets and any hope for world recovery.
>
>
> 2) Some new scare develops or is conjured up, which sends business
> and the public into a deeper retreat that reverses the initial positive
> news and emerging fledgling confidence we're beginning to see, now.
>
Free money and enormous point spread heals a lot of bad stuff.
Yes more banks will fail but not as many as in 1989. June 1970 was also pretty bad. Look up Penn Central. We all survived. I wonder what the S&P was in June 1970? Some folks made fortunes buying bank stock in 1989. ok. I know. This time it's different. We are all going to be living in cardboard boxes....
Yes there will be more defaults but we are at th etail end of the mortgage deal and commercialproperty may not be as bad as people think Look at Reits.
That's all.
On Aug 22 01:30 PM Dialectical Materialist wrote:
> Tack,
>
> I agree with some of what you're saying, but I'm going to throw out
> a few counter arguments, mostly because I'm curious what you think
> about them
>
> 1) You can have positive cash flow and still be insolvent. General
> Growth Properties has cash flow but is mired in debt. Bernie Madoff
> had cash flow (!) These aren't banks of course, but the point is
> the same. Don't you think that BOTH cash flow and value of assets
> are important? I agree that valuing performing loans should not be
> at fire-sale prices. But we do need to account for how some of these
> loans may not perform so well into the future. This has been a huge
> recession after all. It's not a stretch to think past performance
> does not guarantee future returns.
>
> 2) Some of the lending has been curtailed by reduced demand. But
> it is undeniable that banks have tightened their lending standards.
> At least that is what they say they are doing with mortgages and
> car loans (and it is about time frankly). It is also undeniable that
> many credit limits are being scaled back by the banks and this is
> a way of curtailing lending. Both the supply and demand sides of
> this equation are in play, it's not all simply that there is less
> demand for financing.
>
> The bottom line is that some banks are going to get through this
> fine and they will play a role in the recovery. But that doesn't
> convince me that many of these banks are ready for what happens if
> a new wave of defaults hits their books (as may be coming if the
> recovery proves slower and more uneven than some folks assume).<br/>
Most of the blooger are worth reading for amusement value only. The survivialists and exreme right and religious freaks are scary. Wish I could filter.
On Aug 22 03:01 PM shrike wrote:
> "The yield curve. Very cheap money. There is lending going on. Not
> as much as there used to be but it is happening and to better credits.
> Less competition. The economy is coming out of recession. "
>
> You're too logical for the other conspiracy filled posters here,
> FB.
>
> The rate spreads are enormous - banks will do very well going forward
> with their new emphasis on risk analysis (finally).
So the "Firms" Involved in this program are allowed to "Skim Fees" for "Managing" CRAP WE (The Tax Payer) PAYED TOO MUCH FOR !!!
Shuffle Them With Their Buddies (It Is A Small Market Of Less Than 20) => Tax Payer Will Cover The Losses.
I think if ;I had someone willing to "Make Me Whole Again" at someone else's expense => My Sock Would Rise As Well.
Fantasy Accounting and now "Governmental Garbagemen" => We Must Be Saved (Oh Dang, Not The Tax Payer).
Might want to look into my last comment - It has nothing to do with "Pretend" and everything to do with "Reality Of The PPIP".
A "Conspiracy" Is 2 Or More Working Toward A Goal Or Purpose. "Staying On To Of The Pile" Drives Much.
The More You Know The Less Certain You Will Be.
Humanity In Regards To Money And Power Does Not Change; To Assume Benevolence Is Foolish.
Whatever dude.
Leave the political ideology out of it. I don't give a rats about the left or right spin that some of you are so focused on. Alpha is about making money. If you don't want to listen, figure it out for yourself champ.
On Aug 23 01:19 AM PainfullyAware wrote:
> FB5000 and shrike,
>
> Might want to look into my last comment - It has nothing to do with
> "Pretend" and everything to do with "Reality Of The PPIP".
>
> A "Conspiracy" Is 2 Or More Working Toward A Goal Or Purpose. "Staying
> On To Of The Pile" Drives Much.
>
> The More You Know The Less Certain You Will Be.
>
> Humanity In Regards To Money And Power Does Not Change; To Assume
> Benevolence Is Foolish.
www.commondreams.org/v...
On Aug 21 07:32 AM j-dub wrote:
> Three reasons
>
> 1) PPT
>
> 2) greater fool theory operating LIKE I HAVE NEVER SEEN BEFORE, stemming
> from the perpetration of accounting fraud.
>
> 3) governement intervention (stealing taxpayers money on a LEVEL
> NO ONE HAS EVER SEEN BEFORE)
What Is The Largest "Contributor" To The Economy At This Point? Could It Be The Government? Since I am living in this economy I think it might be a good idea to discuss the things that Government Does.
You are right to leave out the "Spin". Action And Event Are The Only Measures.
The Repub/Dem paradigm is a Fallacy. Their Actions Are The Same.
"Wow Pain. What insight. Well I'm convinced. Let's load up the truck with guns, ammo and spam and let's you and me head to Idaho. We'll wait out Armageddon and come back for the pickings. You bring the banjo and I'll bring some assorted ball gags." - FB5000
Excellent Fecious Statement. In response I would say "Don't Be A Wus - Running And Hiding Leaves Your Fellow Citizens To The Wolves"
"Armageddon" has many forms and hardship is not distributed homogeneously.
I would ask you:
What do you know of "The Presidents Working Group On Financial Markets" and how they carry out their "Mandated Mission"? Do you think there is a corollary between the "Repeal Of Mark To Market" and the "Record Profits" reported and the current rise in the "Market"? What do you know about "Shadow Banking" and "Secularized Investment Vehicles" - Are you aware that "Derivatives" are the ROOT CAUSE of the debacle we are currently in? Are you worried about the USA being able to service the Debt with the rate tax revenues are falling and the loss of "Producers" in the economy?
Yes it is about "Making Money" - If you do not pay attention to "How Money Is Created" and only look at "How It Is Shuffled", the dollars you make may not have the "Value" you thought they might.
Pawns Are Meant To Be Sacrificed.
Safety Is A Function Of Awareness.
On Aug 23 02:41 AM FB5000 wrote:
> Wow Pain. What insight. Well I'm convinced. Let's load up the truck
> with guns, ammo and spam and let's you and me head to Idaho. We'll
> wait out Armageddon and come back for the pickings. You bring the
> banjo and I'll bring some assorted ball gags.
>
> Whatever dude.
>
> Leave the political ideology out of it. I don't give a rats about
> the left or right spin that some of you are so focused on. Alpha
> is about making money. If you don't want to listen, figure it out
> for yourself champ.
In all honesty I can't say they are wrong. Looking at the landscape of government handouts, waste, and moral hazard and terpitude, it looks like the government is willing to destitute 90% of all Americans to support the financial sector in our best interest. Their reasoning is simple, without a financial system the government couldn't help you anymore. Right! For some reason I'm willing to risk it.
On Aug 23 11:36 PM Moon Kil Woong wrote:
> The author has a very credible point. There is a disconnect between
> falling mortgage and commercial real estate combined with the subsequent
> increase of forclosures and bad loans and bank stocks. Primarily,
> it is the theory that the government will not only prevent large
> banks from going under but insure long term viability and profitability
> through a series of disasterous accounting loopholes, low interest
> Fed interest rates to fund badly performing long term loans, high
> credit card rates, government buying of bad debt, and Fed backstops.
>
>
> In all honesty I can't say they are wrong. Looking at the landscape
> of government handouts, waste, and moral hazard and terpitude, it
> looks like the government is willing to destitute 90% of all Americans
> to support the financial sector in our best interest. Their reasoning
> is simple, without a financial system the government couldn't help
> you anymore. Right! For some reason I'm willing to risk it.