Are banks well-capitalized or insolvent?

[Supercilious]

Re: Are banks well-capitalized or insolvent?

I don't know. There is countries with much worse debt to gdp ratio's than the US. They was able to bring themselves into that position. It would not surprise me the least if the US was able to take it up one notch further, and if it don't happen, then they can just print as during WW2, or default trough the printing press. You still get a boom, if you print enough.

Inflation is also a form of jubilee. The bad debt losses are spread proportionally among all dollar holders. In inflation every person storing surplus wealth in dollars takes a haircut proportional to the amount of dollars held and all savers are punished (regardless if they were or not creators of bad debt).

In the end, bad debt has to be written off somehow. It can be hidden only temporary into balance sheet tricks or stuffed into a new bubble but it never goes away. Somebody has to take those losses. That's inescapable.

As long as there is no punishment and no liability for creating bad debt, the financial sector will continue to create bad debt. I'll go tomorrow and lend $100 with %50 daily interest to the first junkie I see in dowtonwn. In one month when I come to collect the debt, of course all money has gone in smoke, so I declare my crack bond as an illiquid troubled asset... eligible for TARP. Once the Treasury pays me ... well, I find another junkie to lend him $100 at 50% daily interest.

The problem isn’t simply greed, isn’t simply ignorance, isn’t a failure of regulatory diligence, but a systemic flaw in how our economy finances itself. As long as growth in claims on wealth outstrips the economy’s capacity to increase its wealth, market capitalism creates a niche for entrepreneurs who are all too willing to invent instruments of debt that will someday be repudiated. There will always be a Bernard Madoff or a subprime mortgage repackager willing to set us up for catastrophe. To stop them, we must balance claims on future wealth with the economy’s power to produce that wealth.

Basically the government guarantees the high profits of the financial system at everybody else's expense. And as long we are going to take it, they are going to do it. It is that simple.

[nero3]

Re: Are banks well-capitalized or insolvent?

all savers are punished (regardless if they were or not creators of bad debt). .

I don't think there is such a thing, as an honest saver, if you imply that. Because, it's the fake society, built on sand, that gave the fake money worth. To preserve it the music needs to keep playing. You don't have the honest saver, simply because none of the wealth was honest, but rather a function of the unhealthy spiraling of more and more debt, or the pyramid scheme that caused the US to prosper on borrowed time, even at the expense of most other countries in the world. To have honest money, gold, you also need a society that's not an empty shell like the US. I think the irony is that you have to print a lot of money, to preserve the integrity of the dollar as it stands now, crazy as it sounds.

[Supercilious]

Re: Are banks well-capitalized or insolvent?

I don't think there is such a thing, as an honest saver, if you imply that. Because, it's the fake society, built on sand, that gave the fake money worth. To preserve it the music needs to keep playing. You don't have the honest saver, simply because none of the wealth was honest, but rather a function of the unhealthy spiraling of more and more debt, or the pyramid scheme that caused the US to prosper on borrowed time, even at the expense of most other countries in the world. To have honest money, gold, you also need a society that's not an empty shell like the US. I think the irony is that you have to print a lot of money, to preserve the integrity of the dollar as it stands now, crazy as it sounds.

You may be right here. You may have the occasional granny or honest professional with 0 debt who saved from her teacher salary few dollars a week for the last 30 years, but that is the exception not the norm and the wealth at the core is corrupted.

I think you are also right about the printing part, because in order to increase the profits of the banking system, the non-interest bearing share of money supply has been chocked artificially (to increase the share of credit money build on top of government credit money )

[LargoWinch]

Re: Are banks well-capitalized or insolvent?

Also, no matter amount of money printing it takes to drown the toxic waste, it will not create hyperinflation. If the society accepts printing money as the solution to the financial crisis, it will accept price controls to kill the hyper monster.

Medved, I find hard to envision how price controls would work in the internet age.

Goods would quickly disapear from shelves while a black market and/or flourishing online markets would replace "normal" distribution channel.

As such, is it fair to assume that price controls can only be a short-term solution?

I cannot believe even governments would be that dumb to try this.

That would surely be the final step before a new currency is introduced, which by then means that all precious metals and bottles of cognac would be long gone.

[nero3]

Re: Are banks well-capitalized or insolvent?

Since this thread was started, I think things are going even more in the direction of solvent banks. They will as geithner said, earn their way out, and that will be possible through more inflation. The yield curve, the 30 year bond at around the pre lehman level, everything seems to be getting more or less back towards normal. The spreads that are now, are amazing for banks.

[medved]

Re: Are banks well-capitalized or insolvent?

Medved, I find hard to envision how price controls would work in the internet age.

Exactly the same way they worked before the internet age. Exactly the same way non-stop "money" printing works in the internet age. Exactly the same way continuing gov't takeover of anything and everything is happening. Following advice of Mr. Kucinich, the gov't will be moving from controlling the financial system to controlling the economy. Obviously, this will fail too. The next step is control of the society.

Goods would quickly disappear from shelves while a black market and/or flourishing online markets would replace "normal" distribution channel.

This is a fairly correct description. Americans will learn to deal with it the same way they learned to live with constantly growing taxes.

As such, is it fair to assume that price controls can only be a short-term solution?

So was the Federal Income Tax. Remember? Just to fund some minor war.

There is no problem in the world, that the government cannot solve using taxation and regulation. Just kick out the corrupt capitalist idiots and replace them by honest dogooders :rolleyes:.

I cannot believe even governments would be that dumb to try this.

O ye of little faith ...

