Our Forlorn Financial Future, or the doom of banking

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    Posted: 22 January 2009 03:56 AM

    I spent a good part of the holiday weekend reading about the banks, whilst BAC and C collapsed, and the UK moved ever closer to complete nationalisation of their banking sector.  My digression on this morning’s intraday thread was informed in large part by that reading and my realisation that the banks in their current form may be doomed (ie this isn’t just the result of dastardly short-sellers—the banks are insolvent).

    Right now there’s a fierce debate going on in economic and political circles about whether to bite the bullet and nationalise the banks.  I can’t see a compelled nationalisation of the banks yielding less fear and panic in the short run, even if it might save the economy in the longer run.

    I’ll open this topic with a link to a Wall Street Journal: ‘What if Uncle Sam takes over your bank?’—essentially an FAQ on bank nationalisation.

    Somewhat less seriously, The Big Money ‘calls on Apple Inc. to step forward and, for the good of the nation and itself, join the ranks of the money-changers’.  With its $25 billion cash, ‘if Apple sequestered just half of this cash as seed funding for its new bank and set aside $2.5 billion of that half for capital and startup costs. At regulated reserve ratios, that means the company could lend out up to $100 billion to hungry consumers and businesses.’

    In any case, the Apple bank doesn?t need to be huge for Apple to get rich from it. In the segmented, regionally splintered banking industry, it doesn?t take a lot of new deposits to make an impact. This would be a niche bank, taking deposits disproportionately from Apple consumers and lending for the kinds of ventures that, well, your typical Apple consumer might be undertaking: creative small business projects, distressed urban lofts, student lending, hybrid vehicles, and renewable energy (remember that Al Gore is on Apple?s board).

    First the motor industry, then banking—next they’ll be asking Apple to save the housing market.

    [ Edited: 23 January 2009 01:36 AM by Winterpool ]

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    Ah, love, let us be true to one another! for the world… hath really neither joy, nor love, nor light, nor certitude, nor peace, nor help for pain

         
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    Posted: 22 January 2009 12:00 PM #1

    WP - Nice post. Since I’m feeling somewhat optimistic this morning, in spite of the market’s action, I’m going to refrain from making a thoughtful post. But don’t worry. As soon as I feel a little more cranky I’ll post some of my thoughts on this topic.

         
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    Posted: 23 January 2009 03:18 AM #2

    In the gloom of the evening I’m slightly less optimistic. Especially after reading a little Roubini (from the WSJ):

    Expect the World Economy to Suffer Through 2009

    Some optimistic experts are now saying that though this will be a turbulent year for global markets, the worst of the financial crisis is now behind us. Would it were so. We believe that 2009 will be tougher than many anticipate.

    We enter the new year grappling with the most serious global economic and financial crisis since the Great Depression. The U.S. economy is, at best, halfway through a recession that began in December 2007 and will prove the longest and most severe of the postwar period. Credit losses of close to $3 trillion are leaving the U.S. banking and financial system insolvent. And the credit crunch will persist as households, financial firms and corporations with high debt ratios and solvency problems undergo a sharp deleveraging process.

    Worse, all of the world’s advanced economies are in recession. Many emerging markets, including China, face the threat of a hard landing. Some fear that these conditions will produce a dangerous spike in inflation, but the greater risk is for a kind of global “stag-deflation”: a toxic combination of economic stagnation, recession and falling prices. We’re likely to see vulnerable European markets (Hungary, Romania and Bulgaria), key Latin American markets (Argentina, Venezuela, Ecuador and Mexico), Asian countries (Pakistan, Indonesia and South Korea), and countries like Russia, Ukraine and the Baltic states facing severe financial pressure.

    Policy remedies will have limited effect as insolvency problems constrain the effectiveness of monetary stimulus, and the risk of rising interest rates (following the issuance of a wave of public debt) erodes the growth effects of fiscal stimulus packages. Only when insolvent banks are shut down, others are cleaned up, and the debt level of insolvent households is reduced will conditions ease. Between now and then, we can expect further downside risks to equity markets and other risky assets, given the likelihood that markets will continue to be jolted by worse-than-expected financial news.

