It Is The Loans And Not The Derivatives ......

[LuckyOne]

Despite the bonunce in many markets since March, the fundamental problem remains : people cannot afford to repay the money that they owe despite the massive intervention in free markets.

It looks doubtful that all of the intervention has given enough banks enough time to earn their way ot of the problem. The system is on the edge of the cliff.

http://www.bloomberg.com/apps/news?pid=206...id=aTTT9jivRIWE

More than 150 publicly traded U.S. lenders own nonperforming loans that equal 5 percent or more of their holdings, a level that former regulators say can wipe out a bank’s equity and threaten its survival.

The number of banks exceeding the threshold more than doubled in the year through June, according to data compiled by Bloomberg, as real estate and credit-card defaults surged. Almost 300 reported 3 percent or more of their loans were nonperforming, a term for commercial and consumer debt that has stopped collecting interest or will no longer be paid in full.

The biggest banks with nonperforming loans of at least 5 percent include Wisconsin’s Marshall & Ilsley Corp. and Georgia’s Synovus Financial Corp., according to Bloomberg data. Among those exceeding 10 percent, the biggest in the 50 U.S. states was Michigan’s Flagstar Bancorp. All said in second- quarter filings they’re “well-capitalized†by regulatory standards, which means they’re considered financially sound.

“At a 3 percent level, I’d be concerned that there’s some underlying issue, and if they’re at 5 percent, chances are regulators have them classified as being in unsafe and unsound condition,†said Walter Mix, former commissioner of the California Department of Financial Institutions, and now a managing director of consulting firm LECG in Los Angeles. He wasn’t commenting on any specific banks.

Missed payments by consumers, builders and small businesses pushed 72 lenders into failure this year, the most since 1992. More collapses may lie ahead as the recession causes increased defaults and swells the confidential U.S. list of “problem banks,†which stood at 305 in the first quarter.

Cash Drain

Nonperforming loans can eat into a company’s earnings and deplete cash, leaving banks below the minimum capital levels required by regulators. Three lenders with nonaccruing ratios of at least 6.2 percent as of March were closed last week. Chicago- based Corus Bankshares Inc., Austin-based Guaranty Financial Group Inc. and Colonial BancGroup Inc. in Montgomery, Alabama, each with ratios of at least 6.5 percent, said in the past month that they expect to be shut.

“This is a fairly widespread issue for the larger community banks and some regional banks across the country,†said Mix of LECG, where William Isaac, former head of the Federal Deposit Insurance Corp., is chairman of the global financial services unit.

Ratios above 5 percent don’t always lead to failures because banks keep capital cushions and set aside reserves to absorb bad loans. Banks with higher ratios of equity to total assets can better withstand such losses, said Jim Barth, a former chief economist at the Office of Thrift Supervision. Marshall & Ilsley and Synovus said they’ve been getting bad loans off their books by selling them.

Exclusions

Bloomberg’s list was compiled by screening U.S. banks for nonperforming loans of 5 percent or more, and then ranked by assets. The list excluded U.S. territories and lenders that have already failed. Also left out were the 19 lenders that underwent the Treasury’s stress tests in May; they were deemed “too big to fail†and told by regulators that government capital was available to keep them in business.

Excluding the stress-test list, banks with nonperformers above 5 percent had combined deposits of $193 billion, according to Bloomberg data. That’s almost 15 times the size of the FDIC’s deposit insurance fund at the end of the first quarter.

About 2.6 percent of the $7.74 trillion in bank loans outstanding in the U.S. at the end of March were nonaccruing, the highest in 17 years, according to the most recent data from the FDIC. Nonaccrual loans peaked at 3.27 percent in the second quarter of 1991, during the savings and loan crisis, and averaged 1.54 percent over the past 25 years.

‘Off the Charts’

“These numbers are off the charts,†said Blake Howells, an analyst at Becker Capital Management in Portland, Oregon, referring to the nonperforming loan levels at companies he follows. Banks are losing the “ability to try and earn their way through the cycle,†said Howells, who previously spent 13 years at Minneapolis-based U.S. Bancorp.

Corus, with more than two-thirds of its loans nonperforming, has the highest rate among publicly traded banks. The company said last month that it’s “critically undercapitalized†after five consecutive quarterly losses tied to defaults on condominium construction loans. Randy Curtis, Corus’s interim chief executive officer, didn’t respond to calls for comment.

Marshall & Ilsley, Wisconsin’s biggest bank, reduced its nonperforming loans last month to 5.01 percent from 5.18 percent after selling $297 million in soured loans, mostly residential mortgages in Arizona, the Milwaukee-based company said Aug. 10.

Deadline for Nonperformers

The bank has “been very aggressive in identifying and tackling credit challenges,†Chief Financial Officer Greg Smith said in an Aug. 12 interview. Smith said 26 percent of loans classified as nonperforming are overdue by less than the industry’s typical standard of 90 days. With those excluded, the ratio would be around 3.7 percent, he said.

Synovus, plagued by defaulting construction loans in the Atlanta area, said nonperforming loans rose to 5.4 percent in the second quarter from 5.2 percent the previous period. Disposals of nonperforming assets reached $404 million in the quarter ended in June, the Columbus, Georgia-based company said.

Synovus is selling troubled loans and will continue its “aggressive stance on disposing of nonperforming assets†as long as the level is elevated, spokesman Greg Hudgison said in an e-mailed statement.

Michigan Home

Flagstar is based in Troy, Michigan, the state with the nation’s highest unemployment rate. Flagstar has $16.4 billion in assets and reported last month that 11.2 percent of its loans were nonperforming; about two-thirds were home mortgages. Flagstar CFO Paul Borja didn’t return repeated calls for comment.

The bank’s allowance for loan losses was 5.4 percent of total loans at the end of the second quarter, compared with 3.3 percent at Synovus and 2.8 percent at Marshall & Ilsley, according to company filings. All three reported at least three straight quarterly deficits.

The FDIC doesn’t comment on lenders that are open and operating and doesn’t disclose which banks are on its problem list. The agency will probably impose an emergency fee on the more than 8,200 banks it insures in the fourth quarter to replenish the insurance fund, the second special assessment this year, Chairman Sheila Bair said last week. The FDIC attempts to sell deposits and assets of seized banks to healthier firms to avoid eroding the fund, said agency spokesman David Barr.

Capital Levels

To determine which banks are most troubled, regulators compare the ratio of nonperforming loans to the percentage of equity a firm has relative to its assets, said Barth, the former OTS economist. A company with 5 percent nonperforming loans and equity of 8 percent is better positioned than one with the same amount of troubled loans and equity of 4 percent, he said.

Flagstar’s equity-to-assets ratio in the second quarter was 5.4 percent, Synovus’s was 8.9 percent and Marshall & Ilsley, which raised $552 million through a stock sale in June, was at 11 percent, according to the banks.

The three lenders that failed last week -- Florida’s First State Bank and Community National Bank and Oregon’s Community First Bank -- all had nonperforming loans above 6 percent and equity ratios below 4.5 percent.

“The nonperforming ratio, in and of itself, should be a great concern,†said Barth, a professor of finance at Auburn University in Alabama and senior finance fellow at the Milken Institute in Santa Monica, California. “It becomes even more troublesome when it goes above 3 percent and the equity-to-asset ratio is quite low.â€

Toast Time

While 5 percent can be “fatal†for home lenders, commercial real estate lenders may be able to withstand higher rates, said William K. Black, former lawyer at the Federal Home Loan Bank of San Francisco and the OTS. Commercial loans carry higher interest rates because they’re riskier, he said.

“At the 5 percent range, you’re probably hurting,†said Black, an associate professor of economics and law at the University of Missouri-Kansas City. “Once it gets around 10 percent, you’re likely toast.â€

[interestrateripoff]

Debt is the problem and so far it's not been tackled.

Until this has been address there will be no sustainable recovery.

[Justice]

The trouble is borrowed money is being used to buy deraitaives and is the same a taking money as a loan and going down the bookies.

wait untill the $600tr + weapons of mass finantial destruction goes off

[Charterhouse]

The trouble is borrowed money is being used to buy deraitaives and is the same a taking money as a loan and going down the bookies.

wait untill the $600tr + weapons of mass finantial destruction goes off

Sandwich to the pylon of goodness, the inspector of the donut said to the giant flip flop. Insert a widget for the green green grass speculum raider.

That is how much sense what you just wrote makes to anyone who understands the financial system. Idiot.

[LuckyOne]

http://www.zerohedge.com/sites/default/fil...et%20Falacy.pdf

Fantastic piece and well worth a read. Thank you.

I like the conclusion : "The new bull market thesis is a fallacy"

[Timm]

Isn't it the case that there is too much debt and too much money?.

It sounds daft - how can they not balance out? But it does rather seem to me that while the consumer is responsible for creating much of both the debt and the money through credit, too much of the money is sucked of into the financial paraverse for the debts to be serviced.

The solutions could include either reduce the amount of debt and money (easy but painfull), or increase the movement of money through the real economy rather than sloshing round in a wall of money that seems to create as much harm as it creates profits. That second solution might produce a net good, but I imagine it would be somewhat difficult to implement.

Disclaimer: I might be talking utter rubbish.

[Bloo Loo]

saw a chart by Prof Niall Ferguson? on the BBC news channel this morning...he was talking about the credit crunch compared to evolution.

Now, what was interesting for me was this chart of Banking assets, and these included loans, loans that are defaulted and the MBS's that are trading 22c on the dollar.

