This is very stressful - not!

The stress test white paper many were eagerly anticipating is perhaps not quite what they expected or wanted. By most accounts it is worthless. Accordingly, we need to await the actual results on May 4th. Let me give you a secret - they will be worthless too. Just giving you a head start on what to expect.



http://www.bloomberg.com/apps/news?pid=20601087&sid=aM3ONm5cSMK8&refer=home

Cautious Optimism in the Headlines

Lately headlines have been a bit more upbeat but not 100%.

First, let's start with the administration, which had a bit less positive spin. Its head economic guru, Summers, sees the bad times keeping their grip for a bit longer than most others seem to now be forecasting. I think his prediction is light, but better than many others predicting we have turned the corner:

http://www.bloomberg.com/apps/news?pid=20601087&sid=a9sjzp1FKCmY&refer=home

Next, on the positive side, banks - flush with taxpayer money (and with a gun to their heads) are lending to each other again. Funny how the government basically guaranteeing their solvency gets the credit flowing again.

Another bright spot is that inventory levels are down. That bodes well for the future - at least at some point.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aA7bRErDqlPE&refer=home

Overall, I admit these are cautiously optimistic signs. But for foreclosures, job losses, housing not at a bottom and all those other countries out there sucking wind, I would think we were at a bottom. Not there yet in my opinion, but definitely closer.

Disclosures: None.

How Stessful is a Stress Test?

Here is an interesting link on the "stress tests" being conducted by the government. I prefer to call them the "non-stress tests" but let's assume they are what they are represented to be. One of the key measures supposedly being tested is tangible capital equity ("TCE"). What the heck is that, you might ask. I initially asked the same question as I do environmental law and in that world TCE is a degreasing chemical that is polluting a good bit of this country's groundwater. Nonetheless, this TCE is something different.

TCE in a financial sense is a measure that looks at how much common equity is supporting a company, which ignores things like goodwill, which these days may not be worth much. In other words, it has more meaning in economically depressed times than some other measures. The problem is, there is no clearly defined way to define TCE, the government definition may be too lax, and the each company gets to do their own definition and calculation. The following link has a very nice chart on how some companies are perhaps overstating their TCE. Guess which head the list? The usual suspects. Wells Fargo leads the crowd by overestimating TCE 146% - according to the linked article. I am not sure the criteria used to build the chart in the attached but I trust the source.
And as the article notes, for all companies some off balance sheet assets are not included.

The biggest playground for me in the linked chart is the last category for level 2 & 3 assets as a percentage of TCE. To be clear, level 2 is "mark to model" over which there is a good bit of discretion by the bank and level 3, which is pretty much mark it to whatever in the hell you can justify. So, for example, Wells Fargo, in addition to the overstatement noted above, has level 2&3 assets that are a multiple of 24 times their TCE. This, of course, pales in comparison to Citigroup at 66 times or Bank of America at 38 times. Do we have something to hide? Me thinks so. Will the stress tests cause these banks to raise their kimonos and reveal the truth, I think not. We will see what the stress test results reveal. I suspect nothing of value.

http://www.nakedcapitalism.com/2009/04/guest-post-handicapping-stress-test-tce.html

Now Number 29

Bank failures 26, 27, 28 and 29 are here for the year (and another credit union down too). Frankly, the number should be higher and should include some more significant banks - but for the alphabet soup of government programs designed to avoid a major bank failure - apparently at any cost. Still, four banks down this week is a up-tick.

http://www.calculatedriskblog.com/2009/04/bank-failure-29-first-bank-of-idaho-fsb.html

Disclosures: None.

This is Staggering!!

If this is true - and it is being reported by Bloomberg- it is staggering. If this is true, Paulson forced Bank of America to acquire Merill Lynch & Co. or else the senior management and officers or Bank of America would be replaced. This is all according to Andrew Cuomo. If he is right, this is a major Class A scandal.

There are far too many details for me to repeat here, but please follow this link to more information. It is well worth the read. This could become very interesting and I will be happy to watch from the sidelines. I am cheering for Cuomo to set some records straight.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aVnL7XywRK1A&refer=home

Long Day - No Disclosures.

Mortgage Defaults Have Reached Bottom - NOT

Couple of points here. First, subprime is near or at a bottom. That is the good news. The bad news is that the dollars loaned in prime and Alt-A far exceed subprime and the dollars in delinquency on these loans now outstrip the dollars on defaulting subprime - go figure. Second, just when you think the worst might be past, mortgage defaults are setting new records in California.

http://www.calculatedriskblog.com/2009/04/dataquick-mortgage-defaults-hit-record.html

As I noted yesterday, big bank profits seem to be driven by some short term boosts and machinations. As the linked article notes, loan losses continue, as are CRE and credit card and other loan losses. Loan defaults
are at record levels in California (the link has an awesome chart). As I said yesterday, banks are in the eye of the storm. I continue to have that opinion.

http://www.nakedcapitalism.com/2009/04/guest-post-how-big-banks-earned-so-much.html

From Calculated Risk I am simply going to link their report on the IMF showing a world wide economic slump like nothing since the Great Depression.

http://www.calculatedriskblog.com/2009/04/imf-global-synchronized-cliff-diving.html

I admit that the government largess might lead to a short to medium term rebound even beyond what has already happened. To me the healthier market reaction is reaching the true bottom and growing from there. But that is in part on the government letting businesses and consumers reach their true bottom, which the government seems hell bent on not allowing. Unfortunately, there are true prospects of us building a new bubble. I do not think it has the legs to match the last one and I pray American consumers are wise enough not to bite, but there may be enough stimulus there to get us to a small to medium bubble, which could lead to a mid-term market recovery. I think this is the wrong route, but no one listens to me, so get used to it.

On the other hand, people might wake up to reality and the market could correct again. We could do what the economy needs to do and flush out all the toxic crap. Never mind, we have no patience for that. We are in for years of false recoveries and a gradual return to reality. This truly creates a difficult enviroment in which to invest. Last year was easy if you understood what was happening; just bet on things going down. This year is harder - at least for me because I do not believe any rally is sustainable.

Disclosures: None

The Eye of the Hurricane

Today Geithner came out and announced that the vast majority of banks have adequate capital to be considered well capitalized. OMG - pick me up off the floor. What a shocker that the government would tell us that banks are well capitalized. I am having flashbacks to Paulson and others telling us in 2008 how fine and dandy everything is and the American economy is strong.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=asTVO5RFuZ.Y

Well let me add a few considerations to the equation. First, for the major banks - you know the 19 getting fake stress tests - they definitely have adequate capital because we have given it to them with very few strings attached. So let me count the ways that the top 19 can - AND ARE ALLOWED IF NOT ENCOURAGED TO - to cook their books:

• first the FASB has changed mark-to-market accounting rules further enhancing the ability of banks to mark-to-fantasy. Transparency is out the window;
• I have read that AIG has been actively paying on and closing out CDS positions in the first quarter for 100 cents on the dollar with our money. I am not sure this is true but the TARP oversight folks have this in their sights for an investigation. If correct, the profit for these companies came straight out of our pockets;
• Banks are getting money for free or close to it so making money is nearly like printing money. This will not continue forever; and
• Most have some one time items on their books not likely to be repeated.

There is more here, but this is a good start.

Let's talk about the Stress Tests for a moment as the results are supposed to be made public in early May. As Nouriel Roubini points out, the base line for the tests is way off and even the worst case assumptions in many areas are already optimistic. It is a non-stress test, if you will. And of course they all will pass.

My bigger concern is turning to regional and local banks that for the most part are not at fault for our current problems. They are a good size. They are not too big to fail or too big to save. Just right. Yet many are going to go under because their competition in some markets - big banks - are getting billions in taxpayer funds to create unfair competition. Let me repeat - good banks will go under because we are supporting the banks that got us into this mess!!! This really really is getting me at the end of my rope. I am infuriated that we are doing this, creating massive moral hazard, supporting the idiots that created this situation and excusing it as a necessary evil. The necessary evil is the US Government. Beyond that these idiots need to be taken down and sold apart in pieces. Don't take my word for it, numerous very very prominent economists agree:

http://news.medill.northwestern.edu/washington/news.aspx?id=126671

So what is the health of the banking industry? Some of the big boys reported profit this past quarter based in part on refinancing. Yes, in some markets refinancing loans are the majority of new mortgage loans being completed. I am myself in the process of refinancing. With rates under 5% why not, if you can. So these banks are refinancing left and right for under 5% and they are generating some fees off of these. Hmmm.

This in my opinion is the eye of the hurricane. Banks are making false money on many fronts. They are in a calm eye of the storm. In time, we will return to more turbulent times.

What happens when the government pours literally trillions of dollars at fixing our economic ills? You got it - massive inflation. We are deflationary at the moment but in time, perhaps a year or two from now, this will all change. The inflation bubble will begin.

Let me put this to you in other terms. Let's consider what will happen in the next few years. I propose there are three basic scenarios as follows:

1. The economy - like Japan's lost decade - continues to crash and the banks that are refinancing face a new wave of foreclosures. Not good.
2. The economy stays flat. Let's say it is an "L" shaped recovery. The refinancing profits are a one time thing and the profit from doing them is over. Not good.
3. The economy takes off due to the stimulus, but the stimulus is so extreme that the inflation rate goes up to 5 - 10 -12%. How much money does a bank make on a 4.7% fixed rate loan if inflation goes to 10%? Not good (unless you are the homeowner with the 4.7% rate)

What I am saying is that the banks are not in the clear yet. And we are not there yet either. We are in the eye of this storm in my opinion. Hunker down!

Disclosures: None.

Don't Read Too Much Into It

The market went down - a lot - today, in keeping with my doom and gloom predictions. I simply thought, consistently, we are not to the bottom yet. I would like to think that today was my justification. Perhaps it is, but I am thinking in large part it is people taking profits. I do not think the depressing mood of early March has returned yet. Unfortunately, I think that mood will return at least one more time before it is all over with. Lest you wonder where I am coming from, the attached article tells you what I have been saying. I agree with pretty much every word of it.

http://www.thestar.com/Business/article/620504

Apparently the TARP does not like Critics

Elizabeth Warren is not a politician. Otherwise she would know she is commiting political suicide by her actions. Rather she is calling it like she sees it. We need more people like this. Unfortunately, don't hold your breath.

http://www.nakedcapitalism.com/2009/04/right-wing-turns-on-elizabeth-warren.html

That is all I have to offer at the moment. I have a boat load of stuff to read to catch up over the past few days and I want to read that before I do anything further here. So much to read, so little time.

Disclosures, None.

Radio Slience

I went to a rather tragic family funeral this weekend and have been unable to post much. Got back late so I am just doing one link because not a lot of time to do other reads justice. Here it is on real estate. In my view we do not bottom until real estate bottoms. My sense is that we are getting nearing real estate bottom, at least in some markets, but we will likely stay near the bottom for a while due to foreclosure sales continuing. The bottom could perhaps come next quarter and if not probably the next after that but this will be at best a U shaped bottom and perhaps an L for a while. Prime mortgage defaults and Alt-As are probably not peak yet, but in most markets I think we are getting close. We will see. Any hoot, I hope we are close.

http://www.calculatedriskblog.com/2009/04/housing-activity-forecast.html

Disclosures: None