    The U.S. twin fiscal and current-account deficits will rise over the next two years as the country runs trillion dollar-plus fiscal deficits. We’re all aware that foreign actors have financed most of this debt over the past several years. During the 1980s, the U.S. also faced the burdens of twin deficits, but relied on financing from key strategic partners like Japan and Germany. This time, the situation is more worrisome because today’s financing comes not from U.S. allies, but from strategic rivals like Russia, China and a number of relatively unstable petrostates. This leaves the U.S. perilously dependent on the kindness of strangers.

    There’s some good news in this interdependence. The mutually assured economic destruction that this relationship implies ensures that China can’t simply pull the plug on all this financing without suffering a considerable amount of self-inflicted pain. Reducing its financing of Washington would, among other things, put significant upward pressure on the value of China’s currency, sharply undermining its export sector and, therefore, the country’s economic growth.

    But over time, the ability and willingness of China and others to finance U.S. deficits will diminish as they begin to run fiscal deficits of their own. They’ll need to use their financial resources at home just as a tsunami of U.S. Treasury bond issuances peaks.

    Politics will make matters worse, primarily because governments in both the rich and the developing worlds are intervening in their economies more broadly and deeply than at any time since the end of World War II. Policy makers around the world are hard at work crafting stimulus packages filled with subsidies and protections they hope will breathe new life into their domestic economies, and preparing to rewrite the rules and regulations that govern global markets.

    This is part of a worrisome long- term trend. In China and Russia, where histories of command economics predispose governments toward what we’ve come to call state capitalism, the phenomenon is especially obvious. National oil companies, other state-owned enterprises, and sovereign wealth funds have brought politicians and political bureaucrats into economic decision-making on a scale we haven’t seen in a very long time.

    Now the U.S. has gotten in on the game. New York, once the financial capital of the world, is no longer even the financial capital of the U.S. That honor falls on Washington, where lawmakers are now injecting populist politics into economics decisions. Companies and sectors that should be left to drown are being floated lifeboats. This drama is also playing out across Europe and Asia. As engines of economic growth, Shanghai is losing ground to Beijing, Mumbai to Delhi, and Dubai to Abu Dhabi.

    Global markets will also face the more traditional forms of political risk in 2009. Militancy in an increasingly unstable and financially fragile Pakistan will continue to spill across borders into Afghanistan and India. National elections in Israel and Iran risk bringing the international conflict over Iran’s nuclear program to a boil, injecting new volatility into oil markets. The impact of the financial crisis on Russia’s economy could produce significant levels of unrest across the country. And Iraq may face renewed civil violence, as recently dormant militia groups compete to fill the vacuum left by departing U.S. troops.

    The world’s first global recession is just getting started.

         
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    Posted: 23 January 2009 04:15 AM #3

    chartguy - 23 January 2009 07:18 AM

    In the gloom of the evening I’m slightly less optimistic. Especially after reading a little Roubini (from the WSJ):

    Lately I’ve found that if I short any company with a PE over 30 that I feel better by the end of the day. ‘Course, I’m an eternal optimist like playing country songs backwards.

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    Black Swan Counter: 9 (Banks need money, Jobs needs a break, Geithner has no plan, Cuomo’s grandstanding, .Gov needs a hobby, GS works for money, flash crash, is that bubbling crude?).

    For those who look, a flash allows one to see farther.

         
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    Posted: 24 January 2009 11:21 AM #4

    http://news.alibaba.com/article/detail/entrepreneur/100043182-1-law-under-obama.html

    “In 1994, Obama was the attorney in a class-action case against Citibank, demanding that the bank approve an equal percentage of minority and non-minority mortgage loan applicants. The result: Banks underwrote more subprime loans. You know what happened next.”

