Stress Test Zombies: Not Too Big To Fail? Tough Tootsies Little Banks!
Further to our post yesterday about the Stress Test Zombies (“19th Nervous Breakdown: TBTF Stress Test Banks”), below is our latest comment about bank stress tests and other such nonsense. It is not that we do not wish to be helpful, you understand, but if our public officials are not going to say and do things that are credible, we have a duty to say so. Am I right?
Anyway, one thing I did not put in the post but which definitely deserves some time on the BP is the shenanigans by certain members of Congress around the bank bailout boondoggle. Like Rep Maxine Waters (D-CA) and her buddies at OneUnited Bank. A mess. The bank had -7% TCE at year-end 2008.
Click here to see the Q4 2008 profile for OneUnitedBank, which we rated “F.” Now just imagine the entire Congress conducting the bailout of the large banks with the same diligence and clarity of purpose displayed by Ms Waters with respect to OneUnited Bank. Now you know why we sound a little testy when we write about the zombie dance party in Washington. Enjoy.
The Institutional Risk Analyst
March 13, 2009
Last week, we learned from Fed Chairman Ben Bernanke and Treasury Secretary Tim Geithner that Washington lacks the guts to fix the problems eating away at the US financial system, at least so far. So large are the derivative-fueled losses and so majestic the collective incompetence of the Congress, regulators and the Sell Side dealers on Wall Street in enabling these losses, that the judgment of the single party state called Washington is to simply hide the problem under an ever-widening public TARP.
Now, in most parts of the country, a TARP is used to cover unneeded things, usually a pile of stuff nobody wants, far in the back yard. This is essentially the plan articulated by Bernanke and Geithner: Buy the bad assets, invest more capital in the zombie banks, and hope asset prices eventually recover. This is not a plan to do anything but buy time and extend losses. The scary part is that nobody else in the Obama White House seems to know enough about finance to argue the point.
As we told the subscribers to IRA’s Advisory Service, the Fed and Treasury have created a rule without reason, a ridiculous standard that only ensures the unsoundness and instability of the US financial system. Apparently, banks that fail the Supervisory Capital Assessment Program stress test will not be broken up as required by law, but instead given more capital at taxpayer expense. This is the solution to the financial crisis embraced by President Barack Obama. There is no market discipline, no bad results for the bond holders who stupidly funded these giant derivatives-driven, risk-creation machines.
Below is our best guess as to the identity of the 19 or so banks that are part of the stress test process. We hear in the community that these 19 domestic financials are the de facto “Too Big Too Fail” banks, which of course means that all other banks are not part of the group. We should probably add American International Group (NYSE:AIG) and the Depository Trust and Clearing Corp, which owns a Fed member bank, to the TBTF list.
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Holding Company |
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JPMORGAN CHASE & CO. |
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BANK OF AMERICA CORPORATION |
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CITIGROUP INC. |
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WELLS FARGO & COMPANY |
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MORGAN STANLEY |
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PNC FINANCIAL SERVICES GROUP |
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U.S. BANCORP |
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BANK OF NEW YORK MELLON |
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SUNTRUST BANKS, INC. |
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STATE STREET CORPORATION |
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GOLDMAN SACHS GROUP |
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CAPITAL ONE FINANCIAL CORPORATION |
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BB&T CORPORATION |
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REGIONS FINANCIAL CORPORATION |
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FIFTH THIRD BANCORP |
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AMERICAN EXPRESS |
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KEYCORP |
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NORTHERN TRUST CORPORATION |
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COMERICA INCORPORATED |
Notice that there are no foreign-owned banks as part of the stress test group. Note too that there are several banks on the list that are rated “F” by the IRA Bank Monitor as of year-end 2008. These negative ratings are driven both by negative ROEs as well as above-average realized credit losses.
We see two issues facing Bernanke, Geithner and the Obama Administration when it comes to the cowardly “feed the zombies” approach articulated last week. First, it is not sustainable financially and must eventually be changed because of funding constraints. And two, the policy of subsidizing the bond holders of the largest banks is unworkable politically and must eventually also be changed to conform with domestic political reality. That’s right, at some point the Obama Administration may need to choose between our foreign creditors and American voters.
The Bernanke/Geithner approach to not dealing with the financial crisis amounts to a hideous public subsidy of the global transactional class, a transfer of wealth from American taxpayers to the institutional investors who hold the bonds and derivative obligations tied to the zombie banks, AIG and the GSEs. All of these companies will require continuing cash subsidies if they are not resolved in bankruptcy.