In spite of these huge losses, the assets value had barely changed.....why?

he explained that the King Kong of deflation in the assets was causing huge losses in value. however, the Godzilla of Government and Central banks were pumping liquidity into the banks....QE and bad asset purchase.

He feels Godzilla will win, but what we will be left with are obsolete and poorly performing banks which should have gone under.

I agree with him....even if I did get his name wrong.

EDIT: and another thing he mentioned.

forgive if I have the dates wrong and the exact figures, but here is the Gist.

about 1997 there were just 12 AAA rated institutions.

in 2009, there were 60,000 AAA rated institutions ( could have been 10,000, or 50,000, I just dont remember) but the growth is quite astonishing and illustrates how the genii at the banks had eliminated risks.

Edited August 14, 2009 by Bloo Loo

[Timm]

So we have yet more money in the financial system, but still not enough in the real economy to service the debts?

[Charterhouse]

Bloo Loo, Niall Ferguson is good but you have to take him with a pinch of salt as he is a dyed in the wool Thatcherite and he has a political agenda.

[Bloo Loo]

Bloo Loo, Niall Ferguson is good but you have to take him with a pinch of salt as he is a dyed in the wool Thatcherite and he has a political agenda.

thank you. the presentation made no judgement however, and he just had a few charts and figures.... the thing was to compare finance and evolution. he pointed out 3 important differences. SEX, GOD and intelligent design.

nothing political there!

[thedebtisreal]

He feels Godzilla will win, but what we will be left with are obsolete and poorly performing banks which should have gone under.

I don't think its just the badly performing banks that we are left with, but the sense we are proping up a system of "wealth through property and debt" that they are too scared to reset.

We have kept people in mortgages they should have been released from, people in jobs they should have lost and we have not allowed anyone to really learn anything from this disaster.

It feels like the Kremlin trying to prop up the failing USSR. It can be done, but its unpleasant.

[R K]

http://www.zerohedge.com/sites/default/fil...et%20Falacy.pdf

Excellent thanks. Could do with its own thread.

Reminds me of all the securisation rampers telling us how 'AAA' stamped sh1t will spread risk and save the world. It's going to get ugly, fast when it comes.

[scottbeard]

about 1997 there were just 12 AAA rated institutions.

in 2009, there were 60,000 AAA rated institutions ( could have been 10,000, or 50,000, I just dont remember) but the growth is quite astonishing and illustrates how the genii at the banks had eliminated risks.

Maybe it's just grade inflation - same as GCSEs

[the_austrian]

Is the problem derived from the loans or the derivatives? It is from whatever makes the banks go bust because the taxpayer (or the DMO) ends up bailing them out. You could describe a loan asset as a derivative so it is a bit of a false distinction, although the derivatives do allow spectacular risk.

[Bloo Loo]

I don't think its just the badly performing banks that we are left with, but the sense we are proping up a system of "wealth through property and debt" that they are too scared to reset.

We have kept people in mortgages they should have been released from, people in jobs they should have lost and we have not allowed anyone to really learn anything from this disaster.

It feels like the Kremlin trying to prop up the failing USSR. It can be done, but its unpleasant.

yes I feel much the same.

as to the question of inflatio being produced by the QE....well, that wont come until the bad assets have been traded out...that is goin got take a good few years yet....THEN, the banks will be awash with cash for lending...THEN the inflation may come....BUT, the central banks have a plan....they are going to get all the QE BACK from the banks.

now IF They are successful with this, then we have the same amount of time again when there will be restricted lending.

IMPO the bankers in the western world should have no bonuses whatsoever, as STILL the QE and TARP purchases are keeping the system afloat. NO banks appear to be trading without support either directly or indirectly.

[Meerkat]

http://www.zerohedge.com/sites/default/fil...et%20Falacy.pdf

A very sober and honest piece indeed.

[Timm]

That again is a very interesting question Timm and one I have been thinking about.

Basically the debts have allowed some other people/entities to become more wealthy. The excess debt is matched by excess savings. But they are not held by the same people - in fact as the debts have got bigger the rich have got richer.

So whilst on one side we seem to be finding the problems of deflationary deleveraging (esp. property), we also have an excess of money held by others chasing returns in the market and leading to bubbles e.g. in stocks and commodities.

So for deleveraging to work its way out - those with excess savings have to lose that money be it in speculation or taxes or default etc. Or they manage to reinflate the assets backing the debts so that the debts can be cleared without default.

Exactly.

I've posted a few times about the difference between deflation by default and deflation by deleverage. The second is slower, but causes much less personal pain. It is also, to a limited extent, what we are seeing in the housing market at the moment.