    This lawsuit by Obama and ACORN was the triggering event which forced every bank in the US to open the floodgates of subprime loans.

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    Posted: 24 January 2009 10:31 PM #5

    TanToday - 24 January 2009 03:21 PM

    http://news.alibaba.com/article/detail/entrepreneur/100043182-1-law-under-obama.html

    “In 1994, Obama was the attorney in a class-action case against Citibank, demanding that the bank approve an equal percentage of minority and non-minority mortgage loan applicants. The result: Banks underwrote more subprime loans. You know what happened next.”

    This lawsuit by Obama and ACORN was the triggering event which forced every bank in the US to open the floodgates of subprime loans.


    Please Tan, don’t confuse us with the truth…. We must all try to plan accordingly, if possible…. Change has come.

     

     

    :apple:

         
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    Posted: 25 January 2009 11:31 AM #6

    Thanks Tan and Macube for dumbing this down for us simpleminded folks. I had no idea it was a little ‘ol 32 year old lawyer living on the southside of Chicago that caused the collapse of LEH and the worldwide banking system.

    I always thought the real culprit was the spray-tan, diamond-pinky ring wearing, former CEO of Countrywide Financial? Feel free to google Angelo Mozilo. Feel free to google Countrywide Financial. Feel free to move the needle along from the groove in your broken record. That’d be some change we could all get behind!  LOL

    Speaking of lawyers, here’s a question for you two, smart gentlemen:  in a murder trial, is it the maker of a weapon charged with the crime? Or is it the individual who picks up the weapon and uses it to intentionally harm someone? I figure if I use guns in my analogy, it will make the most sense to you both.  :wink:

    [ Edited: 25 January 2009 11:34 AM by kiwitrader ]      
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    Posted: 25 January 2009 12:03 PM #7

    ...whatever

    [ Edited: 25 January 2009 04:36 PM by ChasMac77 ]      
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    Posted: 25 January 2009 12:09 PM #8

    Where are we heading….a Simple but Profound explanation.

    We are sadly becoming a Democracy

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    ldrhawke

    Never Underestimate the Power of Stupid People in Large Groups or of Hedge Funds that Naked Short Sell aapl

         
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    Posted: 26 January 2009 12:13 AM #9

    Momentum keeps building towards nationalisation.  An article in tomorrow’s New York Times wonders if the Obama administration is ‘prepared to nationalise a huge swath of the nation?s banking system’.  Already ‘taxpayers are now the biggest shareholders in Bank of America, with about 6 percent of the stock, and in Citigroup, with 7.8 percent’.

    The article does mention some of the objections to nationalisation (which I share):

    So far the Obama administration has signaled that it is trying to avoid that day, and members of its economic team ? among them Mr. Geithner and the president?s top economic adviser, Lawrence H. Summers ? made the case during the Asian financial crisis in the 1990s that governments make lousy bank managers.

    Indeed, the risks of nationalization they warned about then apply equally to the United States now. The first is that nationalization can prove contagious. If the Obama administration took over Bank of America and Citigroup, two of the largest banks in the United States, private investors could decide to flee from the likes of JPMorgan Chase and Wells Fargo, or other major banks, fearing they could be next.

    Moreover, Mr. Obama?s advisers say they are acutely aware that if the government is perceived as running the banks, the administration would come under enormous political pressure to halt foreclosures or lend money to ailing projects in cities or states with powerful constituencies, which could imperil the effort to steer the banks away from the cliff.

    The argument in favor of nationalization, even a brief nationalization of a few months or years, is straightforward: It might be the only way to pull America?s largest financial institutions out of the downward spiral that makes it enormously difficult to raise the capital they need to keep operating.

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  • Posted: 26 January 2009 12:51 AM #10

    Winterpool - 26 January 2009 04:13 AM

    Momentum keeps building towards nationalisation.


    Pardon me while I throw up in my mouth just a little bit:


    “Will I be able to get a loan?

