Posts Tagged ‘banks’

Too Big to Fail – A Concept that has gone into Bankruptcy

Tuesday, May 12th, 2009

Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay its creditors. Since the beginning of the current financial crisis thousands of businesses and individuals have filed bankruptcy in America. Most of America has no protection from bankruptcy. The US government has invented a term “too big to fail” which seems to have immunized the nation’s largest businesses from bankruptcy.

Companies that have been labeled “too big to fail” directly and indirectly (suppliers) employ millions of people. Over the past year the Government contributed billions of US tax payer money to these behemoth companies to prevent them from meeting a self inflicted fate.

The recent optimism over banks seems somewhat over exaggerated considering we have already given hundreds of billions of dollars to these banks and they need 75 billion more. The treasury secretary has been quoted that he believes the banks can “earn their way out” of this crisis. Tax payer allowed these once doomed banks to raise their profit margins so they can “earn their way out” of the hole they dug themselves into (i.e. questionable credit card practices that has taken recent political stage).

The US auto industry has been dying slowly for decades. Two out of the three US auto manufacturers were pulled from the thaws bankruptcy late last year. Now one of them has already entered bankruptcy and the other is all but guaranteed to file. So this intervention by the US government just ended up being a waste of taxpayer money.

Bankruptcy is a clear case that capitalism is successful. It is Business’s form of natural selection. A business goes bankrupt when supply exceeds demand and or new innovation trumps the old. Bankruptcy makes room for new businesses that are better suited for the times. Since bankruptcy is such an integral part of capitalism and the evolution of business, what happens when you manipulate natural selection?

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Bank Stress Test – At Least 1 then, now 10 need Funds?

Tuesday, May 5th, 2009

On Friday April 24th, 2009 the US Government released the parameters of their imposed stress test on the 19 largest banks in the USA. This release acknowledged that at least one of the banks involved in the test needed additional capital. On Tuesday May 5th 2009, information has leaked out that possibly 10 of the 19 banks will need additional funds.

The stress test results are scheduled to be released on Thursday May 7th, 2009. Since the release of the parameters on April 24th, information has been suspiciously disseminated seemly to soften the blow of the tests findings. So far from the information released, it appears over 50% of 19 largest banks in the USA need more money.


With still a couple days until the results are released, one has to consider if there will be more than 10. With the diminished political will towards Wall Street the obvious first step towards these banks raising the necessary capital will be to convert the US governments preferred shares (from TARP funds they received) to common equity. This conversion, which would alleviate debt from their balance sheets, would essentially put these banks one step towards nationalization.

Over two months ago the US Markets plunged to new lows on fears on banks being nationalized. Now it appears that the US government is inches from nationalization of some of the largest banks in the USA. If over 50% of the largest banks need money, what about the mid and small sized banks? Where will the funds come from?

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Posted in Banking | No Comments »

Innovation in Banking

Friday, April 24th, 2009

While the real estate market was roaring, banks where feverishly competing to provide mortgages to the anxious American homebuyer. During the peak of bubble new “innovative” products were released regularly requiring less information from buyers and or more payment flexibility. Institutions that did not offer these “innovative” products fell quickly behind their competitors who did.

In every industry leaders are chased by lagers. In a top 10 list of an industry, 2 through 10 are always trying to take number ones spot. This competitiveness is what typically spurs “innovation” in an industry.

Banking is one business where “innovation” is more difficult to develop. Banks can and do develop”innovative” ways to service their customers more conveniently and efficiently without increasing risk. When banks develop “innovative” lending or insurance products, it is typically at the expense of increased risk.

Risk in banking during good times typically leads to increased profits. So during the good times typically banks look to increased product risk makes you more competitive. When times are tough, risk typically leads to losses. Then during bad times you could say reduced product risk typically makes you more competitive.

