greedcanbgood

DIY Stress Test 2: Final Spreadsheet

Moon - You're kidding, right?

So the banks lend money, get chewed out in front of the likes of Barney Frank for making the wrong loans to the wrong people. Then the government gives them more money to lend, which they do. This time however, they tighten up underwriting and become more prudent and YOU think they should be "shamed"? What a crock. I have news for you, we can't lend our way out of this.

One thing I do agree with you however is the derrivatives positions - that's the REAL 800lb. gorilla.

DIY Stress Test Part 3: Evaluating Size vs. Losses

I agree with Dr.. In addition, I would assert that more difficult to find factors (e.g. underwriting strategies) will also play a VERY important role. BB&T and USB are two institutions that come to mind as entites that tend to write off less than their peers when compared to portfolio sizes.

Why Are Banks Paying Back Loans They Can't Afford?

Painfully aware - I concur that the difference between investment and commercial banks has become more blurred. That said, while most of the investment banks are now running under commercial charters it does not change (in the immediate term) their current business model and thus they remain starkly "different" from thier legacy commercial bank peers.

I'm quite familiar with off balance sheet instruments and yet not ALL credit default swap contracts or any of the other instruments you cited are, by defintion, "toxic." The problem here is that "toxic assets" is the latest and greatest buzz word that exists without definition. I do agree with you however in that the more these instruments are "pyramided" with one another the more difficult it is to asses their realitive value - and risk. Yet, that alone does not make them "toxic". If you are as familiar with these as you seem to be, you would know that they also exist as simple transactions.

Why Are Banks Paying Back Loans They Can't Afford?

You are WAY off-base TBill. Investment banks are different than commercial banks. Do you have a 401(k) plan with your employer? I bet you've got some bank stocks in that portfolio. At the end of the day, the corporation exists for the benefit of its shareholders.

Why Are Banks Paying Back Loans They Can't Afford?

Old Trader,

"How about "difficult, if not impossible to value/and or in danger of becoming non-performing" for a definition of a "toxic asset"?"

Again, you have to define these factors. In it's purest form, "value" could be defined as that which someone is willing to pay for a given asset at a given point in time. By this definition, an asset worth $1 today could be worth $1000 tomorrow. You might as well get into penny stocks. It doesn't work.

What about "danger of becoming non-performing"? How does one define this attribute? Admittedly, a simplified example could be a mortgage. Presume that a consumer has a $750k mortgage on a home that has now plumetted in value to $400k. They are underwater by $350k yet they have a job with good income, good credit and solid assets, even some that are liquid. What is their propensity to become "non-performing" on their mortgage? Most people would say that assuming all of those factors remain, the probability is quite low. That said, commercial banks are seeing these loans move immediately into default/voluntary reposession without warning. Why? Because the individual decides to go buy another home at $400k (start over at or near the bottom) and sacrifices the hit on their credit bureau for 7 years or so because they don't believe that their existing home will recover in value as much as their new home will appreciate. How can this be predicted?

My point here is that people need to be more responsible and define their interpretation of these latest "buzz words" (i.e. credit markets, toxic assets, etc.) if they choose to use them to make an argument.

Why Are Banks Paying Back Loans They Can't Afford?

So what do you define as a “toxic” asset? I find this just the most recent in a sea of buzz words that people like to use to make a point. Is it defaults on commercial loans? Consumer loans? Credit default swaps? Something else? In addition, nobody ever makes a distinction between commercial banks and investment banks – they simply get factored in together.

Commercial banks have already significantly increased loan loss reserves and they don’t do so on a whim. Good commercial banks (and there are many more that are good than are not), large and small, employ rigorous analysis and modeling so that they can effectively weather any storm. They will be fine. This is the market at work and the market CAN learn. The best way for it to do so efficiently is to have the government keep it’s fingers out of it.

Repaying TARP and the Myth Behind 'Taxpayer' Money

VERY well put...enough said! =)

Banks: Rebuilding the House of Cards

"accounting shananigans" Such an intelligent, well thought out research term.

Come on people! Do your own due diligence. Everyone has a "the sky is falling" pet theory that takes pieces of an extraordinarily complex mechanisim and assembles them together to fit said theory.

I'm just waiting for the article that connects all this with the end of the world in 2012.

Is There Any Limit to Bank Arrogance?

1. Do more research on the mark to market changes. 2. Banks are in the business of trading risk, they always have been. 3. Losses in mortgage-backed portfolios are beginning to ease making these portfolios more attractive. 4. Many of the TARP recipients were forced to accept it. 5. There never should have been "bailouts".

Arrogance? How about Congress, the Treasury and the FED - you find them to be humble and capable?

