Who Did They Think They Were Kidding?
By Larry Doyle on January 18, 2009 at 9:13 PM in American Consumers, Auto Industry, Banking Institutions, Ben Bernanke, Current Affairs, Economic Stimulus, Economy, Hank Paulson, Obama Administration, Obama's Cabinet, Real Estate, Retail Businesses, TARP, Tax stimulus package, Unemployment, Workers
(bumped up by Susan || Larry’s latest radio show will be available via BlogTalkRadio and through subscription to iTunes [see our instructions in the right column, down about a screen], which you can download to your iPod.)
It was only a matter of time before the losses embedded in our banking system caught up and surpassed the capital injected. As such, our politicians and bankers are now forced to be somewhat honest with the public at large.
At long last the “news” is out: there’s another expected $1 trillion in embedded losses in our banking system. I have tried to judiciously, but clearly, highlight that very fact here at NQ over the last three months. In today’s WSJ:
Goldman Sachs economists estimate that financial institutions and investors world-wide will ultimately realize $2 trillion in losses on U.S. loans, but have recognized only half those losses so far. That scares investors who might otherwise give banks needed capital, and makes banks reluctant to make new loans. Regulators say they worry that the only remaining source of capital for banks is the government.
While I know a few readers here at NQ, blogs are generally anonymous communities. Given the nature of my writings, a month or so ago I realized it would be more effective and compelling if I opened myself to public criticism if warranted. For that reason, I went from identifying myself as LD to Larry Doyle. For those who know me, I think they would say that I am a very competitive, honest, and humble individual. I’d like to think that I am. That said, I have plenty of shortcomings. As we look to grow our audience and community, I beg your indulgence as I retrace the posts since I started writing in mid-October in which we wrote about these massive unrealized but embedded losses. We’re all about sharing here, so please pass this along to your friends. We’ll try to stay ahead of the curve for you. ~LD
Without further adieu . . .
The Economy – What Lies Ahead (October 14, 2008)
This injection of capital will not necessarily fully flow through to the economy. The banking system here in the U.S. likely has $1 trillion in embedded losses. This plan is trying to buy time for the system to recognize those losses. The recognition of those losses will curtail future growth for the banking system and the economy as a whole.
Economic/Market Highlights 10/16 (October 16, 2008)
Remember the overall banking system has upwards of $1 trillion in losses that need to be recognized. Both Citi and Merrill know this and have pre-announced that they do not expect to show a profitable quarter in the near future.
McCain/Palin’s Economic Stimulus Plan (October 23, 2008)
. . . what these steps have done is buy time so that the banking system can generate revenues over the next few years to both write down and realize losses that are currently on their books, but which if were currently acknowledged would have rendered certain banks as already bankrupt.
Markets Selloff 10% Overnight (October 24, 2008)
In the midst of all this though, please remember that as I have tried to highlight, that there are likely $1 trillion in embedded losses in the banking system. That bill must be paid.
The Wall St. Model is Broken … and Won’t Soon be Fixed!! (November 12, 2008)
The losses in the banking system alone are upwards of $1 trillion. From there let’s move into insurance companies, hedge funds et al. Paulson, Sheila Baer, Bernanke and others know that any money that goes into the system is purely going to help the banks recapitalize themselves in the face of these losses.
When Barney Frank, Nancy Pelosi, and Barack Obama complain that they need to make sure that credit lines open and remain open, they are not addressing the fact that the banks have an overwhelming amount of non-performing assets already and that those assets are likely going to grow in the face of an unemployment rate headed up by 2% to 4%!!
Economic/Market Highlights 11/12 (November 13, 2008)
Transparency
I had an exchange with a reader as to why the government is not revealing which banks have been participating in certain specific programs launched over the last few months. I made the case that the government is trying to protect the participating banks and in turn the taxpayers by not revealing the names.The reader responded as to why and how could he ever invest in a bank. That is a very good point, investing in banks now is a much higher risk proposition because one does not know just how deep losses are in individual banks. Who does know?? Hank Paulson knows and he does not want to reveal those figures because they would further spook the markets.
“The Greatest Generation”…… (November 14, 2008)
The TARP bailout/rescue plan proposed to date has not inspired confidence nor generated any real impact for three reasons:
1. the banks have such sizable embedded losses that the funds already injected are being and will be used to recapitalize the balance sheets …
Economic/Market Highlights 11/17 (November 17, 2008)
Markets read this as a further indication that losses are so deeply embedded in the system that only time and “private money” can truly bring needed change. But how does “private money” receive incentive to enter the market?
Economic/Market Highlights 11/19…The Pain Increases!! (November 20, 2008)
Neither Paulson nor Congress nor anybody in Washington or Wall St. will tell you that the system has trillions in embedded losses but they do and our markets know it and are showing it by their prices.
“IT’S EASY TO FIND FAULT…especially if you’re clueless!! (December 11, 2008)
It keeps getting back, though, to the fact that the current situation as well as our future situation under any reasonable economic scenarios highlight the fact that the Wall St. banks are sitting on enormous embedded losses and expected future losses (continued increasing defaults on residential mortgages, credit cards, commercial loans, corporate loans). The money is not flowing through because:
banks need to replenish capital against these losses.
“Where’s The Money??….!!” (December 29, 2008)
In large measure, our mainstream media has done an exceedingly poor job as to highlighting the dynamics at work in the banking system. I will utilize a tape from a high profile financial show to reveal how the media is largely pandering to the public on this topic. Prior to doing that, though, let me get very detailed in answering the question as to “where’s the money?”
The business of banks is to lend money and in so doing they provide the liquidity to keep our economy moving. The banks lend money in a number of sectors but they can be summarized as follows: credit cards, residential mortgages, commercial mortgages, corporate loans. In addition to their lending role, most banks maintain a separate investment portfolio to further augment their revenue.
We have maintained that as a result of these investment activities, banks retained a wide array of what are now qualified as “toxic mortgage assets”. Globally, while banks and investment banks have taken $1 trillion in write-downs on these assets, by my estimation, confirmed by independent research and analytics, there are likely at least another $750 billion in write-downs yet to take on these assets.
Larry Doyle’s (LD’s) Dollars and Sense “Central Station” (January 10, 2009)
Comment by LD | 2009-01-10 10:45:43
Citi will inevitably sell other units at discounted prices.
In summary, it is not outside the realm of possibilities that this institution ends up being nationalized much like has occurred with some banks in the UK.
Against this backdrop, do not expect access to credit to improve anytime soon.
“Market Musings on a Monday . . . “ (January 12, 2009)
We have highlighted extensively why the embedded losses in the banking system would inhibit credit from flowing.
“Where’s The Money?” on December 29th specifically addressed the extent of losses and expected chargeoffs in our banking system. Why do the mainstream media and politicians continue to pander to the public on this topic?
“When Big Ben Speaks . . .” (January 14, 2009)
What does this mean? The banks need more money along with government guarantees against further losses from their deteriorating portfolios. To wit, Citigroup is selling divisions to raise capital. How will those government guarantees be structured? Potentially the nationalization of a banking institution, like Citi, or the splitting of Citi and perhaps other banks into “good banks” and “bad banks”. The “good banks” will house the day to day operations, while the “bad banks” will house the toxic and deteriorating assets and will be capitalized by, you guessed it, “Uncle Sam!”
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