The Bankwatch

As we await the results of the Federal Reserve Stress tests, the FDIC quarterly tells us much of what to expect.  This report is a roll up of all banks in the US, and it provides some interesting stats.  The numbers are broadly negative over the periods since 2002, and since last year.  Banks are highly levered, and at their most levered for the duration of the reporting periods back to 2002.

FDIC

The Quarterly Banking Profile is a quarterly publication that provides the earliest comprehensive summary of financial results for all FDIC-insured institutions.

• Capital – $ 1.3 Tn
• Loans  – $ 7.9 Tn
• Leverage – 7.49% (worst since 2002)
• # of banks 8,305 – note, only down 1,000 since 2002

The FT sums up the report, noting that we don’t have to await the stress test to realise the outcomes.  There will be some blood on the table before this exercise is over, and it will continue to keep banks eyes off customer and service development.

The banking system is severely undercapitalized, with numerous insolvent banks. Clearly a more robust banking system requires far more capital and a robust loan loss reserve adding to the capital cushion. Until the trillion plus of impaired assets are removed and the banking system is recapitalized, credit flows will be restricted. In this context, it is puzzling why the administration is tinkering at the fringes with programs designed to enrich Wall Street. Geithner and Summers need to address the banking problems square-on.

Netbanker notes the new MAsterCard ATM app for iphone.  Nice move by MasterCard to try out the new platform.

MasterCard Launches ATM Hunter iPhone App | Netbanker

A few weeks ago there wasn’t a single dedicated ATM finder in Apple’s App Store, now there are three, not counting the bank-branded versions (more on that below). MasterCard is the latest entrant with a cute app called ATM Hunter (see inset; iTunes link) launched six days ago.

The effect of low interest rates, low home prices, and elimination of ‘irrational’ lenders has paved the way for Wells, and likely the other recognised bank names to gather large amounts of new mortgage business in the US.

I would estimate that banks are not taking undue risks and have tightened credit policies, however this is precisely the moment for regulators to perform that double check as part of their stress testing, both to ensure no re-occurrence of 2007/8, and to assure the public that this is based on solid growth.

Incidentally that stress test result was due early in April and it was recently noted it has been delayed until late April until after the Bank’s results were announced.  There was speculation that the stress test results were not good – only speculation at this point.

Wall St jumps on mortgage resurgence | Globe and Mail

Yesterday, Wells Fargo & Co. WFC-N stunned investors by saying it expects to report a record profit of $3-billion (U.S.) in the first quarter, owing to a surge in its mortgage business. The bank said it handled $190-billion worth of mortgage applications in the quarter, up 64 per cent from the last quarter of 2008. In March alone, the San Francisco-based lender said it processed a record $83-billion worth of mortgage applications.

“We had incredible [mortgage] volume increases in the quarter,” said Howard Atkins, the bank’s chief financial officer. “People are buying homes.”

UPDATE:

From San Francisco Chronicle.  Some expectation management going on here, to avoid publishing the stress test results alongside earnings results.

Federal regulators have told the nation’s largest banks to keep quiet about their performance on government stress tests. They fear investors could punish companies with nothing to brag about.

In letters to the 19 banks undergoing tests of their financial strength, regulators told the companies not to disclose their performance during upcoming earnings announcements, according to industry and government officials who requested anonymity because they are not authorized to discuss the process.

Its a chilling example that the themes contained in the Homer-Dixon book The Upside of Down are happening with convergence of natural and human catastrophe bringing  results that will inevitably threaten world security and stability in unexpected ways.

Water cut off in Mexican capital | BBC

Mexico City officials have shut down a main pipeline providing fresh water to millions of residents because reserves have fallen to record low levels.

The closure, due to last 36 hours, will affect five million people, or a quarter of the city’s population.

Unusually low rainfall last year and major leakage are blamed for leaving reservoirs less than half full.

Thomas M. Hoenig, President and Chief Executive Officer, of the Kansas City Fed offers up some sobering and pragmatic advice for allowing market forces to deal with banks.

Success depends on failure| Kansas City Federal Reserve

The first principle is to properly understand our goals and correctly identify the problems we are attempting to solve. This may sound  obvious. However, when we are  in the middle of a crisis where more than a half million people are losing their jobs every month, it is tempting to pour money into the institutions thinking that it will correct the problem and get credit flowing once again. Also, rather than letting the market system objectively discipline the firms through failure and stockholder loss, we tend to micromanage the institutions and punish those within reach.

He goes on to identify a systematic approach to addressing the US bank situation based on the Continental Illinois failure in 1984 in which he was involved along with 347 other bank failures between 1982 and 1992.

Let me make two final points.
First, the debate over the resolution of the largest financial firms is often sensationalized because it is framed in terms of nationalizing failed institutions. It is also pointed out that government officials may not be effective managers of private business concerns.
In response, I would note that no firm would be nationalized in this program. Nationalization is the process of the government taking over a going concern with the intent of operating it. Though a bridge institution is the most likely outcome when a large financial firm fails, the goal is for the firm to be reprivatized as quickly as possible. In  addition, subject to regulatory agency oversight, the bridge firm would  be managed by private sector managers selected for their experience in operating well-run, large, complex organizations.
The second point is related to the complexity issue, which is that it would be hard to find enough people with the required knowledge, experience and skills to fill the open positions. Going back to the Continental Illinois example, we were able to do it then. More generally: The United States is a vast country with a tremendous amount of management resources in a broad-based economic and industrial system. If the United States does not have the talent to run these firms, then we are much worse off than I thought. I refuse to accept that conclusion.

An employee at Tokyo Mitsubishi UFJ (Tokyo, Japan) has been arrested, charged with stealing 1.5 million customer records, of which about 49,000 have been sold to criminal elements.  The remainder have been safely recovered.

Mitsubishi UFJ says 49,159 customer records leaked | Reuters

TOKYO, April 8 (Reuters) – Mitsubishi UFJ Financial Group’s (8306.T: Quote, Profile, Research) brokerage unit said on Wednesday records on 49,159 customers, including salary details, were leaked and sold to data list agents.

Data stolen included customers’ names, addresses, dates of birth, occupation and rough salary figures, the brokerage said. (Reporting by Junko Fujita)

This piece from Nasim, author of The Black Swan is simply too good a piece of advice not to replicate, with full attribution.  The first two points in particular are simply too precious.

The message – a debt crisis is the worst kind, and leverage is one of the worst of all bad economic situations.

Ten principles for a Black Swan-proof world | Financial Times

By Nassim Nicholas Taleb

Published: April 7 2009 20:02 | Last updated: April 7 2009 20:02

1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.

2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.

4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative”. Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards.

5. Counter-balance complexity with simplicity. Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products. The complex economy is already a form of leverage: the leverage of efficiency. Such systems survive thanks to slack and redundancy; adding debt produces wild and dangerous gyrations and leaves no room for error. Capitalism cannot avoid fads and bubbles: equity bubbles (as in 2000) have proved to be mild; debt bubbles are vicious.

6. Do not give children sticks of dynamite, even if they come with a warning . Complex derivatives need to be banned because nobody understands them and few are rational enough to know it. Citizens must be protected from themselves, from bankers selling them “hedging” products, and from gullible regulators who listen to economic theorists.

7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”. Cascading rumours are a product of complex systems. Governments cannot stop the rumours. Simply, we need to be in a position to shrug off rumours, be robust in the face of them.

8. Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is not homeopathy, it is denial. The debt crisis is not a temporary problem, it is a structural one. We need rehab.

9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require. Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control).

10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.

Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news.

In other words, a place more resistant to black swans.

The writer is a veteran trader, a distinguished professor at New York University’s Polytechnic Institute and the author of The Black Swan: The Impact of the Highly Improbable

Copyright The Financial Times Limited 2009

The normally quiet FSA is becoming proactive, taking advantage of the current climate to do deeper assessments of market participants.  In fact they are getting deliberately personal in assessment of market participants.

FSA steps up scrutiny in ‘get scary’ drive | FT

The Financial Services Authority is delving deeper into the pasts of those it supervises in what solicitors see as a crackdown that could lead to more companies and individuals being excluded from the market.

Executives and managers are being called for interviews more often, asked for more detail about their CVs and experience, and quizzed more closely on past problems, such as auditors’ qualifications to their companies’ accounts, lawyers said.

“There is definitely a sense that the FSA is becoming tougher on approvals,” said one solicitor. “Up until now it was more about excluding the obvious bad boys from the industry.” One recent public institutional casualty of the FSA’s vetting was Lithuania’s Bankas Snoras, which last month gave up its fight to be allowed to open a branch in Britain.

In a much anticipated upward revision of earlier forcasts, the IMF is expected to increase its estimate of toxic assets, that is loans that should be written off, to $ 4 trillion. The new forecast is expected 21st April, and reported today by The Times.

The forecast apparently will cover primarily US-originated assets but this forecast introduces European-originated assets.

This represents the most ocnsequential statement of evidence yet, that this is a debt crisis which must be resolved before other elements of the banking system will return to any degree of normality.

It will also require changes at the top in those banks that are the worst culprits.

Christian Caryl points out just how little Japan is both misunderstood and underestimated, particularly with regard to the 1989 bubble economy.  Feel free to read at your leisure.

Mr  Koizumi government too charge in getting the banks to clean up their act, and after that the economy responded with remarkable speed. By contrast, the present U.S. slump is the result of a culture of financial profligacy that enmeshed consumers and homeowners as well as major financial institutions

This lesson is one that must be considered as the PPPIP (Geithner) plan is implemented in the US, and European governments should take note as they waffle on the point.

Think Again: Japan’s Lost Decade | Foreign Policy

Policymakers hobbled by a dysfunctional political system dawdled for years when it came to cleaning up “zombie” companies (bankrupt in all but name) and getting financial institutions to dispose of toxic assets. That failure to take decisive action may have shaved points off Japan’s overall growth rates and ended up leaving the country saddled with enormous public debt (peaking at 175 percent of GDP by one recent measure). Yet, a push to force banks to shed their nonperforming loans under the government of Prime Minister Junichiro Koizumi starting in 2001 had notably positive effects on growth.