Friday, April 10, 2009

TIME: The Great Banking Crisis of 2008 is Over

The great banking crisis of 2008 is over. It began last September 15 when Lehman Brothers filed for bankruptcy and bottomed when Citigroup traded below $1 last month. Most analysts believe that mortgage-backed securities which included packages of subprime home loans failed when mortgage default rates went up and housing prices raced down. That is only partially true. Banks made a tremendous series of ill-advised loans to private equity firms, hedge funds, commercial real estate holders, and the average man with a credit card balance which he cannot pay.

When people look back on the near-collapse of the banking system they may say that the Congress and Henry Paulson threw enough money into the path of the oncoming failure of the credit system to slow it down so that the government could properly go through the process of guaranteeing parts of the balance sheets of firms including Citigroup and Bank of America. The initial TARP may also have provided time for the new Administration to put together its widely hailed bank "stress test" program meant to determine which of the big financial institutions have dysentery and which do not. Finally, the hundreds of billions of dollars that went into the largest banks late last year allowed Secretary Geithner to produce his public/private partnership to buy toxic assets off of bank balance sheets.

All of those plans, no matter how well-intentioned they may seem, are unnecessary now. Wells Fargo indicated that it made about $3 billion in the first quarter of the year and declared its buyout of the deeply troubled Wachovia to be a success (see bottom chart above). Wells Fargo said that the low cost of money from the government combined with a surging demand for mortgages was all the medicine that it required (see top chart above of the interest rate spread).


At 4/10/2009 9:28 AM, Blogger Jeff Herron said...

Why am I not convinced?

The Wells Fargo chart in the original post points to wild volatility, not stability (an unprecedented drop followed by an unprecedented upswing does not exactly engender confidence). And it goes without saying that one month does not a trend make.

As for the top graph, all I can say is "it ain't over until it's over" (the grey shaded area indicating the recession, that is). We'll see how this all pans out in due time.

These early reports of the end of the crisis seem premature to me.

At 4/10/2009 9:52 AM, Anonymous Anonymous said...

OK, I am not an economist but an investor. These are the question I have.
What has been fixed? Have Crop. Taxes, Cap Gains, Mark to Market been fixed? Did Obama Folks Nix Crap & Trade when my back was turned?

Grandmas retirement along with most Investments have been hit hard.
JFK,Reagan,Bush,Clinton (Newt) and Bush all have Blue Prints to get out of recession. Are the Obama Folks using any of them?

So let us just say it is a new day and the economy is going to grow at a rate of 2.5% a year starting today.

We are going to spend 10 Trillion Dollars and build no new Refineries, Nuke Energy, or drill for the vast oceans of oil we have in the USA.
How will we find the energy to drive a growing economy?
How will we fight off $300per Barrel Oil with inflation and increasing demand for a growing economy?

Sorry to pop this bubble but there are still many questions to be asked.

Dave Johnson
Sacramento CA

At 4/10/2009 10:55 AM, Blogger bix1951 said...

Two words to delete from our vocabularies



(how about "war on...." from the Johnson era)

Life is never easy but good words are more useful than neagtive words

At 4/10/2009 11:04 AM, Anonymous gettingrational said...

Let us hope the Banking Crisis is over but there are concerns such as new Treasury financing coming. The banks will be dealing with more expensive money to lend. Two-thirds of the economy is consumer based. I think if we can rebuild our industrial base and gradually lower the ratio to one-half then we will have a solid economy -- if not then the banking crisis revisits again and again. Let's work to invest capital in new industrial enterprise and not for living beyond our means.

At 4/10/2009 1:27 PM, Anonymous Anonymous said...

One can be agnostic about the banking "crisis" - i.e., the collapse of the financial system - being over without being sanguine about the countries future economic prospects.

The federal government, having given us the mortgage crisis, seems intent on bankrupting the nation through unprecedented and unnecessary spending. And while the Democrats have cleverly put off imposing the massive tax increases required to finance their socialist gluttony until after both the 2010 congressional elections and the 2012 presidential elections, the day of reckoning is approaching. Local governments, having entered into a Faustian bargain with the public employees unions, are finding it impossible to meet the incredibly generous compensation and retirement promises they have made in exchange for political support without massive tax increases, service reductions, or both. Ad to all of this the approaching tsunami of entitlement spending and future economic prospects look challenging to say the least.

Of course, it has always been a bad idea to bet against the American people. As D.H. Lawrence observed, "The essential American soul is hard, isolate, stoic and a killer. It has never yet melted". The question is whether that hard, independent American archetype still exists or whether it has been so diluted by mass immigration and socialist indoctrination that as P.J. O'Rourke recently commented, we have become "a nation of moochers". Time will tell.

Enjoy your "hope and change" for the next couple of years, you'll be paying for it for the rest of your lives.

At 4/10/2009 2:13 PM, Blogger Dave Narby said...

Oh, please! This article is 9 days too late (check the month and date).

The banks are insolvent and will need hundreds of billions more in bailouts.

Everything Bush did, and Obama did and is threatening to do, is wrong.

We are turning Japanese.

At 4/10/2009 2:16 PM, Blogger bobble said...

smoke and mirrors, as usual. banks have been doing this every quarter.

Wells is under-reserving loan losses. they need to raise capital right now, so they are pushing recognition of loan losses into the future in order to appear stronger than they are.

"This shows the ratio of loan loss reserves/total loans at the four major U.S. banks still standing. Wells Fargo is in white. Notice anything? You know, like [Wells Fargo] is comparatively weakest on reserving activity against its loan book?

This chart doesn’t include updated Q1 numbers for Wells, as the bank did not provide an updated loan total on Wednesday — meaning it doesn’t include Wachovia. Historically, Wells has justified its lower reserves by maintaining a comparatively higher-quality loan book; can the same argument really be made now? With Wachovia’s option ARMs lurking? Because there’s an ugly truth about credit costs: they come home to roost eventually, irrespective of any games played with loss reserves in the interim."

At 4/10/2009 2:47 PM, Anonymous Anonymous said...

If it was in Time then I believe it--NOT.
Cramer liked the news as well. Convinced yet?
Phila Inquirer offered this re W-F--

But what Wells Fargo isn't telling us has some bank-watchers worried. "While the market is reacting favorably... we remain cautions based on what we don't know," writes analyst Paul J. Miller Jr. and his colleagues at FBR Capital Markets & Co., Arlington, Va., in a report to clients this morning. "We believe that credit quality materially deteriorated in the first quarter, and that Wells Fargo is under-reserving for expected future losses."

What WFC isn't telling, according to Miller: "What happened to nonperforming loans, and what would have been net charge-offs excluding purchase-accounting adjustments? What are the trends" in West Coast mortgage write-offs? "Was there any benefit" from the Financial Accounting Standards Board's new watered-down mark-to-market rules?... We hope these questions will be answered when the company reports results on April 22."

At 4/10/2009 10:19 PM, Blogger marketdoc said...

It used to be that "a million dollars" could buy something. Now, nobody takes Washington seriously unless they include a couple hundred billion in a rescue plan. Question... What happens when all of those properties which back the so-called toxic loans begin selling for a profit? Someone is getting a great deal by picking these up for pennies on the dollar right now.


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