Automatic Earth: As the Banks Tank

[don]

Dorothea Lange Spud October 1939
"Tavern on main street of potato town during harvest season. Merrill, Oregon"


Ilargi: In the past few weeks, I’ve provided you with a series of stats on financial institutions. I was drawn back to thinking about them when I saw a headline earlier today in the Daily Telegraph that said something in the vein of: "Wall Street recovers...", a headline based on the fact that the Dow and S&P were -temporarily- out of the red.

Since this to me represents a pretty gross misrepresentation of actual facts, I thought I’d get back to my numbers series, and add a few, in order for you to be able to understand still better what is really happening. A recovery it's not, not even close.

Here's from August 3:

The Next Bank Bailout Bloodbath is Here

US banks:

• Bank of America: -34.1% over the past 12 months, -34.51% over the past 6 months, -14.2% over the past month alone.
• Citigroup: -9.78% YoY, -22.64% over 6 months, -13.22% over the past month.
• Morgan Stanley: -24.23% YoY, -30.12% over 6 months, -12.33% over one month.
• Goldman Sachs: -13.95% YoY, -19.93% over 6 months, -3.53% over one month.
• JPMorgan: -3.21% YoY, -12.54% over 6 months, -4.38% over one month.

Foreign banks:

• Société Générale: -34.82% YoY, -36.39% over 6 months, -30.28% over one month.
• Crédit Agricole: -30.9% YoY, -31.66% over 6 months, -30.8% over one month.
• Deutsche Bank: -31% YoY, -17.61% over 6 months, -16.48% over one month
• RBS: -35.61% YoY, -25.12% over 6 months, -17.73% over one month

Ilargi: And this from August 16:

Europe on the Verge of Breaking

• Bank of America: +7.93% Aug 15, but -22.4% in past month, -34.95% in past 3 months
• Citigroup: +4.76% Aug 15, but -18.53% in past month, -24.71% in past 3 months
• Morgan Stanley: +6.10% Aug 15, but -15.03% in past month, -25.74% in past 3 months
• Goldman Sachs: +2.28% Aug 15, but -8.28% in past month, -15.79% in past 3 months
• Société Générale: +2.06% Aug 15, but -28.53% in past month, -41.23% in past 3 months

Ilargi: The reason why I wanted to revisit the stats is that it's important to understand to what extent what we see happening is a structural, rather than an incidental or circumstantial turn of events. To wit:

The Domino Effect of Europe Bank Woes
by John Carney - CNBC.com

There’s also the problem with hedge funds trying to hedge exposure to European banks. The short-selling ban on European banks makes hedging exposure more difficult. One response by some hedge funds will be to short U.S. banks as a proxy.

Ilargi: I'm sure you can agree that that is funny, no matter how tragic it is.

The tragedy that's unfolding is shed in an even clearer light when we expand the stats series to include the longer term, in this case 5 years.

In the past 5 years (dating back to August 25 2006, a date I took from Google Finance), these are the loss numbers for financials, as taken at noon, August 19 2011:

• Bank of America : - 86.68%
• Citigroup: -94.33%
• Morgan Stanley: -70.72%
• Keycorp: -83.46%
• Fifth Third Bancorp: -76.06%
• Barclays: - 76.85%
• RBS: -96.83%
• Société Générale: -83.57%
• BNP Paribas: 60.64%
• Crédit Agricole: -81.39%
• UBS: -75.27%
• Credit Suisse: -52.92%
• Deutsche Bank: -65.26%

The numbers are made even more poignant when we look at losses at the Dow and the S&P in the same time period.

• Dow Jones: -3.97%
• S&P 500: -12.81%

Ilargi: Now we can see where the real problem really is: in the financial world. Banks are down way more than other companies. As we've long known, the sole and only reason many banks are still standing is that they have been given your money. But we can also see where the money you have so graciously donated to them has led.

Namely, to more and further gigantic losses, into the deep dark hole of a bottomless pit where not a penny shall ever return from -and you can disregard any statements from any politician claiming that the money is being repaid-. Sure, it may be on paper, but when you lose 80%-90% of your market cap, as Bank of America, Société Générale and Citigroup have done, that is but a meaningless gesture, good only for propagandistic purposes.

Now there will be those who say that market cap is not the same as cash flow, but that is only partly relevant. Once your share price dives down into penny stock territory, it's your market cap that is very relevant. To put it in a somewhat humorous way, Reuters had this today:

Apple is worth as much as all 32 biggest euro zone banks

Technology company Apple is now worth as much as the 32 biggest euro zone banks.

That's the stark result from a steep fall in the share price of banks including Spain's Santander, France's BNP Paribas, Germany's Deutsche Bank and Italy's Unicredit, compared to a steady rise in Apple's valuation, according to Thomson Reuters data.

Earlier on Friday the DJ STOXX euro zone banks index fell 4 percent, valuing its 32 members at $340 billion. That's based on the market capitalization of their free-float shares, which for some French banks in particular is less than 100 percent.

The index has crashed by a third since the start of July, hammered by fears banks will lose billions from their holdings of euro zone government bonds and a failure of policymakers to stop a euro zone debt crisis from spreading. The euro zone banks have lost three-quarters of their value since peaking in May 2007.

Ilargi: Look, yeah, we can talk cash flow here, but we'd be better off talking sheer survival. How are France, Britain and the US keep their banks afloat? After transferring trillions of dollars to them in a period during which they have lost ever more of their market value?

Recent developments throw a wrench into every single bail-out deal agreed on over the past few years. These deals all use certain valuations in order to come up with the numbers deemed necessary for a deal to be struck. And now the numbers just ain't there anymore. The name of the game will turn into "margin calls". The banks will only be able to meet these calls by holding up their hands to governments.

But the people who elected these governments will look much less favorably upon the next bail-out, if only because the prior ones have not worked at all. That is to say, they have kept banks alive a bit longer, but they haven't solved any of the underlying issues. Which thus and therefore always keep coming back.

So, when you see the Dow temporarily out of the red, that has zilch to do with recovery. Markets never only go in one direction. It's one step up and two steps back. But, as the numbers above show unequivocally, the numbers that count are going down, fast, over the medium and longer term. Just like we at The Automatic Earth have been saying for years now.

We’ll do a gloating chest-thumping session of schadenfreude on of these days. But not today.

http://theautomaticearth.blogspot.co...p-and-two.html