[Bloo Loo]

snip

So for deleveraging to work its way out - those with excess savings have to lose that money be it in speculation or taxes or default etc. Or they manage to reinflate the assets backing the debts so that the debts can be cleared without default.

not sure what you mean...we are talking about banking assets here, not real assets directly.

the financial assets have already been devalued to 22c on the dollar....this is a 78% drop in value...yet the US and UK housing markets are nowhere near that figure.

not all loan holders are going to default.

to trade through these losses, the banks need time. time gives them a chance to make profits...they cant do it the old way, they need to do it sensibly and with risk accounted for. QE and TARP give them the time needed by providing numbers on the asset side.

I dont see where savers are at a disadvantage, unless QE is so great that banksters dont need private cash at all...so why pay for it.

this is a balancing act the BoE needs to do very carefully indeed. I dont think they can, mainly because of political and lobby group pressure.

[Timm]

not sure what you mean...we are talking about banking assets here, not real assets directly.

the financial assets have already been devalued to 22c on the dollar....this is a 78% drop in value...yet the US and UK housing markets are nowhere near that figure.

not all loan holders are going to default.

to trade through these losses, the banks need time. time gives them a chance to make profits...they cant do it the old way, they need to do it sensibly and with risk accounted for. QE and TARP give them the time needed by providing numbers on the asset side.

I dont see where savers are at a disadvantage, unless QE is so great that banksters dont need private cash at all...so why pay for it.

this is a balancing act the BoE needs to do very carefully indeed. I dont think they can, mainly because of political and lobby group pressure.

For every debt (asset) there is a corresponding amount of "money" floating about.

If the net amount of debt falls, so should the amount of money.

It's not so much that savers are at a disadvantage as that if the debt falls, their savings need to fall too.

[Bloo Loo]

For every debt (asset) there is a corresponding amount of "money" floating about.

If the net amount of debt falls, so should the amount of money.

It's not so much that savers are at a disadvantage as that if the debt falls, their savings need to fall too.

disagree. the MBS's are sold for money based on returns...the money has gone to produce new MBS's

you could have made 50, 100 10,000 MBS with the same £1bn.

[Timm]

disagree. the MBS's are sold for money based on returns...the money has gone to produce new MBS's

you could have made 50, 100 10,000 MBS with the same £1bn.

I don't understand what you are saying.

It sounds like you are saying that the books don't balance, but I know you well enough to know you wouldn't say that...

To simplify, I'm not talking about the initial seed money (your £1bn), I'm talking about the money created (the money the borrowers spent buying the houses on which the RMBS rests). This money matches the debt. If the debts all blow up, the money the original sellers of those thought they had, is gone.

Messy.

[Bloo Loo]

I don't understand what you are saying.

It sounds like you are saying that the books don't balance, but I know you well enough to know you wouldn't say that...

To simplify, I'm not talking about the initial seed money (your £1bn), I'm talking about the money created (the money the borrowers spent buying the houses on which the RMBS rests). This money matches the debt. If the debts all blow up, the money the original sellers of those thought they had, is gone.

Messy.

I see, you are talking about credit.

QE is not credit. It is M0. only he BoE can deflate of inflate it....(unless you burn your fiver).

again savings are not destroyed either unless the financial entity in which it is stored defaults. yet the MBS based on actual assets have devalued much more than the assets on which they are based (as a whole).

Its not money being destroyed....its numbers on a balance sheet. QE simple replaces those numbers. if applied as I suspect the BoE wishes it.

[The Spaniard]

Despite the bonunce in many markets since March, the fundamental problem remains : people cannot afford to repay the money that they owe despite the massive intervention in free markets.

I know it was just a typo, but that word has possibilities:

It suggests a combination of bonus, bounce and bunce.

[Stars]

Isn't it the case that there is too much debt and too much money?.

It sounds daft - how can they not balance out? But it does rather seem to me that while the consumer is responsible for creating much of both the debt and the money through credit, too much of the money is sucked of into the financial paraverse for the debts to be serviced.

Money was borrowed in order to use an investment strategy which creates no new wealth but raises costs for other people (real estate speculation). The end result is that debts cannot be serviced because production has faltered because of the afformentioned raised costs.

[Bloo Loo]

snip

EDIT: The asset and the liability created during the credit creation process have to be retired by meeting up again - so when a debt is retired by being repaid or written off, the credit money disappears from whence it came. Poooffff.

thats right, its like yo buy a share for 40 and sell it for 20. 20 is gone.

however, the drop in values at a bank means its asset bank is insufficient in this case fo the bank to remain technically solvent ( forgetting FRB and all that) the books now show negative.

hence the bail outs...first, the BoE lending with a haircut on those assets, and now buying the assets with QE>

QE can lose no value numerically so the rot stops......unless they are feckless and invest the QE in the stockmarket...as many beleive is happening....they could lose the numbers all over again.