The Bankwatch

Fewer than half of consumers would  switch to smart cards according to a “survey” by  terminal makers Ingenico. They arrive at the conclusion based on surveying people using the cards.

There is an enormous gap between use of cards, and the benefits of the cards.  The simple truth is that people do not associate any benefits with the switch to the smarter cards.

Convenience to drive contactless uptake, but consumers still need convincing | finextra

Convenience, rather than security, will be the driving force behind the UK adopting new payment methods, according to a survey of 1000 British consumers conducted on behalf of Ingenico.

In a fascinatingly shrewd move the Administration has tied the auto crisis and the banking crisis together by appointing a panel to oversee the “revamping” and that panel is chaired by Treasury Secretary Geithner – who obviously also has accountability for the banks.

This makes eminent sense.

To Fix Detroit, Obama Is Said to Drop Plan for ‘Car Czar’ | NY Times

DETROIT — President Obama has dropped the idea of appointing a single, powerful “car czar” to oversee the revamping of General Motors and Chrysler and will instead keep the politically delicate task in the hands of his most senior economic advisers, a top administration official said Sunday night.

This is much talk these days of the decline of the United States and a fundamental reshaping of relative world economic clout.

It is worthwhile to reflect on the current size of economies before such claims are made. This rambling piece from Richard Florida that I thought was going to deal with the decline of America, actually ends up making the case that the impacts on US cities will be significant.  Of that there is little doubt, but the example of Detroit may not be the best to make the point (the Phoenix example is a better one).

Detroit has had and survived at least four sets of signifcant rioting with manufacturing issues at the core, amplified by race issues.

This from the Pittsburgh News in Oct 1933 during the depression.

Indeed it is worth clicking through and reading of this particular event.

“A factory manager at one plant fired several shots as the mob approached the place, but said he aimed over the heads of the rioters”

What can I say.  The history of the US is all about survival and moving ahead despite setbacks – but I digress.  America cannot be “mis’underestimated.

Here is the GDP ranking of the world.  Bear in mind that 2% shifts in GDP are considered gigantic.  If the US economy reduced by an impossible 50% it would remain 50% larger than the next largest.  [I am aware that there has recently been reported a shift in the top 4 rankings, but the point I am making does not change]

Gross domestic product 2007 | World Bank

Ranking Economy US dollars [000's]
1 United States 13,811,200
2 Japan                 4,376,705
3 Germany           3,297,233
4 China                 3,280,053
5 UK                      2,727,806
6 France                2,562,288
7 Italy                   2,107,481
8 Spain                 1,429,226
9 Canada              1,326,376
10 Brazil              1,314,170

There will be serious impacts, the economies of the world will be dramatically different after this event we are all part of, but i maintain the ability of the US to come back is unfathomable compared to the rest of the world. The nearest hope would be the EU if only by size, but while they try to re-architect using 20th century thinking, the US has little to fear.

I do worry about the debt levels in the world [The Great Unwinding], reflected in the banking system.  The pending impact of revaluation of that debt to accomodate new asset values will be enormous, and not seen since some of the events in the 17th and 18th centuries.   When the dust settles on that score there will be impacts on countries, exchange rates, and inflation/ deflation within those countries – impacts I am not qualified to predict, but they will come.

Fascinating talk by Umair Haque at a conference in Sweden.  His topic is the future of business and the failure of business strategy.  it is long, but worthwhile.  Would love to get a hold of the deck, and if i do will attach.

He speaks of new principles for corporate DNA:  and the Laws of Constructive Capitalism:

1. Strategy is a commodity
2. Competition is obsolete
3. There is nothing more asymmetrical than an ideal
4. Tomorrow is today
5. Connections not transactions
6. People not product
7. Creativity, not productivity
8. Outcomes, not incomes
9. Advantage is in the DNA
10. The next revolution is institutional

Daytona Sessions

Umair Haque @ Daytona Sessions vol. 2 – Constructive Capitalism from Daytona Sessions on Vimeo.

In keeping with the theme that bank assets need to be properly valued before confidence can be returned to the system, this piece summarises the next immediate problem.  As you read this, bear in mind that the American system for most states employ the non-recourse system.  This little known implication just came known to me recently, and further explains the extent of the fear on bank asset value.  Non-recourse means the homeowner can walk away from a home where the mortgage exceeds the home value with no recourse from the bank back to that homeowner for the shortfall.  This is quite different than other countries, and frankly an insane provision for a rational economy.

