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The Fed is risking a second Depression by putting pressure on banks to raise more capital,...

The Fed is risking a second Depression by putting pressure on banks to raise more capital, analyst Dick Bove writes in a scathing note that accuses the central bank of losing "all sense of reality." Banks must be allowed room to lend money and conduct business but are being handcuffed by onerous capital restrictions, Bove believes.
Comments (19)
  • paulseglund
    , contributor
    Comments (94) | Send Message
     
    I can personally vouch for that.
    If you are a business owner or self employed, there is no money available for you. From one extreme to another but this has been true for over 2 years now.
    7 Jun 2011, 04:55 PM Reply Like
  • American in Paris
    , contributor
    Comments (5504) | Send Message
     
    It hasn't been because of higher capital requirements.
    7 Jun 2011, 05:12 PM Reply Like
  • Wyatt Junker
    , contributor
    Comments (4503) | Send Message
     
    Frank/Dodd for president... of Haiti.
    7 Jun 2011, 04:56 PM Reply Like
  • Poor Texan
    , contributor
    Comments (3533) | Send Message
     
    "accuses the central bank of losing "all sense of reality.""

     

    Whether I agree with his particular concerns or not, this is a great quote.
    7 Jun 2011, 04:56 PM Reply Like
  • Tom Armistead
    , contributor
    Comments (5719) | Send Message
     
    The central bank has not lost the memory of what caused the crisis.

     

    The banks could liberate a lot of capital for constructive purposes if they would just stop writing trillions upon trillions of derivatives on interest rates and foreign exchange, not to mention CDS.

     

    When they will have freed up capital by stopping that nonsense, it will be available for their necessary social function as financial intermediaries. They can lend it out, rather than tie it up in speculation. And the economy will benefit accordingly.

     

    Just a thought, but if these big banks would drop the derivatives, they would be far simpler, more transparent, and much easier to analyze from a risk management point of view. Maybe they would not need as large of a buffer.
    7 Jun 2011, 05:05 PM Reply Like
  • cynic2011
    , contributor
    Comments (652) | Send Message
     
    Banks are neither a charity nor institutions for social work. They are businesses organized to optimize their risk-adjusted return on capital. Unfortunately they haven't done very well at that recently.

     

    Increasing capital in and of itself will not cause a depression,recession,or anything else,because the money would just be moving from where it is employed today to where it would be employed at a bank.

     

    What could cause a depression/recession is if the regulators force the bank to hold that extra capital in a non-productive use. So if they lower the leverage ratios permitted to banks the total business the bank could do would be less with a given amount of capital, thereby reducing the overall amount of business activity in the economy. But in that case the recession/depression would be caused by the regulators,not by the banks,just as the Fed caused the Great Depression of the 1930's.
    7 Jun 2011, 05:10 PM Reply Like
  • Herr Hansa
    , contributor
    Comments (3083) | Send Message
     
    Increased capital requirements over time would make them more able to sustain losses, but the requirement is more Basel III rules than Federal Reserve rules. So far only the Swiss are requiring greater capital requirements than Basel III suggests. The big global banks usually argue that they need more leverage, which is what lower capital requirements allows. What the Federal Reserve should do to increase lending is to stop paying interest on excess reserves. If the banks are profitable, then why not increase their capital requirements, until they reach Basel III levels.
    7 Jun 2011, 05:09 PM Reply Like
  • PVizzle
    , contributor
    Comments (741) | Send Message
     
    "What the Federal Reserve should do to increase lending is to stop paying interest on excess reserves."

     

    Exactly. This really nails the crux of the problem.
    7 Jun 2011, 05:40 PM Reply Like
  • TAJerrell
    , contributor
    Comments (4) | Send Message
     
    The plan here is to reduce the amount of risk taken and increase the capital buffer so that when the next bank-initiated financial crisis comes along, the State can cut them loose instead of bailing them out.

     

    Two decades of financial "innovation" have revealed the man behind the screen to be focused on his pay package and not on the risks to the security of his employer or the tax-paying public.

     

    These changes are likely to mean that the profits of the financial "industry" will no longer represent so significant share of GDP.

     

    I personally welcome such a change. Never have so few been paid so much for such irresponsible behavior.
    7 Jun 2011, 05:13 PM Reply Like
  • Wyatt Junker
    , contributor
    Comments (4503) | Send Message
     
    "I personally welcome such a change. Never have so few been paid so much for such irresponsible behavior."

     

    Just pay them a buck a year in salary like Jobs. Then tie their compensation back into stock options with an emphasis on loan losses as the central jewel of that compensation.
    7 Jun 2011, 05:21 PM Reply Like
  • gigeze787
    , contributor
    Comments (12) | Send Message
     
    Bove is a fool and a propagandist pimp who will say anything the too-big-to-fail banks tell (or pay) him to say. Like this statement in March 2008 just before Bear Stearns collapsed and six months before the entire banking sector collapsed:

     

    "This is a generational opportunity to buy (bank stocks) on the cheap."

