Loan-value Data Shows Ills Persist (double-dip)

Source: American Banker

The fair value of loans held by the nation's biggest banks continues to decline, indicating that credit markets have not yet turned around and raising serious questions about the effectiveness of the government's efforts to help the industry through the credit crisis.

In fact, among the banks that were stress-tested in May, the difference between carrying values and fair values grew 14.4% from Dec. 31 to June 30 — to $164.4 billion.

Observers said the data shows that it is getting even more difficult to find buyers for stressed loans and that banks' efforts to jettison bad assets could be delayed. And if the Financial Accounting Standards Board advances a sweeping mark-to-market proposal, some banks might have to raise more capital to close their valuation gaps.

"It is clearly a sign of stress that surprises me," said Tim Yeager, a finance professor at the University of Arkansas and a former economist at the St. Louis Federal Reserve Bank. "I thought by now that we would have turned the corner, but things seem to be getting worse."

Kevin Jacques, a former official at the Office of the Comptroller of the Currency who now is chairman of the finance department at Baldwin-Wallace College, agreed. "There is still difficulty moving assets," he said. "There is still talk of a double-dip recession; unemployment keeps rising, and there is concern over commercial real estate. Put it all together, and it is going to be really difficult to price these loans."

cont'd




Read more: http://www.americanbanker.com/issues/174_167/loan_value_data_shows_ills_persist-1001517-1.html

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OR as one predictor put it:

As I’ve said, this isn’t an ordinary recession: it’s a turning point in history comparable to the beginning of the Industrial Revolution and the system of finance capitalism that enabled it. The old order is frantically printing money, creating credit and ginning up one bubble after another to try and preserve the status quo. That’s how we get a rising stock market (with made-up money and bank bail-outs), increased auto sales (with government rebates) and home sales (with government first-time buyer payoffs). It’s how we keep unemployed workers from taking to the streets (with extended unemployment benefits, and 10% of the US population now on food stamps). All of this, of course, is being financed with borrowed money. At some point, one sees that the Emperor has no clothes...

It works for a time, because demand destruction caused by hard times around the world will keep inflation under control at first. But as the dollar is debased through government-directed capital spending and free-basing monetary policy, inflation begins to raise its head once more, wringing the last bit of savings out of the system. (Look at the interest you’re getting and tell me it isn’t true!)

By Matt Monks, American Banker
August 27, 2009

The number of U.S. banks could shrink by half in coming years, though a few stumbling blocks still are hindering much-needed consolidation. That was the consensus of analysts participating in an American Banker roundtable this month in New York.

Economic uncertainty and stringent new accounting rules have the healthiest banks wary of buying weakened rivals, they said. Also, the heads of struggling institutions are still unrealistic about their prospects for survival — but that may be changing as bank failures accelerate.

"This is going to take some time to work through and I think we're somewhat at the tip of the iceberg here," said Joseph H. Moeller, a managing director in the investment banking group at KBW Inc.'s Keefe, Bruyette & Woods Inc. "As some of the weaker banks see the guy next door failing they'll capitulate."

Consolidation is inevitable because there are simply too many banks in this country, Moeller and two other industry experts said. And those that emerge from the recession in relatively good shape won't be nearly as profitable as they were before the economy tanked. To survive in the long term, they are going to have to buy other companies to increase deposits and boost margins by eliminating redundant locations and back-office functions, among other things


"Our sense is that the pace of consolidation will accelerate from what we've seen. Over the last 20 years, the industry has gone from 16,000 banks down to 8,000 banks," said Mark Fitzgibbon, director of research at Sandler O'Neill & Partners LP. "We think the number will get cut in half again in the next five, so we'll go from 8,000 to 4,000 banks."

More than 80 banks have failed this year, and there have been few mergers outside of federally assisted deals...cont'd

http://www.bankinvestmentconsultant.com/news/ma-bank-halved-2663690-1.html



There was a barely disguised hint of things to come in a recent quote from Geitner.
Reading between the lines of Geitner's statement -

"Our system is not going to be significantly more concentrated than it is today," Geithner said. "And it's important to remember that even now, our system remains much less concentrated and will continue to provide more choice for consumers and businesses than any other major economy in the world."
http://www.washingtonpost.com/wp-dyn/content/article/2009/08/27/AR2009082704193.html

He seems to be suggesting that the current state of consolidation, which is substantial, is acceptable. And there may be a bit more to come. But hey, it's even better than what other countries have, so be happy!
He doesn't suggest that what has been done needs to be UNdone.
So it's my guess this was the plan all along.