    Nationalized banks are more likely to loosen the lending spigots. Banks would start making loans that they wouldn’t otherwise make today, such as to borrowers with less-than-stellar credit. There would be more pressure to make loans to achieve social objectives.”

    Ahhh yes. So we get all the ills of the previous system, but we all get to pay for it this time. AND rules get thrown away in favor of political whim. Sounds like a winner.

    I’ve not doubt about total nationalization coming. FDR was a giant scar on the face of capiltalism born from crisis, so here we go again. My hope is that Obama is pragmatic and capitalist enough to understand logic vs political power and do the right thing.

    What makes me even more sick is at the bottom of the article the question comes up :

    “What are the disadvantages of bank nationalization?”

    :cry: Really? The previous points were advantages?

    [ Edited: 26 January 2009 12:55 AM by superbaka ]      
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    Posted: 26 January 2009 04:10 AM #11

    Superbaka’s, erm, violent (but probably justified) reaction highlights the two different (though related) crises in banking: bank solvency and systemic deleveraging (which others call the credit crisis).

    Banks have all manner of bad and decaying assets, most notoriously the alphabet’s soup of exotic securities (MBS, CDOs, CDS, etc), but also an increasing proportion of old-fashioned bad loans, as college students on credit cards and auto dealerships on life support all begin to default.  The obvious response is to retrench and recapitalise, but private funds have dried up.  Uncle Sam, of course, can always print more money.

    Retrenchment necessarily means calling loans, dropping limits, raising fees, and probably taking a second look at lending to dodgy mariachi bands.  Unfortunately this rather pulls the legs out from under our massively leveraged economy.

    We want the banks to do two contradictory things: repair their balance sheets whilst somehow expanding lending in a collapsing economy.  But Uncle Sam can reconcile the contradiction.  He can give the banks more money and force them to lend it to us.  Eventually he will probably realise the ‘bankers’ are just getting in the way.

    Of course eventually those pesky foreigners might start wondering if Uncle Sam can go broke himself.

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    Ah, love, let us be true to one another! for the world… hath really neither joy, nor love, nor light, nor certitude, nor peace, nor help for pain

         
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    Posted: 26 January 2009 04:26 AM #12

    Many financial institutions have loan:deposit ratio of 20 to 40.  With so many foreclosures, capital provided by Uncle Sam barely able to support the deposit base.  Providing capital to banks won’t work without a plan to reduce foreclosures and stall the declining house prices.

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    Posted: 26 January 2009 11:24 AM #13

    One of the problems with liberalism, is the rewarding of failure and the penalizing of success. Businesses, politicians and groups that make bad decisions are supported and even encouraged to do more of the same, while those that are successful are penalized with higher taxes, regulations and restrictions. Any action that is rewarded will be repeated. Seems very simple.


    :apple:

         
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    Posted: 26 January 2009 11:38 AM #14

    MacCube - 26 January 2009 03:24 PM

    One of the problems with liberalism, is the rewarding of failure and the penalizing of success. Businesses, politicians and groups that make bad decisions are supported and even encouraged to do more of the same, while those that are successful are penalized with higher taxes, regulations and restrictions. Any action that is rewarded will be repeated. Seems very simple.


    :apple:

    I think is a problem of democracy not liberalism.  Politicians are voted in by majority of overspending citizens and not the few who are financially prudent.  So, join the crowd, overspend, live beyond your means and vote politicians that would support your lifestyle.

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    Posted: 26 January 2009 12:01 PM #15

    Mace - 26 January 2009 03:38 PM

    So, join the crowd, overspend, live beyond your means and vote politicians that would support your lifestyle.

    A number of years ago when I was in college, a fellow classmate had the philosophy of accruing and dying with as much debt as possible.  I was shocked then as well as now.  But that is the philosophy of society.

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    “Once we roared like lions for liberty; now we bleat like sheep for security! The solution for America’s problem is not in terms of big government, but it is in big men over whom nobody stands in control but God.”  ?Norman Vincent Peale