Thursday, May 7, 2009

Stress test not so stressful after all

Fed determines 10 banks need to raise additional capital

The Federal Reserve determined that 10 U.S. banks need to raise a total of $74.6 billion in capital. The banks include Bank of America, which needs to raise $33.9bn, Wells Fargo ($13.7bn), GMAC ($11.5bn), Citigroup ($5.5bn) and Morgan Stanley ($1.8bn.) "The results released today should provide considerable comfort to investors and the public,” said Fed Chairman Ben S. Bernanke. “The examiners found that nearly all the banks that were evaluated have enough Tier 1 capital to absorb the higher losses envisioned under the hypothetical adverse scenario." The adverse scenario's projections are more optimistic than the latest IMF forecasts for US growth, employment and house prices.

Posted by little professor @ 11:41 PM (1202 views)
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27 thoughts on “Stress test not so stressful after all

  • little professor says:

    Sorry, headline got messed up.

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  • Not so stressful? Back in 2007 we used to think $74.6 billion was a huge number. Those were the days….

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  • The banking crisis is over and the supposed quadrillion trillion billion worth of outstanding derivatives are not going to swamp the world. The only thing worth thinking about now is a mundane old fashioned recession.

    Regarding house prices, any aspiring house buyer should only be concerned with public and private spending cuts, unemployment projections, future restrictions on mortgage lending and increasing taxation.

    It’s a fair bet that spending will be significantly cut, unemployment will go higher, credit will remain restricted for another year or two and taxes will rise. House prices will therefore fall by a further 15 to 40%.

    Obsessing about banks is a waste of emotion. Most of them will prosper and we’ll get ulcers railing against the injustice of it all. The doomsters and conspiracy theorists will have to accept that they were wrong. The scale of the banking collapse was obviously not so large that the world would collapse. It (the banking problem) was all but solved in less than a year. Most of the bailout money will have been paid off while the next decade is still young. Bank profit margins are higher than they have been for many years and tellingly Barclays and crew are experiencing healthy growth in their investment banking profits. Even the disastrous RBS have just reported a mere 44 million loss in the last quarter (this is after writing down 2.9 billion in the same period). The banks are increasingly well capitalised/profitable and will find it relatively easy to survive/raise more private funding in the event of a crisis. Don’t shoot the messenger

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  • Flashman

    I think you’ve summed it up there – at least from what I saw on the news last night.

    If the banks are now rolling in it, why will lending be restricted, particularly in light of most politicians wanting them to lend ?

    Also the lending element is the self fullfilling prophecy of the housing market.

    Also the banks are so well capitalised now as base rates are 0.5% but lending still goes out at 4 – 5%.

    At what point do Central Banks lift base rates and in this case do the banks maintain their margins and simply raise borrowing costs higher, or will they somehow be forced into working on tighter margins. IE we see base rates rise a couple of % but not the cost of mortgages ?

    And on the unemployment front will that continue to rise significantly if the banks do start lending more ?

    I’m under the general impression this recession was largely brought about by excessive debt and subsequent bad debt. Surely everything being well now with the banks highlights the beginning of the end of the recession.

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  • LP

    The link didn’t seem to lead to an article, but it did lead me to bloomberg tv, which I didn’t realise I could get for free so thanks for that.

    Now I’ll never get any work done you realise.

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  • str 2007 said, “If the banks are now rolling in it, why will lending be restricted, particularly in light of most politicians wanting them to lend ?”
    – because in recessions default rates are high and recovery rates are low.
    This is also reflected in the spread between new lending & base [as you say, 4-5% – 0.5%], although one should really compare to the cost of borrowing rather than the base rate [e.g. EURIBOR]) these margins will come down as competition picks up, which will signal the idea that the worst of the troubles for the real economy are gone. It’s pretty typical of the cycle I believe, just slower because of the global nature of this recession.

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  • str 2007 – The link worked for me but here it is again.

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  • Bizarre

    I still get to the same place 666.

    IE a bloomberg page but no article, how strange.

    So what’s your view with this ‘good news’ from the banks.

    Personally I can’t help thinking that we just haven’t seen enough bad news to put people off houses and whilst I don’t see a pick up in prices, I can’t help thinking that with all the vested interests jumping on this we’ll see people back out buying houses again.

    Perhaps unfounded as we haven’t had the bill for the bailout yet.

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  • 3. flashman – The banking crisis is over and the supposed quadrillion trillion billion worth of outstanding derivatives are not going to swamp the world. The only thing worth thinking about now is a mundane old fashioned recession.

    I would not go that far just yet……there is still a hell of a long way to go before this is all over.

