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The long-awaited downgrades of big U.S. and U.K. banks from Moody's could come after the U.S....
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Thursday, June 21, 2012, 8:04 AM ETThe long-awaited downgrades of big U.S. and U.K. banks from Moody's could come after the U.S. close tonight, reports Sky News' Mark Kleinman. Morgan Stanley (MS) is an especially interested party (I, II)
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We need to actually start working on the problem of how to restructure our Zombie Bank system so we can have a working banking system. NOw the banks can't lend money because all their money has to go into protecting their hidden bad loans and hidden derivative liabilities.
As I've been told by several CPAs.Banks pushing for every trick under the sun to value things higher to meet Bazel..
Water fountains at replacement cost ! ha ha ha ha
When individuals become insolvent, they're finished because, absent winning the lottery, their access to capital, with which to make further income, is destroyed. Banks, on the other hand, are part of the distribution system for the money supply. As such, when money "disappears," the world's governments and monetary authorities replenish that money supply because it's vitally necessary to maintain commerce. Therefore, other than an accounting nicety, solvency is a rather irrelevant issue for banks.
Banks make their money by deploying their liquidity. The solvency debate has almost no impact on this issue. In fact, if loan values appear on bank books at higher than MTM, as some argue, that just frees up more money for lending, while still allowing capital ratios to appear higher. The present problem is that banks are not deploying their money because, despite overwhelming liquidity, they find the returns, versus the business risks, too low. The reason that they're too low is not related to MTM or solvency; it's a direct outgrowth of ZIRP. ZIRP is suppressing economic activity by making it unattractive for banks to expand private credit, simple as that.
And -- oh, by the way -- Moody's can declare anything they wish. It has virtually no impact on the banks operating mechanics because they don't borrow from the market; they get funded by the Fed, which doesn't give a rat's patootie about what Moody's thinks. Banks actual balance sheets, liquidity and attractiveness of lending opportunities appears exactly the same after Moody pronouncements, as before. Just noise.
So, if you want to see the economy pop, get rid of impediments to bank lending and make the returns more attractive. Our present rearview-mirror approach, appealing to persistent populist outrage, manufactured and fanned by the media, has been doing the opposite.
Thanks for clarifying the difference between individual and bank solvency. One thing puzzles me, though; how does ZIRP make it unattractive for banks to expand private credit? Any elaboration you care to provide is much appreciated (including referral to a site where it's explained).
ZIRP, as presently practiced by the Fed has two negative effects on bank lending to the private sector:
1) The Fed has made it possible for the banks to borrow almost limitless amounts of money and to hold that money in relatively risk-free Treasuries.
2) By actively trying to suppress interest rates, the Fed has made the extra return that the banks would make by making private-sector loans, versus parking money, unattractive, given the commercial risks involved. Placing money at risk for many years at ultra-low rates exposes the banks to risk of losses should short-term rates increase or if the borrower should fail.
Given the foregoing, I'd be loath to lend, except to the most credit-worthy borrowers and, even then, with provisos, like floating rates, that would protect me from adverse interest-rate moves.
P.S. I've also contended, ironically, that when the fed announces that it expects to maintain low rates indefinitely, that borrowing demand suffers, as well. Borrowers are motivated by fear that rates will go higher. If you take that away, they get very complacent about making purchase/borrowing decisions, given their existing state of apprehension. The Fed needs to overcome one fear of borrowers (the economy, etc.) with another fear (that the good deals will expire).