The Curtains Are On Fire

[peternap]

http://news.oldva.org/blogroll/the-curtains-are-on-fire/

Wow, this sounds pretty good!

    WASHINGTON — U.S. banks reported a first-quarter profit of $7.6 billion, buoyed by revenue at a few larger companies, but overall the credit picture remained grim as the number of banks in trouble continued to rise and borrowers increasingly fell behind on their loans.

Or is it?

Let's think.  During that quarter AIG passed through some $100 billion plus from the taxpayer to the largest of these very same banks.

So the banks "made" $7.6 billion, but they had an "unearned gain" of over $100 billion.  Let's call it an even $100 billion as some of it didn't stay here in the United States.

Now The WSJ claims:

    Still, the latest results were an improvement from the industry's net loss of $36.9 billion in last year's fourth quarter.

They were?  I guess if you can count robbery as an "improvement", ok.  But let's look at this from a different angle - back out that "unearned" and illicit gain from the passthrough and they would have lost $92.4 billion dollars, or well more than twice last year's fourth quarter.

Heh, if I can steal making my numbers is easy!  All you have to do is leave the bank vault open and promise me that there are no guards, no cameras and no guns!  I will then march in and steal whatever I want, and of course will turn in respectable quarterly results.

The problem with the banks lies here:

    Despite those actions, banks were increasingly unable to build their reserves fast enough to keep up with noncurrent loans. The ratio of reserves to noncurrent loans fell to 66.5% in the first quarter from 74.8% in the fourth quarter. It was the lowest level in 17 years.

To put this in a bit more simple form, this means that while the banks are claiming to be increasing loss provisions, loans are going bad faster than their provisioning is increasing - which means they're reporting "profits" that are false, as provisions for bad loans hit earnings.   So we can take some more off those "reported earnings", as much as another $6-10 billion dollars.

Do those reported numbers still look ok?

What's worse is that the banks are charging off (that is, disposing as worthless) a huge amount and yet even that is not slowing down the bad loan count - they're going delinquent faster than the banks are charging them off.

That's not bullish folks.

Then there's this:

    WASHINGTON — A government program designed to rid banks of bad loans, part of a broader effort once viewed as central to tackling the financial crisis, is stalling and may soon be put on hold, according to people familiar with the matter.

    The Legacy Loans Program, being crafted by the Federal Deposit Insurance Corp., is part of the $1 trillion Public Private Investment Program the Obama administration announced in March as a way to encourage banks to sell securities and loans weighing on their balance sheets to willing investors.

And this...

    May 26 (Bloomberg) — The highest-graded bonds backed by commercial mortgages may be cut by Standard & Poor's, potentially rendering the securities ineligible for a $1 trillion U.S. program to jumpstart lending.

    As much as 90 percent of so-called super senior commercial- mortgage backed bonds sold in 2007 may be affected as the ratings firm changes how it assesses the debt, New York-based S&P said today in a report. About 25 percent of the bonds sold in 2005, and 60 percent of those sold in 2006 may be cut.

The "CMBS", or Commercial Mortgage Backed Securities marketplace has seen an amazing contraction in spreads - that is, perceived risk - over the last month or so.  Most of this has been due to the belief that The Fed would effectively monetize them (yeah, I know, they're claiming they aren't - riiiight!)

This change will drive a stake through the heart of that program - expect to see those spreads start to blow out again, and soon, as commercial real estate is in much more trouble than is being discussed openly.

Simply put there is far too much supply and far too many retailers that are or will go under to support it.  There's no realistic possibility of fixing this problem and as a consequence the expectation has to be that we will see an all-on collapse at some point in the not-so-distant future in this marketplace as rent collections and therefore valuations collapse.

Now add a dose of panic in the Treasury market, and oh boy, things could get interesting fast, no?

Buckle up folks - this ride is likely to be a bit rough.

[Sassy]

Interesting stuff - I've been looking for all this to happen for awhile now - it's a house of cards, a magician's slight of hand, smoke & mirrors...  what is going on now, Michael Milken, the junk bond king, could have never have dreamed...  Kenneth Lay & his cronies from Enron were innocents... 



Wonder what considerations would have to say about the state of the economy from the budgets she's working on in her corner of the world...