Remember that the maximum probably loss (“MPL”) shown in The IRA Bank Monitor for the top US banks with assets above $10 billion, also known as Economic Capital, is a cash number representing the amount of incremental capital the banks may require to absorb the losses from a 3-4 standard deviation economic slump, such as the one we have today. If you include the subsidy required for the GSEs and AIG, the US Treasury could face a collective funding requirement of $4 trillion through the cycle. Do Ben Bernanke and Tim Geithner really believe that they can sell such a program to the Congress? To put it in perspective, the $250 billion in the Obama Budget for additional TARP funds will not quite cover Citigroup (NYSE:C).
Bottom line: The policy decision articulated this week by Bernanke and Geithner represents the largest transfer of wealth in American history, yet no legislation and been passed and no meaningful debate has occurred. The biggest danger facing the markets is that Ben and Tim still do not seem to have a clue what to do about the big banks — other than to write more checks against the public trust. The conflict over this decision to pass the cost to the taxpayer, between the Fed, Treasury and the Congress, on the one hand, and the Wall Street dealer banks is staggering, yet nothing is said in the Big Media.
The Fed and Treasury claim that situations like C and AIG cannot be addressed idiosyncratically, to paraphrase our friend David Kotok, but the reality is more complex. Fact is, the Sell Side dealers have leveraged the real economy via OTC derivatives to such a degree that bailing out toxic waste sites like AIG, several large Euroland banks and the world of structured finance could cost trillions of dollars. That is the true cost of the crisis. The only issue is whether we recognize it directly, via a public resolution, or hide the costs via public subsidies and future inflation.
If we wish to preserve some semblance of market discipline in the US, an alternative strategy must be found. Until somebody, somehow gets to President Obama and effectively refutes the self-serving argument of the Fed and Treasury that we can’t resolve C or AIG, the cost of the zombie dance party can only grow. The way you end the need for public subsidy is by resolving these firms via a restructuring and forcing the bond and equity holders of the bank’s public parent company to absorb the cost of marking assets to market. If we establish a hard rule regarding solvency and break up rather than recapitalize zombie firms, then we have started to apply a real solution.
Mark to Market Accounting
To answer your many questions about our view on mark-to-market accounting, the damage – or adjustment – is done. We opposed the way the return to FVA was handled because it was too much driven by accounting and not enough other issues around business reporting. We need to be cognizant of not just accounting goals and rules, but also business reporting, investor relations, legal and business issues in order to assess this question.
We like the idea of more disclosure. We just think that swings in short-term prices observed by M2M need be confirmed by time, then you begin to convince us that the observed average price over a period of time equals value and should affect assets or income.
We submitted individual comments on same to The Financial Crisis Advisory Group (FCAG) of the IASB and FASB. Members of the financial community who care about M2M should attend the open meetings hosted by FASB and submit comments to the FCAG as well.
When we stated on Bloomberg TV a while back that M2M was an attempt by the accounting industry to deal with the growing opacity and deliberate inefficiency of the OTC world, our friend David Reilly ran downstairs and declared our conversion to the forces of good “on the road to Jerusalem.” Fair enough. Our recommendation is that we continue to report M2M price swings, but be more reasonable when it comes to writing down performing assets vs. income and charging-off credit exposures that are paying as contracted. The inclusion of something that resembles an impairment test may be part of the eventual solution.
Questions? Comments? info@institutionalriskanalytics.com
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March 13th, 2009 at 3:51 pm
BR: They ain’t going to nationalize the banks….they aint going to dispossess the bond holders……and they aint going to stiff counter parties to whom the banks have legal obligations….. get used to it.
March 13th, 2009 at 3:57 pm
@otto: This was written by Chris Whalen.
March 13th, 2009 at 4:04 pm
Don’t be so sure Otto! That is my point. This plan gonna change again.
March 13th, 2009 at 4:10 pm
I agree, Chris. The political winds are gonna change with time and therefore the “plan” is likely to change, maybe several times, before this is all said and done.
March 13th, 2009 at 4:11 pm
Chris, perhaps you’re just frustrated with Timmy G, Larry, and Ben.
You said no one is articulating a different plan. I don’t know: Volcker seems to be a small thorn in the bankers’ side. But more importantly, the Republicans have come forward to suggest market failure or non-nationalized receivership. I expect them to capitalize on populist anger if Obama tries to make another request; and frankly, between the Blue Dogs and Republicans, I’m not sure Congress can authorize more money for another failed bailout.
The Republicans are going for broke for 2010, which will complicate Obama’s agenda on all fronts. Obama’s request will be playing into their hands, which would be a good thing.