Break Up the Big Banks

But don't you think that regulation (and rigorous reporting) of the off balance sheet portfolios such as derivatives and credit default swaps will provide the defacto free markets influences you wish to see? Why break up a large bank or break apart the “riskier” pieces? Why not let the market decide what level of risks they are comfortable with?

Don’t get me wrong, I concur with much of your conclusions I’m just fearful of government intervention to create a market that is more “free”.

Break Up the Big Banks

Your diatribe here is fraught with contradictions but let me just pick out one:

“It goes without saying that, in a “free” economy, the government should never arbitrarily limit someone’s income. Free markets should be sufficient in themselves to discipline all pay rates, and enforce strict risk management.
But what happens if the market is not free? What happens if an oligarchic consortium takes control of the financial system? What happens when supposedly “free” markets don’t do their job because they are not really free?”

Your first premise here is that the banking industry is controlled by a handful of banks and by extension competition is limited. I challenge you to demonstrate where this is the case. Go to nearly any town in the US and right by your BofA, Wells, Citi, Chage, USB (pick your big bank here) is a small community bank who offers products/services and rates that are at least as competitive. Most of them are making money and doing well. Where’s the “oligarchic consortium”?

Your second premise (though I didn’t quote it here) is that there are no penalties when the big mucky-mucks make a mistake. Tell that to the executives of Bear, Indy and the others that essentially failed.
So you want government to make sure that there is truly a free market by taking stapes that are anti-free market? Give me a break. Look at history. Even if your oligopoly theory is true they will fail eventually. Why? Free market, baby.

Wells Fargo: Doing What It Takes to Succeed

Your article reads like a PSA for Wells Fargo. Wells Fargo, though admittedly well run, has had its fair share of credit losses as a percentage of its portfolio. While not explicitly indicative of the aggressive and often borderline unethical lending practices of many others it does imply some measure of irresponsibility. The mere fact that it wasn’t an investment bank allows it to better absorb those losses and not have them compounded.

You do a disservice by not brining up at least two other VERY well run banks, BB&T and USB, both of whom have performed admirably in the midst of this burst bubble. Other than quoting an interview with its leadership, I’d sure like to see some more analytics and comparative data to support your commercial.

New Financial Sector Pay Rules?

“An era of deregulation and a compensation structure that rewarded excessive risk-taking created the financial mess that we are in.”
I often try to be more eloquent but this is a crock. Compensation should reward performance, period. So when an individual, division or organization is doing well, they should be rewarded appropriately. Poor decisions that lead to poor performance should result in the converse. Deregulation had nothing to do with the mess today, only irrational speculation (poor decisions) and innovation in the credit default swap and derivative markets which were largely unregulated. Nobody cared about the compensation when the market was high-flying and everyone was in the money. It wasn’t just Wall Street investment bankers taking risks, it was individuals also who believed that the meteoritic increase in property values was sustainable.
In addition, the issue of executive compensation is a problem across all industries and not just the financial services sector. Executive compensation has not only been driven by performance but also by comparative bargaining by executive candidates across all industries. When you single out the financial sector, you ignore the larger problem.
“While micromanagement of the financial sector by the government is undesirable, we certainly need to prevent any excessive risk taking behavior in the future,”
Are you kidding me? Before you recommend the solution, try defining what “excessive risk taking is” and let’s see if you can identify it before it happens. I won’t quote you the old saying about hindsight, I’m sure you know it. Besides, our elected officials haven’t a clue about more than half the bills they vote on. Do you really want THEM to define “excessive risk taking” based on their track record?
“…as also ensure that incentives are tied to long-term performance.” This is, and should always be a decision determined by the market and by the shareholders of a company. If you have the government telling an industry how to do business and how to compensate employees, aren’t you really de facto nationalizing the industry?

Stress Test Not Stressful Enough?

Excellent piece of writing!

Look, the situation today is both complex and simple at the same time. Want to know if things are turning around or not, keep an eye on employement and then keep an eye on credit losses (which typically lag by several months). When unemployment is stable to down and financial institution charge-offs are also stable to down, you will know that we've hit the bottom.

U.S. Bank Shares: Pump Almost Over, Get Ready for the Dump

I’m with Joshua on this one…”borderline reckless”…

Why in the world would a shareholder EVER want the company he/she invests in to be at the whim and wish of the government? There is no contradiction here. If you believe the stress tests (another issue entirely) those companies don’t need additional capital. In many respects, they are raising new capital simply to replace that which the government gave them under TARP.

I don’t have a lot of USB in my portfolio but if they need to dilute my shares in the short term to pay back the TARP (and all its strings) then so be it. If you’re a dividend investor it might not be such a good deal but I’m not. I’m in it for growth and value and USB is among the better financials in that regard for the long term.