January 20, 2009

This week in the Credit Crunch

  • First, there's this in the NYT regarding forcing banks to lend.

    It was foolishly easy credit that got us into this mess. A government-mandated return to such lending is not a viable solution.

    Ordering the bankers to make loans is both simple and satisfying. But it will not fix the economy or the financial system.

    Now, I've seen my share of stupid pap in the NYT. Even Krugman's been guilty from time to time. However, this is just pure bullshit. NO ONE is asking the banks to return to their old bad habits. All anyone is asking is for them to get back to work lending to good credits, WHICH THEY AREN'T DOING. For example, last Friday my company and several others were forced to increase fees on conventional loans related to 'elevated' risk. However, this is so broad based that it hits every credit class and loan to value ratio. This flies in the face of Treasuries intention to buy MBS in the open market to increase demand to the level that rates fall into the mid-4% range.

    In other words, while rates might be falling, fees are increasing scrubbing out the net gain for the consumer.

    In the late 1980's there was a joke going around in Texas about a company called North Carolina National Bank which had taken over several insolvent thrifts. The logo was NCNB which was jokingly said to be an acronym for No Cash (for) No Body. The successor bank to NCNB is Bank of America which is sitting on a ton of government money.

    It is absolutely critical that credit be loosened for companies. It IS the only thing that will keep the recession from deepening. The bankers say they'll lend when the economy turns. What they don't seem to understand is that it can't turn without credit.

    What irritates me most is the assumption that people are staying out of bank stocks because of possible nationalization. If that's such a damn concern, why aren't these bankers doing everything in their power to make sure that doesn't occur? Frankly, not to put too fine a point on it, we the people delegate to the government the responsibility to charter and regulate banks to create a financial system that will benefit us all. Banks are not operating in good faith and, frankly, stocks be damned, it would be a good idea to put some fear into them by nationalizing one of them.

    Finally, while it's true you don't fix the sins of the past by continuing the bad behavior, you certainly don't go overboard and cut off the good behavior as well. The credit crunch, despite all the crap, is ongoing mostly because some chickenshit bankers are overreacting on the downside just as they did on the upside. In short, incompetent men and women like Ken Lewis at Bank of America are, in fact, making a bad situation a great deal worse.

  • Nouriel Roubini thinks there could be another $2.6 trillion in bank losses and that the banking system is, at present, insolvent.

    First off, I love Roubini but I think this is really offbase. Let's take derivatives off the table since most of the contracts have been unwound. So, you're left with the bad loans... now, with a bad credit, you will still have an underlying asset. Usually, in liquidation, you will recover up to 80%. Let's say recovery is only 50%. That means Roubini thinks that up to $7.2 trillion, about a third of all loans outstanding, will go bad. Which could happen if the economy really went into a tailspin. Problem is, it isn't. Commodities prices are in freefall which is lowering the cost of living creating a net wage increase for all those still employed. Unemployment stands, right now, most likely around 10% and may decay another 1% but not much beyond that. We have a stimulus plan which, while not much, WILL drive a return to growth and when that happens you'll see more of the money pour into wages and paying debts which will stem losses.

    Without those write downs, stability will return to the marketable assets and the balance sheets of the banks (that is, of course, if they start rebuilding their book of business by lending again) which effectively put a cap on further losses. To this point the banks have written down more than $1 trillion, mostly on paper losses unrealized due to market conditions. I think the losses will wind down this quarter and will cap at around $1.3 trillion.

  • In local news, Treaty Oak Bank applied for and has received TARP funds. Not a real big deal, except for the press release which was a real hoot from the perspective of spin control...

    “We are very pleased the Treasury Department determined our organization an attractive investment opportunity,” said Jeffrey Nash, president and CEO of Treaty Oak Bancorp and Treaty Oak Bank. “Our bank continues to grow requiring additional capital. We had not initially anticipated participating in the CPP Program but given our appetite for capital and the attractive terms of this issuance it was an easy decision for our board of directors when Treasury informed us they had selected our bank.”
  • Right now, Barack Obama is taking the Oath
  • Posted by mcblogger at January 20, 2009 11:05 AM

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