March 13th, 2009 at 4:15 pm
After all this time and money we’re still just kicking the cans down the road – the bank can, the car can and soon the insurance can and then the carparts can. Kick the cans as long as you can.
March 13th, 2009 at 4:15 pm
@simpleton: I’ve taken issue with the O administration’s bank bailout “plans” thus far, but the GOP’s intention isn’t to do the right thing. It’s to play obstructionist to ensure that O and the country does fail in time for 2010 and 2012. It’s pathetic and disgraceful behavior. I don’t think the American people are going to buy it unless they regain their credibility overnight by appearing to do something constructive to help solve these problems. Their little divide and conquer games are played out. The American people aren’t buying what they’re selling anymore (and please don’t take this as an explicit endorsement of the Dems, although I am rooting hard for O to succeed).
March 13th, 2009 at 4:21 pm
Biggest week for the financials ever, Vikram’s revenge. Biggest secret communication leak since the Zimmermann telegram!
March 13th, 2009 at 4:22 pm
@rktbrkr: Three letters in the coming weeks: FAZ.
March 13th, 2009 at 4:25 pm
@ Otto-
then you do not believe what the author is saying- he is indicating $4,000,000,000,000 in additional funds to try to make everything good. Does that even sound do-able and if so at what cost and will the taxpayers go along.
March 13th, 2009 at 4:27 pm
First, it is not sustainable financially and must eventually be changed because of funding constraints. And two, the policy of subsidizing the bond holders of the largest banks is unworkable politically and must eventually also be changed to conform with domestic political reality. That’s right, at some point the Obama Administration may need to choose between our foreign creditors and American voters.
It seems like this is now a geopolitical problem, and the American taxpayer is going to be on the losing end regardless of what action is taken by the Obama Administration.
The goal now is just to limit the damage, but then the question is how to distribute the pain?
March 13th, 2009 at 4:29 pm
Chris Whalen Says:
March 13th, 2009 at 4:04 pm
Don’t be so sure Otto! That is my point. This plan gonna change again.
…….What plan…..I’m not talking about plans just outcomes…..One of the rumors that’s underpinning this financial rally is there could be some movement on MTM…..Who knows, however, I stick to my three basic prophesies…..and as for those like Simpleton obsessed with political tactics and the hope that Obama ‘fails” I think they’re going to be disappointed because if he “fails” the whole system goes in the tank and that is not going to happen.
March 13th, 2009 at 4:32 pm
This post is a wall’o'text. Might want to pare it down.
March 13th, 2009 at 4:32 pm
call me ahab Says:
March 13th, 2009 at 4:25 pm
“then you do not believe what the author is saying”
…….No I don’t
March 13th, 2009 at 4:47 pm
Here’s TBP Quote of the Day, from today’s AP Wire:
“I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets.”
Premier Wen Jiabao
Ruh-roh.
March 13th, 2009 at 4:52 pm
Transor Z Says:
March 13th, 2009 at 4:47 pm
…..What you’re missing is the Chinese are as invested in the US (both in inflows and outflows) as the US is invested in it’s banking system…It’s a sort of financial MAD……The Chinese are not about to rock the boat….This sounded more like AP headline generation…rather than Chinese policy
March 13th, 2009 at 4:52 pm
Creditors will take a haircut. There is very little upside and considerable downside political risk in protecting the bondholders ad infinitum.
March 13th, 2009 at 4:56 pm
bonghiteric Says:
March 13th, 2009 at 4:52 pm
…….This obsession with politics is skewing your vision…..at the end of the day this is about protecting the US financial system…..and as long as the mass of Americans can sense this happening, they’re not going to inquire too closely how the sausage is made…..most of it btw is made off the public radar as glance at the Fed balance sheet would tell you.
March 13th, 2009 at 4:59 pm
franklin411 Says: March 13th, 2009 at 4:32 pm
This post is a wall’o’text. Might want to pare it down.
franklin,
you’re a bright boy, why don’t you give it an edit, and post your result? you know, make w/ the 411
March 13th, 2009 at 5:11 pm
The can will be kicked down the road, but very slowly, as by a small boy on a hot dusty road in Texas in July.
Eventually, Tiny Tim will get tired and a tall older gentleman will give him a ride to the nearest town.
March 13th, 2009 at 5:20 pm
Article is outdated. We’ve hit bottom and the banks are profitable again!
/s
March 13th, 2009 at 5:26 pm
leftback Says:
March 13th, 2009 at 5:11 pm
The can will be kicked down the road, but very slowly, as by a small boy on a hot dusty road in Texas in July.
Eventually, Tiny Tim will get tired and a tall older gentleman will give him a ride to the nearest town.
…..I doubt it……The banking crisis is effectively going to be fixed by the end of this year….I’d say we’re half way there already in the sense that the sense of extreme “crisis” has gone away. Ultimately, this is probably going to involves some sort of global fix a la Bretton Woods or the other one in the seventies whose title eludes me.
March 13th, 2009 at 5:39 pm
Great comments here.
Risking re-hash of great points above – here’s my thinking on why 6 (or 12) months into this – the government can’t create a solid plan to save the financial system”.
1 - can’t be fixed.
2 - Failure of imagination. They can’t think beyond outcome where big banks are saved (ie can’t imagine outcome where big banks aren’t saved)
3- Gov doesn’t have guts to fix it
I keep thinking about the fact that 99% of banks are in OK shape. If they pumped $500B into “good banks” it would expand lending capacity by $5 Trillion dollars.
Gordo
March 13th, 2009 at 6:10 pm
Why should any banks need saving now? JPM, C, and BAC all came out and gave us their two month profit reports this week (did somebody change the rules to require reporting in “sixth’s” instead of quarters?) and they were stellar. Conspiracy theorists would probably think these premature profit reports were coordinated efforts required of their new overseers at the federal reserve to juice a dead market, but who you gonna believe–a tin-foil-hat wearing blogger, or the heads of the three biggest banks in the UNITED States of America?
BAC is going to make $50b in profit this year alone, says Ken Lewis. What’s to save? All is well. He’ll have that little $300b or so in “capitalization” (not “nationalization”) paid back in no time.
Like Buffet says, it’s a great time to be in banking. And everyone knows the Oracle of Omaha never misses a call. Okay, just once, back in October when he started buying just before, well, you know. But that was it. All the other ones have been stellar. Just because that one bad call lost his BRK shareholders about 45% of their value does not tarnish his rep in any way.
So what’s to fix? Nothing’s broken. And give the credit to Obama, just because.
March 13th, 2009 at 7:02 pm
…Who you gonna trust….the oracle of Omaha even when he’s talking his own book…but then his book is America’s book …….or the Curmudgeon………And yep a fair bit of the credit will ultimately be given to the O man…..Now let’s get beyond Curmudgeon’s comic book stuff….It’s clearly not over….but it’s ameliorated which takes some of the heat off Geithner/Summers/Bernanke who are the guys in charge…..As I said earlier I see a grand bargain later in the year at some sort of international conference chaired by Obama or his surrogate……What you guys have never got is that 75% of these banks are ultra sound businesses…….If they ring fence the other 25% ultimately this can be sorted…….all we need is a little uptick…..not a lot in consumer spending.
March 13th, 2009 at 7:11 pm
@ottovbvs…I just won ten bucks betting you’d rise to the bait…thanks:)
March 13th, 2009 at 7:20 pm
wait ’til more job losses mount and combine with ARM reset and consumer credit end of rope, then we’ll see what ken, jamie, and pandit have to say. right, ‘mudgeon? their current mouth flapping sounds an awful lot like Immelt’s last month (double oops, or double snow job, i tend to think the latter whenever a CEO opens their dirty cocksocket these days).
March 13th, 2009 at 7:22 pm
The Curmudgeon Says:
March 13th, 2009 at 7:11 pm
@ottovbvs…I just won ten bucks betting you’d rise to the bait…thanks:)
…….Good for you……I see it as my role in life to increase national wealth and correct the inanities of the comic book crowd……I do btw see that it could all be a con….nobody could be that stupid.
March 13th, 2009 at 7:24 pm
DiggidyDan Says:
March 13th, 2009 at 7:20 pm
wait ’til more job losses mount and combine with ARM reset and consumer credit end of rope, then we’ll see what ken, jamie, and pandit have to say. right, ‘mudgeon? their current mouth flapping sounds an awful lot like Immelt’s last month (double oops, or double snow job, i tend to think the latter whenever a CEO opens their dirty cocksocket these days).
…….See Curmudgeon you actually have a believer…….
March 13th, 2009 at 7:43 pm
@autobus:
Thanks for pointing out the error of my ways earlier. I was just parroting comic book wisdom that says economic downturns tend to produce protectionism and trade wars.
P.S. Maybe a self-imposed quota on your part per thread might be a good idea. I’m getting carpal tunnel rolling the mouse wheel past all of your posts. Thanks again.