    Let’s just wait to see what happens when the billions in QE hit the streets first……

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  • str 2007: The banks are far from rolling in it, but they are mostly now operating at a profit. Their profit margins are not excessive because all they’ve done is return to pre boom levels. Credit will remain restricted because they will want to build up a cushion. The shareholders are for once not on their backs to expand, so it is a good opportunity to stay conservative. When a capital cushion builds up, they will start to lend to corporations first but will remain shy of consumer loans for some time. Eventually consumer loans will pick up, but I imagine lending criteria will remain sensible for a decade.

    Recession momentum is hard to stop so unemployment will continue to rise, but as I said yesterday, I have yet to see convincing calculations on the accepted estimates of 3.1 to 3.5 million. Spending will be cut which will also act as a brake on the economy.

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  • hpwatcher: There is a little way to go but the QE thing looks like it might be a non-issue. The amounts involved are relatively small (don’t laugh) and it is not quite replacing the money lost. The fall in the value of the pound was a masterstroke because it has protected us from deflation. The other major economies are fighting serious deflation because their currencies remained strong. On that note, I am a bit suspicious about the fall in the pound yesterday. Its’ timing and profile was a bit crude and smacked of intervention. The govt. does not want it to rise too far

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  • General Congreve says:

    str 2007 @ 8 – ‘Perhaps unfounded as we haven’t had the bill for the bailout yet.’

    Exactly, let’s see how the recovery fairs when the government serves the bailout bill to Joe Public ordering them to hand over their hard-earned, under threat of imprisonment if necessary. No more flat-screen tv’s, new sofas, nights out etc. for the proles, they’ll be too skint paying off the debt. Falling living standards here we come. The decline of Western Civilisation and the rise of the Red Dragon is what’s around the corner.

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  • general congreve says:

    str 2007 @ 8 – ‘Perhaps unfounded as we haven’t had the bill for the bailout yet.’

    Exactly, let’s see how the recovery fairs when the government serves the bailout bill to Joe Public ordering them to hand over their hard-earned, under threat of imprisonment if necessary. No more flat-screen tv’s, new sofas, nights out etc. for the proles, they’ll be too skint paying off the debt. Falling living standards here we come. The decline of Western Civilisation and the rise of the Red Dragon is what’s around the corner.

    Apologies for the double post in advance – just posted without admin password.

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  • flashman,
    Let’s assume you’re right and this is now just a recession. In the 1990s recession, unemployment peaked in 1993 but house prices kept falling until 1996. Right now in the UK unemployment is rising and looks likely to rise further (although it may be masked by eastern europeans returning home rather than claiming dole in the UK). Compared to the last recession we’re maybe in 1991. On the housing front, we have a long way down to go.

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  • There is a little way to go but the QE thing looks like it might be a non-issue. The amounts involved are relatively small (don’t laugh) and it is not quite replacing the money lost. The fall in the value of the pound was a masterstroke because it has protected us from deflation. The other major economies are fighting serious deflation because their currencies remained strong. On that note, I am a bit suspicious about the fall in the pound yesterday. Its’ timing and profile was a bit crude and smacked of intervention. The govt. does not want it to rise too far

    I don’t accept any of that. I just don’t see how 150 billion pounds could be regarded as a small amout. Throughout history, introducing new money has always had an impact upon inflation. Moreover, I don’t really accept the deflation argument, maybe in some areas, but the cost of key items is still rising.

    I find your comments rather cocksure…lets just see what happens.

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  • drewster: I agree. In my post I said that house prices would fall by a further 10 to 40%. It is, however, not always sensible to predict outcomes based on past recessions. The metrics of this one are very different and the analysts who are forecasting depression scenarios are often bluffing. Next time one of them gives you a projection for unemployment, ask them for the work sheet. They are unlikely to have one

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  • hpwatcher: The 150 billion is relatively small, in that it is smaller than the money lost. That is what I mean by relatively. It is not actually true that “throughout history introducing new money has always had an impact upon inflation”. It depends on how much money is introduced and there are many other important factors to consider like supply capacity . My deflation statement is purely factual in that the other major economies are fighting a worse problem than we are and that the pound ‘collapse’ is responsible . I am being “mathematical” in my argument rather than emotional.

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  • “throughout history introducing new money has always had an impact upon inflation”.
    I am sure you will agree it has had an impact.

    I am being “mathematical” in my argument rather than emotional.
    It all depends on where you are getting your figures from…..

    There are lots of other forces at work in the world; lets just see what happens. I find your analysis far too bullish.

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  • hpwatcher: I have a degree in economics and spend my working week crunching through reports with analysts. It probably contributes to why my comments come across as cocksure to you. I perhaps presented my viewpoint with a stridency that didn’t mesh with an emotionally charged subject … but you shouldn’t really get personal, all the same.