Decay is spreading to the upper floors of America’s mortgage market | economist

The sums involved are depressingly large. In the worst case, losses on the $600 billion of securitised Alt-A debt outstanding—roughly the same as the stock of subprime securities—could reach $150 billion, reckons David Watts of CreditSights, a research firm. Analysts at Goldman Sachs put possible write-downs on the $1.3 trillion of total Alt-A debt—including both securitised and unsecuritised loans—at $600 billion, almost as much as expected subprime losses. Add in option ARMs, a particularly virulent type of adjustable-rate loan, many of which are essentially the same as Alt-A, and the potential hit climbs towards $1 trillion.

The amounts are alarming.  Bear in mind these amounts will also have been securitised and purchased by banks elsewhere.  The above statistics suggest that even Roubini’s estimate (courtesy of John Maudlin)  of 50- 60% of US bank assets being bad could in fact be optimistic.

This is the challenge facing Geithner, and his preparatory words to Congress and G7 this week suggests to me he understands the extent of the challenge.

The prediction from December is unfortunately coming true.  It is time for the politicians to open their eyes – GM was losing money in 2004, and essentially bankrupt in 2006.  those were the supposed good years.  The matter of GM is not a credit crisis matter, rather a matter of bad management, that deserves the obvious fate.  As far back as 2006 GM’s liabilities exceeded assets by $6bn.  By 2008 the deficit was $60bn.

The company is attempting to use the economic crisis as a smokescreen for their own deficiencies, and failure to re-engineer.

GM to Offer Two Choices: Bankruptcy or More Aid | Wall St Journal

General Motors Corp., nearing a federally imposed deadline to present a restructuring plan, will offer the government two costly alternatives: commit billions more in bailout money to fund the company’s operations, or provide financial backing as part of a bankruptcy filing, said people familiar with GM’s thinking.

This is yet another staggerring development that leaves only one simple and obvious conclusion.

Bank assets must be valued to market value immediately.  The argument that the market cannot withstand the result which would of crouse imply enormous writedowns, probably beyond that which will be the ultimate result, but the argument to wait is no longer valid.  Banks have already been written down close to zero on the stock market in any event.

Banks value their loan write downs based on historic data.  These times are an exception.  Time to predict based on locations, and job types – the result will be a catastrophic write down, but when proven wrong those write offs can always be pulled back into income later.  Better that conservative approach than the current death by a thousand cuts that will never permit return of confidence to the banking sector.

In all seriousness, clearly there is a need to manage the communication of the result carefully, and this can only be accomplished with some form of Government assistance and guarantees in order to maintain orderliness in the markets while the asset revaluation is accomplished.

Then and only then, will there be a way forward working from an established and known base.

Lloyds hit by £10bn HBOS losses | ft.com

Investor confidence in Lloyds Banking Group was shaken further Friday after it warned that the newly acquired HBOS had suffered a worse-than-expected £10bn loss in 2008, triggering a share price collapse for the combined bank.

The always clear thinking Fareed wrote this piece on the Canadian Banking system and how it is the envy of the world.  The facts outlined are indisputable and the distinctions between the US and Canadian systems that favour care and moderation in Canada are all true.

However there is one other event he does not mention, that has quietly gone on for the last 14 months and in fact just completed in January this year with the announcement noted below on the E&Y site dated Jan 21st, 2009.

The story here goes back to December 2007, when I first noted it here.  At that time the Canadian government strong armed the Banks in a prescient move to avert crisis in the Canadian component of the ABCP crisis. Recall that ABCP is lending by Canadian banks managed off balance sheet therefore not subject to capital requirements.

The arrangement in effect froze $25 Bn in Asset Backed Commercial Paper by transferring them into a series of trusts. [note this link is to a pdf on the E&Y site].  It explains ABCP, and explains the arrangement. In particular note this little gem on page 6 entitled “Alternative to the Plan”.  They have turned off copying so I saved the screen shot here, and typed the first few words …

The Investors Committee believes that failure of this plan would likely lead to the forced liquidation of billions of dollars in assets that back ABCP ….  the value of the affected ABCP in the context of a forced or voluntary sale is uncertain because there is currently no public market for the notes.

