Zero Hedge points out the strong correlation between Federal Reserve bank reserve creation and the rise in the stock market. Their chart is just the latest in a long series of evidence:
The relation is just too strong to lead to any other conclusion…the Federal Reserve (with the cooperation of its owners) has orchestrated the rise in the stock market since March to pad the income statements of the banks, with the side benefit of building a false confidence in the consumer.
Fitch press release ( emphasis added):
Fitch Announces Expanded Review of U.S. Bank Commercial Real Estate Exposure
18 Aug 2009 10:43 AM (EDT) Fitch Ratings-New York-18 August 2009: The performance metrics of commercial real estate (CRE), an area with a significant risk exposure for the majority of Fitch’s U.S. bank universe, continues to deteriorate at an unprecedented pace. While CRE loans, excluding the more problematic construction and development portfolios, represent more than 125% of total equity for the 20 largest banks rated by Fitch, the risk is even higher for banks with less than $20 billion in assets, as average CRE exposure represents more than 200% of total equity for these institutions.
Given the degree of deterioration, and the substantial exposure of many U.S. banking and thrift institutions to CRE, Fitch has recently launched an information survey aimed at obtaining more granular data on the CRE portfolios of the institutions it rates. Fitch intends to use this information to enhance its insight on the size and performance of particular segments of banks’ CRE portfolios. This will allow Fitch to frame areas of specific concern across the industry, conduct various stress tests, and assess if ratings changes are needed to reflect what will likely be continued deterioration in asset quality.
As reported last week by Fitch’s commercial mortgage backed security (CMBS) group, CMBS loan delinquencies surpassed 3% in July and are expected to increase more than 60% by year end to at least 5%. Further, roll rates from 30 to 60 days have increased to over 50% in 2009 and resolutions continue to slow. “The same factors that are placing pressure on CMBS transactions are increasing pressure on the performance of bank and thrift-held CRE portfolios” according to Thomas Abruzzo, Managing Director and co-head of Fitch’s North America Financial Institutions group.
The stress is clearly not confined to CMBS activity. In commenting on the U.S. bank universe, Abruzzo went on to state, “large banking companies have seen levels of early-stage delinquencies, more severe delinquencies and non-accrual loans, as well as charge-offs increase markedly across their CRE and construction and development portfolios. While the 10%+ of construction and development loans in non-accrual is greatly attributed to residential construction activity, the 5% of the CRE book in non-accrual status evidences more widespread problems.”
Fitch currently assigns Negative Outlooks to nearly half of the 20 largest U.S. bank and thrift institutions it rates. As Fitch has indicated in its recent bank rating actions, a major concern contributing to these Negative Outlooks is the potential for further deterioration in the institutions’ loan portfolios with a specific focus on CRE exposures.
“While the relative size of the CRE portfolio is smaller for some of the very large banks Fitch rates, the recent performance trends, expectations for continued economic weakness and the uncertain availability of the CMBS market increases the concern regarding CRE exposure and makes it a likely rating driver as we look out over the next few quarters,” stated James Moss, Managing Director and co-head of Fitch’s North America Financial Institutions group.
As part of Fitch’s expanded analysis it has sent surveys to more than 75 Fitch-rated U.S. bank and thrift institutions requesting additional detail on the institution’s exposure to CRE, covering both the banks’ loan and investment portfolios. Among the uniform information requested is: collateral type, geography, internal risk rating, and performance. Fitch also requested additional detail on each bank’s largest exposures and watch credits. Fitch has asked that this information be provided by the middle of September.
Once in receipt of this information the data will be compiled and Fitch will begin to provide commentary at an industry level on areas of exposure in order to provide investors with a better sense of where the significant risk exposures are. Fitch will conduct various stress tests to gauge a bank’s ability to withstand incremental deterioration. Results of these scenarios will be highlighted in any rating actions Fitch determines to be warranted.