This is what majority of population will support to punish "speculators and hoarders". You cannot go against the majority. Once the socialist faith takes over, there is no avoiding this outcome. Just watch your own description of disappearing supply and flourishing black market in application to the medical services (it would be the first in line for price control).

[Raz]

Re: Are banks well-capitalized or insolvent?

Gretchen Morgenson worked for the same brokerage firm that I did back in the 1980s. I've traded E-mails with her and she's not only a nice lady - she's smart. Her columns are just about the only thing I continue to read at the Gray Lady since it transformed from an excellent newspaper to a Leftist Rag.



May 10, 2009
Fair Game
Stress Tests Are Over. The Stress Isn’t.

By GRETCHEN MORGENSON

THE beginning of the end of the banking crisis or merely the end of the beginning?

That is what inquiring Americans want to know after last week’s pronouncement that 10 of the nation’s biggest banks must raise $75 billion by November if regulators are going to give them a clean bill of health.
Bank of America, Wells Fargo, GMAC and Citigroup are the neediest institutions, said government stress testers. Nine others, including Bank of New York Mellon, American Express and U.S. Bancorp, were deemed healthy.

“The results released today should provide considerable comfort to investors and the public,” Ben Bernanke, the chairman of the Federal Reserve Board, said in a statement last Thursday when his office released the Supervisory Capital Assessment Program. He added that nearly all of the tested banks had enough capital to absorb higher losses the Fed expected under its “hypothetical adverse scenario.”
With almost 40 pages of charts, graphs and scenarios, the program was a “deliberately stringent test,” its authors said. Clearly, the message they want to send is that the banking mess we have endured for the last two years is finally becoming manageable.

All is under control. Nothing to see here, folks. Move along.

Much as it would be a relief to move on, anyone in search of reality cannot yet conclude that the big banks are out of the woods. The government tests were, in truth, not exceedingly tough. And some of the program’s “adverse” scenarios look more like a day at the beach.

“Let’s not call it a stress test,” said Janet Tavakoli, founder of Tavakoli Structured Finance, a consulting firm in Chicago. “This was a test to try to get a measure of capital adequacy, using broad-brush percentages. I think what they are hoping is that the banks are going to be able to earn their way out of this.”

Some might be able to do that, given the immense taxpayer subsidies they are receiving. Cheap money from government programs translates to delightfully low expenses and the potential for profits where there might otherwise be only losses.
But not all banks will be able to earn enough to see them through. And while no one knows how long our economy will remain under pressure, Ms. Tavakoli said she was certain that the stress tests’ assumptions on worst-case losses at banks were too rosy.
Under the government’s so-called adverse scenario, for instance, banks may experience losses of 8.8 percent over the next two years on first mortgages they hold. A more likely figure, Ms. Tavakoli says, is 10 percent.

“Given what has happened with the economy and unemployment, they are in massive denial,” she said. Losses recently seen in Fannie Mae’s portfolio support this view. In the first quarter, its subprime loans had average losses of around 68 percent; the Fed expects two-year losses in subprime to be, at worst, 28 percent.

For investors interested in a stress test that is free of government spin, Institutional Risk Analytics, a bank analysis and risk management firm, published its own assessment of financial institution soundness last week. Using first-quarter 2009 reports on 7,600 institutions from the Federal Deposit Insurance Corporation, the analysis showed that banks were under increasing pressure.

Christopher Whalen, the editor of Institutional Risk Analyst, said that the data told him that bank losses would not peak until the end of the year; before he combed through the figures, he had thought losses would hit their highs in the second quarter.
Mr. Whalen said he pushed back his estimate for peak losses because banks continued to provision more for loan losses — the reserves bankers set aside for future damage — than they are actually writing off. “We don’t see charge-offs yet,” he said. “When you see banks charging things off, the reserve bill will have ended. Then, you’ll know you are done.”
In the meantime, taxpayer subsidies to banks will help offset some of the losses, he said. But keeping interest rates in the cellar to revive banks has significant costs, Mr. Whalen said. For example, institutions that have agreed to pay out interest on investments that are higher than prevailing rates — think insurance companies and pension plans — are getting killed. “The Fed can’t do this for much longer,” he said. (Emphasis mine.)

What’s more, banks’ costs for working out bad loans — whether mortgages or credit card debt — are rising, Mr. Whalen said. In previous downturns, for example, investors would step up and buy bad credit card debt from banks. Yes, the prices they paid were discounted, but at least the banks could write off the loans and move on.

Now, though, buyers for these hobbled portfolios are so rare, and the prices they will pay so low, that banks are hiring their own workout specialists to recover what they can from troubled borrowers. That costs.
It is good that the stress test circus is over. But two lessons remain.

First, the effects of a debt binge like the one we have just experienced cannot be worked off either quickly or painlessly. Second, there is the matter of the government’s credibility deficit. Maybe $75 billion will be enough to pull the big banks through this woeful period. But weren’t some of the folks providing these estimates also those who assured us subprime would not be a problem? That, in fact, it would be “contained”?
Yes, indeedy.

Yes, indeedy weedy, Gretchen. You don't buy the lies either.

The new "Rat Pack" (Bernanke, Geithner, Paulson, Blair, Summers, etc.) - or should I say "Rat Bastards" - are willing to rob, rape, and leave for dead the working people of the United States, the Insurance Companies, Pension Plans, and everyone who [through ignorance] foolishly saves a US Dollar - in order to protect their turf and bail out their owners (campaign contributors and fellow club members).

If every American knew what we know these people would be lucky to escape the Guillotine.:mad: