Are banks well-capitalized or insolvent?

[unlucky]

According to Geithner - using 'stress-test' data - the US banks are well-capitalized and most will not require any new government money.

According to Roubini - using IMF data - the US banking system is close to insolvency and will need at least $1T of public money to restore it to health.

Good to know that transparency is alive and well in today's advanced market economies. Investors can proceed confidently in the secure knowledge that the banking system is either in rude good health or on the brink of collapse.

It's one or the other, folks, no ifs or buts about it.

[nero3]

Re: Are banks well-capitalized or insolvent?

According to Geithner - using 'stress-test' data - the US banks are well-capitalized and most will not require any new government money.

According to Roubini - using IMF data - the US banking system is close to insolvency and will need at least $1T of public money to restore it to health.

Good to know that transparency is alive and well in today's advanced market economies. Investors can proceed confidently in the secure knowledge that the banking system is either in rude good health or on the brink of collapse.

It's one or the other, folks, no ifs or buts about it.

It's the liquidity vs solvency view. The Geithner view will be correct, if quantitative easing can trigger a new bubble. Roubini will be right if it can't.

[jtabeb]

Re: Are banks well-capitalized or insolvent?

It's the liquidity vs solvency view. The Geithner view will be correct, if quantitative easing can trigger a new bubble. Roubini will be right if it can't.

Well then good to know to follow Roubini's advice, thanks.

Can you say "sixth-order-polynomial decline"?:eek:

[nero3]

Re: Are banks well-capitalized or insolvent?

Well then good to know to follow Roubini's advice, thanks.

Ur welcome.

[D-Mack]

Re: Are banks well-capitalized or insolvent?

I think what Gethner means is, that there is still a lot of food out there for the big 4 or 5(JPM,Citi,BoA,Goldman etc) holding all the derivatives.

[LargoWinch]

Re: Are banks well-capitalized or insolvent?

It's the liquidity vs solvency view. The Geithner view will be correct, if quantitative easing can trigger a new bubble. Roubini will be right if it can't.

The bubble is already here: it is called fiat currencies (especially the UK Pound and the US Bonar).

[c1ue]

Re: Are banks well-capitalized or insolvent?

The amusing part is both may be right:

Roubini is right on what the present situation is.

Geithner may be right once the Big 5 absorb many of the large regional banks (who fail stress tests) plus several hundred billion taxpayer dollars.

[nero3]

Re: Are banks well-capitalized or insolvent?

I am listening to Geithner: http://www.bloomberg.com/avp/avp.asx...der_US_200.wmv

That guy is so good at generating bullshit on the fly, that it's just amazing. He is certainly more intelligent than Roubini, I think, but that does not mean that he is right.

[Supercilious]

Re: Are banks well-capitalized or insolvent?

People, let's be logic. The banks are insolvent. There is no such thing as illiquid assets. Everything can be sold at the right price and to the right people.

I can sell even my aunt Petunia's bellybutton ring for the right price to the right pervert.

The problem is that banks are insolvent, and all this talk about illiquid assets is nothing else than BS.

I think yesterday on Tickerforum a bond trader posted the following message about the valuation of mortgage crap:
http://www.tickerforum.org/cgi-ticke...www?post=92096

Toxic Asset pricing update:

To all those in the .gov and Main Street Media that continually talk about the inability to price the toxic assets, here is an update on where things are trading. First off Billions of bonds are out for the bid weekly, the market is well defined based upon the following factors:
1)year of origination
2)type of collateral
3)subordination, or lack there-of

Option Arms, the senior classes 05 thru 07 trade from low $30's to high $30's. Mezz trade from teens to $20's, junior mezz trade in the high single digits.
Alt-A (~10-20% 60+ day delinquent) trade from high $30's for 07 production, to around $60 for the best quality '05 production.
Alt-A (~30-40% 60+ delinquencies) trade low 30's to mid $40's for Senior tranches.
Alt-A subordinated tranches trade teens to upper $20's.
Prime (5-10% 60+ delinquent) mid 50's to high 60's for seniors.
Prime (0-5% 60+ delinquent) mid 60's to upper 90's for the cleanest paper.

Just a sample of what the bonds that are on the books of the Banks, Insurance Companies, Pension Funds are worth.
[...]
I sell MBS, I look at bonds all day. The delinquencies reported monthly are mind blowing. These bonds aren't trading at these prices for lack of liquidity, they are trading here because of the horrible performance based upon declining housing prices and borrowers not making mortgage payments.

If the banks were to sell the toxic crap at market prices the losses on these assets would make them all insolvent. They are loaded with paper which is nothing else than bad debt that cannot be repaid and will be defaulted.

All this bailout craze is nothing else than fraud on a national level perpetrated by the state (or by the Timmys placed in high gov positions by the banks), in which the bad debt is moved from the balance sheet of banks to the taxpayer.

Look what happens with the Chrysler bankruptcy talks:
http://www.nytimes.com/2009/04/22/bu...1&ref=business

Last week the Treasury Department, which runs President Obama’s automobile task force, presented banks holding $6.9 billion in Chrysler’s secured debt with a plan under which they would get about 15 cents on the dollar, or about $1 billion.
[....]
On Monday the banks, led by JPMorgan Chase and Citigroup, rejected the administration’s plan outright, with some of the debtholders arguing that they would rather break up Chrysler and sell its assets — notably its Jeep brand — because they believed that they would receive more money selling the assets than they were being offered by the administration.
In a plan submitted to the administration on Monday night, the debtholders insisted that they receive about 65 cents on the dollar, or about $4.5 billion, and roughly a 40 percent stake in whatever car company emerges as a re-engineered Chrysler.

So, for debt traded on the market at 10-15c on a dollar, JPM and Citi want to get from the taxpayer roughly 75-95c on the dollar. I would call this the mugger's spread.

If anybody can call this anything else than fraud and outright theft, ... well, ... I'm ready to listen to the arguments.

[nero3]

Re: Are banks well-capitalized or insolvent?

People, let's be logic. The banks are insolvent. There is no such thing as illiquid assets. Everything can be sold at the right price and to the right people.

I can sell even my aunt Petunia's bellybutton ring for the right price to the right pervert.

The problem is that banks are insolvent, and all this talk about illiquid assets is nothing else than BS.

I think yesterday on Tickerforum a bond trader posted the following message about the valuation of mortgage crap:
http://www.tickerforum.org/cgi-ticke...www?post=92096

If the banks were to sell the toxic crap at market prices the losses on these assets would make them all insolvent. They are loaded with paper which is nothing else than bad debt that cannot be repaid and will be defaulted.

All this bailout craze is nothing else than fraud on a national level perpetrated by the state (or by the Timmys placed in high gov positions by the banks), in which the bad debt is moved from the balance sheet of banks to the taxpayer.

Look what happens with the Chrysler bankruptcy talks:
http://www.nytimes.com/2009/04/22/bu...1&ref=business
So, for debt traded on the market at 10-15c on a dollar, JPM and Citi want to get from the taxpayer roughly 75-95c on the dollar. I would call this the mugger's spread.

If anybody can call this anything else than fraud and outright theft, ... well, ... I'm ready to listen to the arguments.

But, what if the easing of market to market accounting, work out similar to in 80-82, in the sense that the government inflate so much that those assets again become "gold" ? If you quantify a turn in the credit cycle, would it not be possible to disable market to market, between now, and the turn, again have solvent banks?

[FRED]

Re: Are banks well-capitalized or insolvent?

But, what if the easing of market to market accounting, work out similar to in 80-82, in the sense that the government inflate so much that those assets again become "gold" ? If you quantify a turn in the credit cycle, would it not be possible to disable market to market, between now, and the turn, again have solvent banks?

No. Interest rates were in the high teens in 1980 and fell for years after. As inflation and the wholesale price banks paid for debt plummeted, retail rates remained sticky; the fat spread made lending so profitable that the banks were soon swimming in money. How can you do that with interest rates at zero?

[Munger]

Re: Are banks well-capitalized or insolvent?

According to Geithner - using 'stress-test' data - the US banks are well-capitalized and most will not require any new government money.

According to Roubini - using IMF data - the US banking system is close to insolvency and will need at least $1T of public money to restore it to health.

Good to know that transparency is alive and well in today's advanced market economies. Investors can proceed confidently in the secure knowledge that the banking system is either in rude good health or on the brink of collapse.

It's one or the other, folks, no ifs or buts about it.

Krugman and Brad Delong point out that Geithner's statement that "The vast majority of banks are well capitalized" may be true, even though most of the assets are held by insolvent banks.

So the market was greatly reassured when Tim Geithner declared that the “vast majority” of banks are well capitalized. Count me as baffled. I mean, maybe he was actually giving us a hint about the stress tests — but I took it as a remark that was uninformative at best, ominous at worst.

After all, there are a lot of banks in America. There are 1,722 institutions on the Fed’s list of “large commercial banks”. And I have no doubt that most of these banks — indeed, the vast majority — are in fine shape. That’s because they’re regional institutions that never got into the risky games played by the big guys.

But the big guys are where the money is. The top 10 institutions on that list have 58 percent of the assets. (If we looked at bank holding companies rather than only commercial banks, assets would be even more concentrated.) So it’s perfectly possible that the “vast majority” of US banks are well-capitalized, but that banks with, say, a third of the system’s assets are insolvent.

What Geithner said, then, was true but useless. If anything, his wording was cause for concern: Treasury knows the difference between raw numbers of banks and asset holdings, even if the press seemed to miss the distinction, and if he’d meant to say that the vast majority of assets are held by sound banks, he would have.

Update: Brad DeLong had the same reaction:
The failure to assure us that the vast majority of bank assets are in well-capitalized institutions seemed to me to speak volumes. Nobody ever thought that the vast majority of banks are not well capitalized–it’s the highly leveraged New York high flyers.

http://krugman.blogs.nytimes.com/200...st-majorities/

[Supercilious]

Re: Are banks well-capitalized or insolvent?

But, what if the easing of market to market accounting, work out similar to in 80-82, in the sense that the government inflate so much that those assets again become "gold" ? If you quantify a turn in the credit cycle, would it not be possible to disable market to market, between now, and the turn, again have solvent banks?

That is a very good point nero, and I believe too there is a good chance these toxic assets would become valuable and the banks will become solvent again. But we are talking here about different issues (please hang out more on Bart's and Finster's forums because I'm sure you will find there a lot of things you will appreciate)

The core of the whole problem is that when a society accumulates excessive debt that cannot be repaid and will be defaulted there are, after repeated sessions of kicking the can further down the road, there are only three ways of solving the crisis:
a) jubilee, which is voluntary debt forgiveness by the creditors (which may not be total debt forgiveness, requiring only the forgiveness of the bad/excessive debt that cannot be repaid)
b) revolution, which is involuntary debt forgiveness (usually the creditors lose more than their wealth and are the first put to the wall when the majority becomes an enraged mob)
c) war, which is nothing else than paying for the bad debt with money and wealth stolen by force from another group of people (well, ... only if the war is successful). In modern times the war doesn't have to be with shots fired in anger and troops on the ground. It can be silent and covert economic war.

Every solution ever devised, no matter how complex is and what fancy name it bears, can be nothing else than a variable mix of kicking the can down the road and the options above.

Balance sheet recessions and QE are a mix of kicking the can down the road and a covert partial jubilee. Inflation is a covert jubilee that punishes all savers (not only the holders of bad debt). The solution to 1929 was a mix of a) and b) (FDR confiscation and other socialistic measures) + kicking the can down the road until 1938 and the problem was solved finally by WWII

These toxic assets cannot become perfumed again if the debt is not purged out the system through one of the three methods mentioned above. Simply moving bad debt from the banks to the taxpayer doesn't solve the problem. It just kicks the can down the road and prolongs the ilness. The same with the engineering of another bubble. Japan's 'lost decade' happened because their option was a trickled/incomplete jubilee, lasting ... well... more than a decade.

The question is not if the bad debt will be purged from the system but how will it be purged from the system and how long it will take to purge it?
If the flushing of bad debt is made through a carefully managed inflation, these toxic assets can become gold only if we have a two stage inflationary evolution:
-a brief inflationary shock which brings back the RE nominal values of houses back to the levels experienced at the peak of the housing bubble (and that would satisfy the debtors , the J6P who will not walk out of his mortgages any more)
-a subsequent regime of moderate inflation that would make the interest of those toxic assets attractive for bondholders (in comparison with other asset classes)

Of course, one can add in this mix other things like: a bit of FDR-ian revolution championed by the Chosen One (look at all this BS about the volunteer work brigades), QE+ another bubble in order to kick the can further down the road and, of course, war (hopefully only economic war)

My bet is that a lot of bad debt purging will be done in the best of Wall Street tradition, which is ... theft. Therefore we will see a big component of economic war against the emerging economies.

Look at what happens with Russia. If the loss of Russia's reserve is not the first stage of an economic war ... (in which Putin's siloviki regime is a fifth column) then I don't know what to say any more.

It is also more and more obvious the next big fat foreign target for defrauding is... China.

[nero3]

Re: Are banks well-capitalized or insolvent?

That is a very good point nero, and I believe too there is a good chance these toxic assets would become valuable and the banks will become solvent again. But we are talking here about different issues (please hang out more on Bart's and Finster's forums because I'm sure you will find there a lot of things you will appreciate)

The core of the whole problem is that when a society accumulates excessive debt that cannot be repaid and will be defaulted there are, after repeated sessions of kicking the can further down the road, there are only three ways of solving the crisis:
a) jubilee, which is voluntary debt forgiveness by the creditors (which may not be total debt forgiveness, requiring only the forgiveness of the bad/excessive debt that cannot be repaid)
b) revolution, which is involuntary debt forgiveness (usually the creditors lose more than their wealth and are the first put to the wall when the majority becomes an enraged mob)
c) war, which is nothing else than paying for the bad debt with money and wealth stolen by force from another group of people (well, ... only if the war is successful). In modern times the war doesn't have to be with shots fired in anger and troops on the ground. It can be silent and covert economic war.

Every solution ever devised, no matter how complex is and what fancy name it bears, can be nothing else than a variable mix of kicking the can down the road and the options above.

Balance sheet recessions and QE are a mix of kicking the can down the road and a covert partial jubilee. Inflation is a covert jubilee that punishes all savers (not only the holders of bad debt). The solution to 1929 was a mix of a) and b) (FDR confiscation and other socialistic measures) + kicking the can down the road until 1938 and the problem was solved finally by WWII

These toxic assets cannot become perfumed again if the debt is not purged out the system through one of the three methods mentioned above. Simply moving bad debt from the banks to the taxpayer doesn't solve the problem. It just kicks the can down the road and prolongs the ilness. The same with the engineering of another bubble. Japan's 'lost decade' happened because their option was a trickled/incomplete jubilee, lasting ... well... more than a decade.

The question is not if the bad debt will be purged from the system but how will it be purged from the system and how long it will take to purge it?
If the flushing of bad debt is made through a carefully managed inflation, these toxic assets can become gold only if we have a two stage inflationary evolution:
-a brief inflationary shock which brings back the RE nominal values of houses back to the levels experienced at the peak of the housing bubble (and that would satisfy the debtors , the J6P who will not walk out of his mortgages any more)
-a subsequent regime of moderate inflation that would make the interest of those toxic assets attractive for bondholders (in comparison with other asset classes)

Of course, one can add in this mix other things like: a bit of FDR-ian revolution championed by the Chosen One (look at all this BS about the volunteer work brigades), QE+ another bubble in order to kick the can further down the road and, of course, war (hopefully only economic war)

My bet is that a lot of bad debt purging will be done in the best of Wall Street tradition, which is ... theft. Therefore we will see a big component of economic war against the emerging economies.

Look at what happens with Russia. If the loss of Russia's reserve is not the first stage of an economic war ... (in which Putin's siloviki regime is a fifth column) then I don't know what to say any more.

It is also more and more obvious the next big fat foreign target for defrauding is... China.

I think, that the US is more effective in inflating their way out, than japan, because of the dollar reserve status. And the effect a weaker dollar will have on emerging economies, commodities, etc. However. at one point, the tide of liquidity will move directly into the US and boost the dollar, even if the US spends like drunken sailors. If the liquidity beast can experience exploding profit margins and a hot stock market through moving to a new host, then that's what this beast will do. I just don't know if the US market is deflated enough through inflation to have reached the moment it is ready to be host to all the liquidity that was spread all over the world, since 2003. I suppose it could be more like in 2014-2016 before that happens. Right now it could instead be China. However, who knows, at one point, there will be a Dow 30000 bull.

[WildspitzE]

Re: Are banks well-capitalized or insolvent?

(look at all this BS about the volunteer work brigades),

Do you mean, get large numbers of people to work for below market wages due to [insert cause]? ...cough.. cough.. WWII playbook.. cough...

Did someone say U-3? no problems with U-3!

It is also more and more obvious the next big fat foreign target for defrauding is... China.

To the keynesian leaches, their savings base is looking like a glass a water looked to someone marching to bataan. Given their protectionism, it's now just a matter of executing the final parts of the con at this point.