    Regarding your comment: “introducing new money has always had an impact on inflation”. I assumed you meant, ‘excessive introduction of money always causes inflation’. New money is always introduced, so without quantifying how much money is introduced, it is impossible to gauge the likely impact on inflation. Introducing too little money will be deflationary or only slow down the rate of deflation. Introducing too much money will generally be inflationary. Considerably more than 150 billion has been ‘lost’ which is why I don’t necessarily consider it to be inflationary.

    I don’t know why you find my analysis to be so bullish. I estimated that house prices would fall a further 15 to 40%. Do you think they’ll fall more than that?

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  • I have a degree in economics and spend my working week crunching through reports with analysts
    Well there are many economists far more qualified than you, probably, who have got it completely wrong.

    but you shouldn’t really get personal, all the same.
    I don’t see how I am getting personal when I write that I found some of your comments rather cocksure? I was not making a statement about you, just what you have written.

    I assumed you meant, ‘excessive introduction of money always causes inflation’.
    There will be an impact upon inflation, is what I believe I wrote.

    I don’t know why you find my analysis to be so bullish. I estimated that house prices would fall a further 15 to 40%
    Your comments are bullish with regards to the banks and the general economy. It’s my view that there will be a significant degree of inflation – even hyperinflation. Given the debt of the UK economy, an incompetent government & central bank, the general recession and now QE. Nobody really knows what the effect of that mixture will be – but I don’t think it will be good.

    No one believed Iceland would go the way it did, until it did….

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  • mountain goat says:

    The banks have never owned up to their real problems. It is only when a few fell over that people started fearing the worst. Weeks before they nearly fell over they were lying that everything was fine, without exception, or blaming evil shorts. They have all been propped up one way or another since Lehman so now people are breathing a few sighs because no more major ones have fallen even after the shorts seem to have done their worst. But still the fact is we don’t know what state the banks are in. Perhaps a year of ailing economy is needed to reveal remaining flaws. That year may also prove that the worst is over and they can get back to rude health. But I won’t be taking their word for it that is for sure.

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  • As you wish hpwatcher. I am definitely not bullish on the economy. Read my post @ 3. “It’s a fair bet that spending will be significantly cut, unemployment will go higher, credit will remain restricted for another year or two and taxes will rise. House prices will therefore fall by a further 15 to 40%”. This would mean a total fall of between 35 and 60%. Anything in that range would indicate a very severe recession.

    It’s an interesting point you make: “there are economists more qualified than you who have got it wrong”. The truth is that almost every one of the economists who supposedly ‘got it wrong’ were in the pay of an interested party. Happily, thus far, I have got it right, In fact, I can truthfully say that I’ve found this banking/economic crisis to be one of the easier events to read. I (we) have been waiting for it since the early part of the decade when Greenspan and crew perverted the course of the markets/economy. Any technical or fundamental analyst worth his salt could see where we were headed. The newspapers are always trying to persuade people that all the economists got it wrong. I mix with economists and analysts every day. Very few of them didn’t anticipate todays events. I think the internet has contributed to the belief that economic enlightenment can be obtained by reading a few choice articles and that the accredited economists have somehow failed to learn the right stuff. I think it’s a myth, but who knows, maybe they’re right. I had very little useful knowledge, when I graduated, but I like to think that 20 years at the sharp end have given me some idea of my craft

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  • mountain goat: there is no reason why you should believe the banks, but I think you can be quite confident in the regulators. They are now falling over themselves to be severe and puritanical. In todays climate, It would be political suicide for any government to encourage the regulators to deceive the public

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  • mountain goat says:

    Flashman agreed I posted an article last week reporting on the new hard fisted FSA.

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  • Flashman

    Dare you attach any kind of time frame to your HP fall predictions.

    I sincerely hope you’re right (’til I buy), but can’t help thinking that general public have not been scared away from the housing market this time and have more tools with which to enter it than last time around.

    I don’t dispute they could trickle down another 10% or so, but for the bigger falls I sense we’d need a ‘real’ shock. That shock not even being more bailouts as I think general public have numbed to the big numbers now.

    Higher (at least 5% up) interest rates would do the trick, but I just can’t imagine that happening now.

    And without sounding like an estate agent in 2 to 3 years the lack of new builds will start to put pressure on the system I’d have thought.

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  • str: My best estimate is that it will take between 20 and 25 months. My best guess is a further 18% fall. Some area will do much better than others. I don’t think it will take a shock…just the drumbeat of higher interest rates, unemployment, sensible lending and very importantly demographics. There will also be legislation/taxation that does not suit foreign owners and second home owners.

    New build is a bullish factor but people never seem to deduct the number of houses being decommissioned. There are thousands of 60’s flats with concrete cancer and thousands of mid 20th century bungalows and houses that are damp, uninsulated and fit for nothing.

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  • I’m in a rush and can’t say much. Just a rhetorical question – did anybody seriously believe the Fed would end this process by reporting “The banks are deep in doggy merde”?

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