March 13th, 2009 at 8:23 pm
Transor Z Says:
March 13th, 2009 at 7:43 pm
@autobus:
Thanks for pointing out the error of my ways earlier. I was just parroting comic book wisdom that says economic downturns tend to produce protectionism and trade wars.
……….You mean trade wars like those produced by the economic downturns in 80-83, 90-91, and 2001-02?….That’s the problem with parroting comic book wisdom, it bears little relation to reality….And I don’t believe in quotas in trade or trading riffs even it it causes problems for the limp wristed!
March 13th, 2009 at 8:28 pm
If prices are down 40% in the bubble states with the big banks in various forms of moritoria what will it be like when they start liquidating their huge shadow inventory? The big banks wrote over 50% of the mortgages. Will they wait til April 1st? Ken, Jamie and Vikram will say the 1Q losses were unexpected and unimaginable!
The US borrows from China at 3% to lend to these banks at 1% to gouge their customers at up to 29.99% and then the US taxes us to pay for the shortfall from borrowing at 3% to lend at 1%.
March 13th, 2009 at 9:06 pm
Isn’t this just semantics? Either way, the taxpayer will have to cash the trash shorterm if the financial system is to recover. And don’t forget this actually first started in March 2007, 2 years ago. The VIX closed still above 40 and Libor is back up again. So where’s the alternative solution?
Call me Bjorn perhaps but Sweden came out of it all quite well. But it’s different this time?
March 13th, 2009 at 10:05 pm
otto goes w/: “You mean trade wars like those produced by the economic downturns in 80-83, 90-91, and 2001-02?….”
Yeah, I’ll mean that. Japan Inc., Taiwan, S. Korea, the rest of the Rain-Forest demolishing “Asia Tigers”, China, and their “Brown Cloud”, surely, they’ve been in a “Trade War”, (uni-/tri-)lateral -style all through that time frame, including those ‘downturns’..We’ve seen “Protectionist” measures, as political sops, thrown in for good measure, as well..
and, as antidote to otto’s BS: http://georgewashington2.blogspot.com/2009/03/why-patient-is-not-getting-better.html
March 13th, 2009 at 11:09 pm
@autobus:
You mean trade wars like those produced by the economic downturns in 80-83…
Yes. The U.S. imposed quotas on Japanese auto imports in the early 80s — FAIL
March 14th, 2009 at 5:31 am
Yeah, I am frustrated with our supposed leaders. None of them are truly free agents, able to do the public’s business. Geithner, Bernanke and the rest are slaves to the system and cannot suggest solutions that would disenfranchise their political sponsors. Bob Rubin and the Goldman Boys are still pulling the strings here, but the rot is so deep that resolution will be the eventual outcome. As my friend Alex Pollock likes to remind me, the losses have already occurred, it’s just a matter of when to recognize them.
March 14th, 2009 at 8:20 am
@ottobvs,
1. Now we are at a point where there are few solutions but to change accounting rules? This was politically shot down months ago, now there appears to be the will to do so.
2. The concerted effort by the banks this week to report two month’s of earnings before taxes and w/off’s smacks of desperation and smells very Thainy. They will be back.
3. Plenty more resets coming = more losses
4. Eventually the last person standing not bleeding will be the creditors. By this time it won’t be lost on many.
March 14th, 2009 at 10:55 am
“TOO BIG TO STRESS” — Any bank that’s TBTF is TBTS!
March 14th, 2009 at 3:29 pm
Re: that the judgment of the single party state called Washington is to simply hide the problem under an ever-widening public TARP
Re: And two, the policy of subsidizing the bond holders of the largest banks is unworkable politically and must eventually also be changed to conform with domestic political reality
This is where the story has a conflict. The reality is that the peasants are NOT part of the politics of `mmmrrca. So, the “unworkable politically” part is totally bogus. It’s COMPLETELY workable, and IS working right now! Oh sure, they (the peasants) might be a bit pissed off at TARP (but, to the average `mmmrrrcan peasant – TARP sounds allot lot Tart, which might mean those deamoncrats are up to no good helping those fornicatin’ harlots again!!) So, the insiders will be happily looting the government – in the open, in public – until it is bone-dry and the peasants will go about their psychotic lives of being lead around by the nose by the likes of Faux News. (Look, over there, one of “those welfare queens” got your “hard earned tax money”. See, SEE!, this bail-out is going to THOSE PEOPLE. YOU FIGURE IT OUT).
The REAL `mmmrrrcan peasants are dumber than dirt. And “their government” proves it, every day.