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Maybe it is just the kindred spirit in me, but Minyan Peter over at Minyanville had something to say about whether the 'credit crisis' is over and banks are now poised to go back on their tear...
http://www.minyanville.com/articles/.../index/a/16978
Caveats, but not so bad right?
http://www.minyanville.com/articles/.../index/a/16978
The immediate credit issues relate to delinquent consumer loans, which are currently moving through the charge-off pipeline. While a significant amount of consumer-related securities write downs have already been booked, non-Treasury and Agency securities represent less than 15% of bank assets, and, on a percentage basis, surprisingly few real consumer loan losses have been taken. Further, substantially none of what I think of as “second derivative” consumer credit losses – from commercial real estate and leveraged loans, have hit bank P&L’s.
One other comment on consumer credit losses: None of the losses we have seen so far have occurred during a recession.
But even if financial services firms get through the daunting consumer credit loss issues I have just described, there are two other long-term structural capital issues which they face.
The first relates to the dislocation of the securitization markets and the impact this will have on most banks' “originate for resale” loan origination business models. Having been there at the beginning, I can assure you that one of the principal motivations for securitization was greater capital efficiency – and over the last 20 years, banks have stretched that efficiency about as far as it can be stretched. So even when the market for securitized debt recovers, which eventually it will, I firmly believe that the capital benefits of asset securitization will be significantly diminished, and significantly more on-balance sheet capital will be required for every off balance sheet dollar of assets.
Second, given the regulators’ focus on “too interconnected to fail,” I anticipate that we'll see a dramatic increase in the capital associated with off-balance sheet derivatives activity. This is the only way I can see the regulators creating a global financial system strong enough to absorb the loss of a major counterparty given the inbred web of derivative contracts among the world’s largest financial institutions.
The first relates to the dislocation of the securitization markets and the impact this will have on most banks' “originate for resale” loan origination business models. Having been there at the beginning, I can assure you that one of the principal motivations for securitization was greater capital efficiency – and over the last 20 years, banks have stretched that efficiency about as far as it can be stretched. So even when the market for securitized debt recovers, which eventually it will, I firmly believe that the capital benefits of asset securitization will be significantly diminished, and significantly more on-balance sheet capital will be required for every off balance sheet dollar of assets.
Second, given the regulators’ focus on “too interconnected to fail,” I anticipate that we'll see a dramatic increase in the capital associated with off-balance sheet derivatives activity. This is the only way I can see the regulators creating a global financial system strong enough to absorb the loss of a major counterparty given the inbred web of derivative contracts among the world’s largest financial institutions.
As a consequence of these three factors, I believe we have miles to go in capital raising – and not “hybrid” capital, but truly eviscerating recapitalization of many large financial institutions. And, particularly due to the derivatives issue, the capital raising process will likely require at least some period of nationalization for several major financial institutions – not just here in the U.S. but across the world.