[considerations]

It's been smoke and mirrors since we went off the gold standard.  There are no reserves, haven't been for many years. Peter has been robbed to ruin and Paul knows it.  The really big boys are afraid to call in their notes.

Hoover left office claiming there was nothing that could be done about the economic crash of 1929, that the cycle had to simply take its own course. Roosevelt came in and started massive intervention but that faltered also and the country stayed in the Depression until Pearl Harbor.  It was the federal spending on industrial retooling and the massive military build up that pulled us out.  The government spent 6 times more in the first year of the war than it did from 1933 to 1942 on economic intervention. 

I don't have any foresight, except that it looks to me like a long road back.  If I had to guess, the next challenge will be inflation.  I suppose we better figure out how to grow the grain for the chickens in stead of buying it.   

The Pacific Island economies are in worse shape than the mainland by a long shot.  I've had more fun, root canals comes to mind.

[waggin]

Well, we at least got a major hiccup in the bonds last week.  Seems not everyone is convinced it's deflation that's the real worry.  The Fed is running out of gimmicks to try to keep yields low while funneling cash to favored Wall St companies and ballooning the money supply in hopes of stimulating the economy.  Sooner or later that money is going to be looking for something of value, and I think the inflation will be big-time ugly!  Arguably, what we're going through now is really just a supply/demand imbalance for things that were bid up based on (too) easy money before, and then the credit contraction pulled the rug out from under the party.  Has the money supply decreased?  Not according to the charts I see out there.  With foreigners getting somewhat spooked about the value of the dollar, note that "on Bloomberg Satellite Radio today: the idea has been floated to offer tax exempt status to US buyers of US debt. Not just a trial balloon, either, this idea. Remember War Bonds."  If foreigners won't buy something that will be purposefully devalued to basically default on the debt, why not foist the garbage paper on hapless Americans as well!?  The financial shenannigans will continue; that's the one thing we can count on.  I think we're going to pay with higher taxes as well as the sneakiest tax of all...inflation!

[muldoon]

Well, we at least got a major hiccup in the bonds last week.  Seems not everyone is convinced it's deflation that's the real worry. 

to be fair, there are multiple logical explanations.  one of which is inflation concerns.  the other is continued flight to safety, and the belief that the 30 year bonds are not as safe as the 13 week bonds.  if you have to hold to maturity, do you put faith in the US for that period time?  It is quite possible that foreign creditors are leaving the long end of the curve for the short end.  The US treausry auctions 100 billion this week in 10 and 30 year notes.  It is no surprise money is leaving those and going anywhere.  Seen oil, seen the stock market today?  Hell, GM bankruptcy, GM and C being removed from the DOW, and it shoots up?  It wasnt going in as much as it was going OUT of somewhere else.  (in my opinion)

The Fed is running out of gimmicks to try to keep yields low while funneling cash to favored Wall St companies and ballooning the money supply in hopes of stimulating the economy.  Sooner or later that money is going to be looking for something of value, and I think the inflation will be big-time ugly! 

Seems to me we have two things, too much inventory in everything.  cars, houses, 4wheelers, land, commercial office space, malls, everything.  (maybe not energy).  Those things continue to decrease in value. 

The second thing is reduced wages, layoffs, no one will get a 30% raise this year.  In fact, even if such a thing were possible - this magical printing press and all - then do you really believe any company in the US will pass those numbers on to US workers? 

And with that I wonder how inflation can catch hold.  A decreasing credit supply, decreasing asset values, and oversaturation of assets.  How can we go from that to hyperinflation? 

Arguably, what we're going through now is really just a supply/demand imbalance for things that were bid up based on (too) easy money before, and then the credit contraction pulled the rug out from under the party.  Has the money supply decreased?  Not according to the charts I see out there.  With foreigners getting somewhat spooked about the value of the dollar, note that "on Bloomberg Satellite Radio today: the idea has been floated to offer tax exempt status to US buyers of US debt. Not just a trial balloon, either, this idea. Remember War Bonds."  If foreigners won't buy something that will be purposefully devalued to basically default on the debt, why not foist the garbage paper on hapless Americans as well!?  The financial shenannigans will continue; that's the one thing we can count on.  I think we're going to pay with higher taxes as well as the sneakiest tax of all...inflation!

I agree the shanigans will continue, I also agree that the banks would LOVE to have inflation; however I do not believe the mechanics to be condusive for it.