Fitch’s current bank and thrift ratings already incorporate further CRE portfolio stress, and many rating actions in the last couple of years have been driven in part by problematic exposures to CRE, particularly the residential construction sector. Fitch believes current indicators point to the potential for continued deterioration to surpass Fitch’s current expectations. The analysis of the additional data will assist in highlighting which, if any, institution’s portfolios are particularly vulnerable to an extended period of stress.
Contact: James Moss +1-312-368-3213, Chicago; or Thomas Abruzzo +1-212-908-0793 and Christopher Wolfe +1-212-908-0771, New York.
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com.
Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, ‘www.fitchratings.com’. Published ratings, criteria and methodologies are available from this site, at all times. Fitch’s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the ‘Code of Conduct’ section of this site.
William Black interviewed on Tech Ticker:
A Gallup poll shows consumer confidence in banks to be at a low. Fewer than 20% of Americans have “a great deal” or “quite a lot” of confidence in the banking system. (ht bankinnovation.net)
Satyajit Das writes in RGE to review the recent history of the banking crisis and attempts to mitigate it, concluding:
“Banks have gone from catastrophic to just awful. By most standards, that condition does not constitute a necessary and sufficient condition for a recovery in the global economy.”
We are still not sure whether “awful” is better or worse than “catastrophic”
Here’s a link to Bloomberg’s interview with Martin Feldstein this morning.
4/20/2009 – Intelligent Investing with Steve Forbes (click here for video)
“Steve Forbes: You proposed, a few weeks ago, nationalizing some of the banks. Do you feel that is still going to happen before this over?
Nouriel Roubini: Oh, I think some of them will have to be taken over. I mean, I proposed these from a market-friendly point of view. Nobody is in favor of medium- or long-term ownership of financial institutions by the government. But in my view, paradoxically, the temporary nationalization is a more market-friendly solution, because you know, if you don’t do it, then you end up with zombie banks, and the fiscal costs are going to be large.
That’s why, you know, fiscal conservatives have been in favor of it. That is why people like Lindsay Graham, conservative Republican from Carolina, is in favor. That’s why Alan Greenspan, high priest of laissez-faire capitalism, has said we may have to nationalize some banks. We will have to do it carefully, choose only the ones that are really beyond pale, that even if you give time, time is not going to heal their wounds.
We’ll see. But I think, in some cases, that might be the appropriate thing. And if it is not market-friendly–take IndyMac, [which] was taken over middle of last year, cleaned up, separated. And now, the bunch of investors, George Soros and John Paulson [and] others, we bought it back and privatized it. It took six months. [It] does not have to take three years if you do it right.”
“Steve Forbes: What is your feeling about the latest Geithner plan?
Nouriel Roubini: My view of it is, actually, that it can work for dealing with the toxic assets of banks that are solvent, because even after you do this stress test and you do a triage within solvent, insolvent. With the insolvent ones, you cannot apply the Geithner plan because the losses are so big that if you apply [that] to them, they are underwater. You have to take them over.
But even with a solvent one, you have to still separate good and bad assets. Now there are five different ways of doing them. We do not have time to go into each detail. Each one of them has merits and some flaws. These ones are among the five different ways in which you can separate good and bad assets of solvent banks–is not the worst. There [are] some design issues, some flaws in which the way the design can be fixed. In my view, all in all, it is actually a reasonable plan.”
FT columnist and economist, Willem Buiter says we will know by early 2010 which banks will survive and which will not:
“By the end of the year – early 2010 at the latest – we will know which banks will survive and which ones are headed for the scrap heap. With the resolution of the current pervasive uncertainty about the true state of the banks’ balance sheets and about their off-balance-sheet exposures, normal financial intermediation will be able to resume later in 2010. Governments everywhere are doing the best they can to delay or prevent the lifting of the veil of uncertainty and disinformation that most banks have cast over their battered balance sheets.”
By the time we know which banks will survive, however, Dr. Buiter argues that the government funds needed for bank bailouts and, more importantly, the reduction in tax revenues from the coincident economic contraction will have brought to the fore the next potential financial crisis: sovereign default.
“In a number of systemically important countries, notably the US and the UK, there is a material risk of a ’sudden stop’ – an emerging-market style interruption of capital inflows to both the public and private sectors – prompted by financial market concerns about the sustainability of the fiscal-financial-monetary programmes proposed and implemented by the fiscal and monetary authorities in these countries. For both countries there is a material risk that the mind-boggling general government deficits (14% of GDP or over for the US and 12 % of GDP or over for the UK for the coming year) will either have to be monetised permanently, implying high inflation as soon as the real economy recovers, the output gap closes and the extraordinary fear-induced liquidity preference of the past year subsides, or lead to sovereign default.”
Dr. Buiter notes how easy it was for both the US and the UK to default on their obligation in the last depression. So, the “banks being unable to pay their bills” crisis is to be followed closely next year by the “governments being unable to pay their bills” crisis. We see either monetization or outright default as equivalent. The panic just begins with the bondholders in the one case and with currency holders in the other.
The EIU’s Robin Bew was interviewed on April 1 about his current expectations for the world economy. He finds little to indicate a quick turn around. Here are a few excerpts from the transcript (we added the emphasis).
Regarding a growth forecast and the time until world recovery begins:
“It became clear that the pace of economic decline actually accelerated during the fourth quarter and the monthly data that we’ve been getting since then (at the moment we have figures for January and some numbers for February) suggests that there was no slackening in that pace of decline. In fact, if anything, it might have got even worse. So we’re now looking at a situation where output is declining very rapidly in a number of major markets – America, as you said the eurozone, also Japan.
So a very, very significant negative outcome. And even if you did see a recovery later on this year, and we think that’s highly unlikely, you would still end up with a terrible number for the year as a whole. In reality, I think we’re not looking at a recovery until well into 2010 or maybe even 2011.”
Regarding world trade:
“Our forecast at the moment for world trade volumes is that they will shrink by about 6 per cent this year, something like that. Now in cash terms, it’s a whole lot worse. If you look at a market like China, which is one of the world’s biggest trading powers, trade there, cash value of their exports is off 20 per cent. Some markets (Japan for example) off 50 per cent. So ‘collapse’ is not too strong a word.“
Regarding the banks and lending:
“Obviously many banks have been nationalised, the ones that haven’t are still taking a lot of money from the governments and they’re desperately trying to repair their balance sheets, so it is going to be very unlikely to start extending credit until that balance sheet repair is done and we’re a long way off that.
But I also think it is important to remember that actually demand for many types of credit has also collapsed.”
Regarding oil prices:
“Well, we’re in an environment now where demand is not rising very quickly at all. In fact, in many markets it is falling and that’s a recipe for oil prices to stay relatively depressed.”
By way of summary:
“Our expectation is by the time you get to the end of this year the best you can say is that perhaps we’ve stopped falling. But in terms of actually getting some growth, even very modest growth, I think you’re looking into 2010 for that and in terms of the sorts of growth which is going to make a difference to how you and I actually feel, I think you’re looking probably to the end of 2010″
Obviously, the Economist’s forecast differs sharply from those expecting a V shaped recovery in the second half of 2009.
WSJ says FHA will probably need a bailout before long:
“Asked at the hearing whether the FHA would need a bailout, HUD Inspector General Kenneth M. Donohue said he couldn’t predict. “Based on the numbers we’re seeing, I think it’s going in the wrong direction,” he said.”
What is the reason for the needed bailout? Well, er, bailing out other banks….
“In an interview Wednesday, Mr. Donovan said that the agency may need to sustain losses to keep backstopping lenders who otherwise wouldn’t make loans. “[W]hile we’re rightly concerned about the safety and soundness of FHA…we also need to be focused on the fact that credit is critical to the economic health of the country,” he said.”