     

    Why does SA quote this idiot without revealing his clear conflicts of interest?
    7 Jun 2011, 05:17 PM Reply Like
  • 7footMoose
    , contributor
    Comments (2266) | Send Message
     
    Old banking was simple, buy money from small depositors bundle it up and sell it to borrowers. The keys to success were also simple buy it cheaply and sell it dearly, keep your expenses low and get solid collateral for your loans in case something goes wrong and finally "know your borrower".
    New banking has very little of this left. Today fee income drives profitability not "net interest margins". Hedging risk and financial derivatives produce large profits to support million dollar salaries. Lending to small and mid-sized companies requires some training, skill and knowledge. Banks no longer train "lenders" they only train "relationship managers", whatever they are.
    The once simple business has become complicated and the many layers of existing government regulations do not lend themselves to institutions keeping expenses low. The answer is not simple because the cow is already out of the barn but it includes going back to basics if anyone can find their way.
    7 Jun 2011, 05:22 PM Reply Like
  • WMARKW
    , contributor
    Comments (10683) | Send Message
     
    First, banks should be required to raise more capital. They have kept excess reserves at the Fed both to sanitize QE and to make risk free profits.

     

    Here's my question. If the banking business is such a great business and you can leverage 40 : 1 and do all kinds of cool things in derivatives, etc...why the heck wouldn't investors want to invest in these banks for the chance to make tons of money. I'm not a banker, but I suspect you can lend invested capital just as easily and with the same multipliers as deposits?

     

    Higher rates of invested capital would lower FDIC premiums, improve the soundness of the banking system, decrease the risk of systemic failure, and give the banks interest free capital to lend.

     

    So what's wrong?
    7 Jun 2011, 05:35 PM Reply Like
  • 7footMoose
    , contributor
    Comments (2266) | Send Message
     
    With the higher capital requirements being mandated by Basel III the 40 to one leverage is down to about 10 or 12 to one, where it should be. If the Dodd-Frank regs are actually mandated then the derivatives and such will be included in capital requirements creating all kinds of havoc as they are off balance sheet now. All of these uncertainties have investors wondering where the "future" profitability will land. It's pretty certain it won't be like the good old days.
    7 Jun 2011, 05:43 PM Reply Like
  • Tom Armistead
    , contributor
    Comments (5719) | Send Message
     
    These banks did some things prior to and during the financial crisis that were not exactly boy scout behavior. As such, they have legal and regulatory risk.

     

    All of them, or their legacy subsidiaries, have breached their representations and warranties made in order to sell or securitize mortgages. And few of them have credibly reserved for their putback liabilities.

     

    Plus, while derivatives may be cool, they are not really very easy to understand. The balance sheets of these too big to fail banks consist of derivative liabilities and derivative assets, amazingly the derivative assets are always more than the liabilities. It's amazing because they keep passing the same risk around and around in a big round robin, and although it should be a zero sum game it is not. Everyone wins.

     

    Until somebody has to be voted off the island. Last time it was Lehman Brothers and AIG.

     

    Why would anyone want to invest in these banks?
    7 Jun 2011, 05:43 PM Reply Like
  • 7footMoose
    , contributor
    Comments (2266) | Send Message
     
    Tom, As usual I agree with some parts of your comment and disagree with other parts. I will only try to comment on your last sentence. At some point, if we are ever going to emerge from this financial quagmire, the banks are going to be front and center to the recovery. It cannot happen without the banks participating. Now, here is the caveat, some banks will not be around to participate. I have some ideas but I do not know which banks will not make it. So, in closing, the reason to invest in specific banks is because you have fully evaluated them and you feel that this bank will be among the winners.
    7 Jun 2011, 05:57 PM Reply Like
  • Tom Armistead
    , contributor
    Comments (5719) | Send Message
     
    I guess I'm afraid the winners will be picked by the government, or by a consortium of hedge funds, or by the unpopularity of someone like Dick Fuld who was arrogant even by Wall Street standards. That's hard for a retail investor to get a handle on.

     

    7 Jun 2011, 06:12 PM Reply Like
  • 7footMoose
    , contributor
    Comments (2266) | Send Message
     
    My only advice, if you are interested enough to do some analysis, is avoid the biggest and the smallest banks. Some of each of these will certainly survive but the biggest will come under the greatest political scrutiny and the smallest have the biggest competitive challenges. The middle is the sweet spot and then there is geographic location, management and business model. These will give you top level screens to eliminate many also rans before you get into the meat of your analysis.
    7 Jun 2011, 06:18 PM Reply Like
  • Tom Armistead
    , contributor
    Comments (5719) | Send Message
     
    As you know I've done some work on regional banks, very possibly an adequate amount of homework, to include who is their regulator and how is the relationship, would eventually pay off.
    7 Jun 2011, 07:10 PM Reply Like
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