Innovation in banking is now more focused on reducing risk, since this improves their competitiveness during tough times. They are doing this by increasing lending requirements and raising fees. The US government has also attempted to reduce banks risk by artificially suppressing rates to keep the cost of lending down, therefore improving profit margins for banks.

Banks “innovation” on increased risk nearly put them out of business. Will their “innovation” on reducing risk finish them off?

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Posted in Real Estate, Stock Market Actions | No Comments »

Banks Profitable – That was Easy

Thursday, April 16th, 2009

Okay so here we are again, it is earning season and to the market’s surprise banks are showing some profits. When I make the above statement I can’t help to picture a older man in a suit riding a bike with training wheels saying “Mom look, I can ride a bike”.


All it took was nearly a trillion dollars to suppress mortgage rates; billions of dollars of direct aid, small change to Market to Market accounting and a commitment from the US government indicating they will not them fail.

Meanwhile earnings of companies who do not have the favor of the government are falling rapidly. Housing starts again appear to be retrenching (remember this was a pillar which Wall Street put such angst on citing recovery). A large commercial real estate firm (holds over 200 malls across America) filed for bankruptcy protection today with a disclosed $29.6 billion in assets and $27 billion in liabilities. What banks are on the hook for that?

The US economy cycles through expansion and contraction of credit. This process has occurred for centuries. Since the Federal Reserve started to maintain control of the overnight bank rate the cycles have become somewhat more predictable. This predictability occurs because as the Federal Reserve identifies where the US economy is in a cycle it responds with a rather predictable action. This action has a somewhat predictable response.

When the economy approaches over expansion of credit the Federal Reserve raises the overnight bank rate to raise the cost of lending, which theoretically should slow growth. When the economy starts to contract credit, the Federal Reserve lowers the overnight bank rate to lower the cost of lending, which theoretically should spur growth.

The actions to save banks over the past year are meant to contribute to the above mentioned goal. The US Government and Federal Reserve are attempting to reduce the cost of lending to spur growth. The dilemma that is facing the United States is that currently its citizens are contracting out of fear. The average US citizens’ mindset has changed from over consumption to conservation. Since US consumers makes up about 70% of GDP, growth cannot occur without them.

To stabilize the US consumer you most likely need to improve unemployment to reduce this fear. This week showed an improvement in claims (attributed to the holiday week) but continued claims are still rising (over 6 million). This indicates that finding a job is still a challenge. For job growth to resume, someone needs to start hiring. The US government is attempting to take this role artificially with their behemoth stimulus they passed.

It appears the US government is attempting to put training wheels on its economy by trying to shoulder the weight on their own. These banks that have already had the training wheels attached are profitable off the actions of the US government, at the expense of the US taxpayer. I was under the impression that companies went out of business because not enough business to support them. What happens when (if?) the US government takes off the training wheels? Will the economy ride on its own or break a leg?

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Posted in Economics, Stock Market Actions | No Comments »

Are Bank’s Balance Sheets going Green on the Taxpayers Back?

Thursday, March 26th, 2009

The Federal Reserve and the US Treasury Department have made dramatic moves (at a heavy taxpayer cost) over the past few months to artificially suppress rates to reduce the cost of lending. Unfortunately these actions also reduce money market yields.


Recently large banks have been revealing their surprisingly profitable beginning of the year. I would note that these so-called profits are actually not including further write downs on bad loans they have made.

Are credit card rates at all time lows? Interestingly the other day I received a notice in the mail from a credit card indicating that they were raising their profit margin (prime plus their margin). My credit rating has not changed. Are they raising their profit margins on their good standings customers to help pay for the bad ones? Am I paying for their credit rating being reduced?

So even though prime is at a very low at 3.25% it seems as though credit card rates have managed to stay the same. Could mortgage rates actually be lower than they are now? Are banks gouging us to claw back from the grave?

Consumer spending is down and savings rates are on the rise. It seems to me that the people would rather make more money on their savings than letting banks make more money off of us.

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Posted in Federal Reserve Actions, Side Notes | No Comments »