This financial trick was managed with the hesitant support of bank credit lines, and essentially (as I understand it) tooremoved the immediacy for settlement from the paper.  However that paper remains contingent off balance sheet debt of the Canadian Banks.

The reason I raise this now, is that the Fareed article suggests that Canadian Banks are perfect, but the Pan-Canadian Investors Committee manouvre hides part of that truth that ought to be factored into the picture for completeness.

Here are the equity bases of the Canadian Banks from Google Finance – how significant is the $32 Bn – you can judge for yourself.  In particular note that pre this arrangement, TD and I think one other were not engaged in ABCP as much, so the percentage would be much higher (worse) against those ABCP participating banks.

Royal    $ 31Bn

BMO     $ 19 Bn

Scotia   $ 22 Bn

TD         $ 32 Bn

CIBC    $ 14 Bn

$ 32 Bn as a percentage of $118 Bn = 27%

_________________________________________________________________________

Most recent update on the E&Y site relative to the euphemistically named Pan-Canadian Investors Committee.

Canadian Commercial Paper : Ernst & Young

Press Release
For Immediate Release
ABCP Restructuring Completed
Plan to Be Implemented on January 21, 2009
Toronto, January 16, 2009 – The Pan-Canadian Investors Committee for Third-Party Structured Asset-
Backed Commercial Paper is pleased to report that all of the principal legal documentation needed to
implement the restructuring plan affecting $32 billion of third-party ABCP has been finalized and is being
signed today by all of the necessary parties.
Final reconciliations and verifications are now being conducted and the Court-appointed Monitor is
expected to file the certificate required to implement the Plan and complete the closing on January 21,
2009.
- 30 -

For further information:
MEDIA
NATIONAL Public Relations
Toronto Montreal
David Weiner Roch Landriault
Tel. (416) 848-1633 Tel. (514) 843-2345
Cell: (416) 931-4633 Cell: (514) 249-4537
INVESTORS
Ernst & Young Inc.
Pierre Laporte
Tel. (514) 874-4383
GOODMANS\\5676758.1

Ms Legarde was a bright star and clear thinker at the recent World Economic Forum.  There is not yet broad agreement on the methodology and priorities amongs the countries as to resolve the global crisis.

In another interview she offers some indication of how globalisation actually works, and the comparison of UK and US approaches is stark.  There is a long history between UK and France, and now is not the time to let that get in the way.

Transcript – Christine Lagarde – Finance Minister – France | ft.com

BH: Are they retreating in Washington and London?

CL: I cannot put my finger on it. It is latent, it is everywhere. And understandably so. Resuming lending is a priority and stimulating growth is an everyday objective because we want to maintain stable employment and stop the fall. But it is a question of a methodical approach. If we don’t start at the root cause of what started this crisis, then we are curing the symptoms and not necessarily the illness itself.

BH: Gordon Brown wants make the global economy the centrepiece of G20 rather than the regulatory agenda?

CL: I’m not denying that he has a very fair point about the co-ordination of economic policies. Alistair [Darling, UK chancellor of the exchequer] made a point in today’s Handelsblatt, and he’s right. I totally agree with him. We need much more co-ordination. Otherwise we’ll get back to the post-Asian crisis, where by diluting the message and retreating from the causes, we’ll be curing the symptoms.

BH: Has European co-ordination fallen apart after the initial bank rescue plan in October?

CL: I hope we can continue to have a line drawn between distressed banks and sound banks and that in any event we are mindful of distorting effects that could result from one approach rather than another. In that vein, the bad bank principle, to the extent that it pretty much protects the shareholders by holding bad assets separately to the normal operations of the bank, is a bit of a query.

In the main, we worked together on the same doctrine, prompted by the Lehman collapse and the Irish approach to protecting deposits in Ireland.

There is not always a lot of consultation.

In a separate interview:

She also chided Alistair Darling, the UK chancellor, who appealed for greater co-ordination in a German interview on Thursday. Ms Lagarde pointed out that whereas Tim Geithner, the US Treasury secretary, called his French counterpart before unveiling his financial rescue package this week, Mr Darling did not consult before going ahead with his latest bank bail-out package last month.