Nothing sudden about this. This consolidation has been moving like a slow boat to China for some time. And perhaps this is simply indicative of the last sweep in a final attempt to ease into an entirely new and more global monetary system.
If you have the interest to pour through IMF/WTO and other white papers
it seems clear that there has been an ongoing debate as to whether there is greater "efficiency" in a "bigger is better" consolidation model or if that type of consolidation poses a greater threat exponentially to global financial security due to a 'the bigger they are, the harder they fall' theory and the risk that a failed giant takes huge parts of the world economy with them when/if they fall. Of course there is also the question of the inequalities of such an extreme heirarchy or Big Brother system that would result from such global conglomerations, but that issue never seems to be at the top or even ON their agendas or a subject of debate in their white papers.

It seems that the consolidation group has won for now, and those focused on a small- and-nimble and more easily regulated/monitored scenario have lost. Surprise! This, despite evidence that the 'bigger is better' group seem to have proven the other group's theory about the massive damage to the world economy upon failure. Unless the current 'failures' were just part of the consolidation plan.
(I posted several articles about these trends last Fall and can't seem to find them in a search of DU archives. But I've posted a couple below.)

And this question - IF they were planning on a massive global consolidation HOW would financial leaders go about achieving that? Would the result look something like what we're seeing now (massive bank failures, acquisitions, etc.)? A great deal of consolidation occurred already during the 90's though I can't imagine that they were all lawful under current Anti-trust laws.

White Papers:

The Dollars and Sense of Bank Consolidation

Abstract

For nearly two decades banks in the United States have consolidated in record numbers—in terms of both frequency and the size of the merging institutions. Rhoades (1996) hypothesizes that the main motivations were increased potential for geographic expansion created by changes in state laws regulating branching and a more favorable antitrust climate. To look for evidence of economic incentives to exploit these improved opportunities for consolidation, we examine how consolidation affects expected profit, the riskiness of profit, profit efficiency, market value, market-value efficiencies, and the risk of insolvency. Our estimates of expected profit, profit risk, and profit efficiency are based on a structural model of leveraged portfolio production that was estimated for a sample of highest-level U.S. bank holding companies in Hughes, Lang, Mester, and Moon (1996). Here, we also estimate two additional measures that gauge efficiency in terms of the market values of assets and of equity. Our findings suggest that the economic benefits of consolidation are strongest for those banks engaged in interstate expansion and, in particular, interstate expansion that diversifies banks' macroeconomic risk. Not only do these banks experience clear gains in their financial performance, but society also benefits from the enhanced bank safety that follows from this type of consolidation.

http://ideas.repec.org/p/wop/pennin/99-04.html
(scroll down page for many other papers on this topic)


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Summary: This paper documents global trends in bank activity, consolidation, internationalization, and financial firm conglomeration, and explores the extent to which financial firm risk and systemic risk potential in banking are related to consolidation and conglomeration. We find that while there is a substantial upward trend in conglomeration globally, consolidation and internationalization exhibit uneven patterns across world regions. Trends in consolidation and conglomeration indicate increased risk profiles for large, conglomerate financial firms, and higher levels of systemic risk potential for more concentrated banking systems. We outline research directions aimed at explaining why bank consolidation and conglomeration do not necessarily yield either safer financial firms or more resilient banking systems.

Author/Editor: De Nicoló, Gianni | Bartholomew, Philip F. | Zaman, Jahanara | Zephirin, M. G.
Authorized for Distribution: July 1, 2003

http://www.imf.org/external/pubs/cat/longres.cfm?sk=16607.0


Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

They're so cute when they're all surprised like that!

observations like these 'experts'.

of crazed creditors, many appear to be Chinese and Japanese, having been too locked into the free-trade scheme to "rock the boat", until now, as the boat has begun to sink...

Or can we keep them down below bailing away, as the seas get rougher and uncharted?

For how much longer?

Only the naive, and their bamboozlers, are claiming that our financial catastrophe is winding down and those supposed "green sprouts" are thriving.

I doubt any rosy forecast propaganda is likely to generate much traction, no matter how much the sheeple are encouraged to disbelieve their lying eyes.

Even the "cooked", "massaged", and invented stats promulgated by the government are horrible and trending negatively. Scary stuff!

Our "leaders" are hoping, and probably praying, that they can skew reality enough to convince the sheeple that everything is going to be better real soon, maybe next year...

Or the year after, 2011?

We will be hearing good news about 2012 soon.

Don't worry, be happy.

The future is not ours to see,

¿Que sera? ¿Sera?

What ever will be, will be.

because of their continual betrayal of average investors. We've entered a period of high, chronic unemployment, and sluggish to negative growth. Next will be the inflationary period, hopefully not in the hyperinflation category, but still very noticeable and painful to the average American. I have no doubt that this new "normal" will last for years and years. And all of this can be laid at the feet of Congress and a president who bought into the deregulation myth. Honestly, who in the hell believes that capitalists will regulate themselves? This is not 20/20 hindsight, this is known human behavior that has been proven countless times through the ages. The regulatory laws that were on the books were there for a reason, they were not a jobs program for regulators.

There are no "green shoots" that are not an illusion, generated by a short-term infusion of borrowed money.

:sarcasm: