Posts Tagged ‘geithner’
Some important messages within Geithners speech in China today that paint a very different next few years compared to the last 10, and as the ‘G2′ move to manage a transition the American economy into one that is very different, yet stable. And all this to be managed against the backdrop of the fear of eventual inflation, which would devalue foreign holdings in US T-Bills, something China is acutely aware of.
These macro factors will play a large role in US banks and credit unions strategy design for the next 5 years.
- no consumer purchase driven economy in US – with the implication of extended higher Government spending for some time to counter
- US consumers save (increasing savings accounts and paying down debt)
- China’s manufacturing supply is sold more and more within China, not Wal-Mart
In the United States, saving rates will have to increase, and the purchases of U.S. consumers cannot be as dominant a driver of growth as they have been in the past.
In China, as your leadership has recognized, growth that is sustainable growth will require a very substantial shift from external to domestic demand, from an investment and export intensive driven growth, to growth led by consumption. Strengthening domestic demand will also strengthen China’s ability to weather fluctuations in global supply and demand.
If we are successful on these respective paths, public and private saving in the United States will increase as recovery strengthens, and as this happens, our current account deficit will come down. And in China, domestic demand will rise at a faster rate than overall GDP, led by a gradual shift to higher rates of consumption.
Globally, recovery will have come more from a shift by high saving economies to stronger domestic demand and less from the American consumer.
As we watch for bank stress test results in the US and other countries efforts to deal with Banks’ asset valuation and capital levels, its useful to keep a track on the economic back drop, and assess the bank’s efforts to address their real problem, which is over-valued assets.
The US stress tests specifically address the impact on banks under certain sets of future assumptions for economic growth and stability.
Spring forecasts 2009-2010 | European commission
The Commission forecasts a sharp contraction of the EU economy by 4% in 2009 (relative to a positive growth of 0.8% in 2008). Almost all EU countries are severely hit by the worsening of the financial crisis, the sharp global downturn and ongoing housing market corrections in some economies. However, with the impact of fiscal and monetary stimulus measures kicking in, growth is expected to regain some momentum in the course of 2010 (annual growth forecast for 2010 stands at -0.1%). Figures are essentially the same for the euro area as for the EU as a whole. These figures represent a significant downward revision compared to the autumn forecast and the interim forecast of January 2009.
So far the news is not good. We have US, Japan, and now EU all noting significant downward adjustments to their forecast for 2009. Magically, they all seem to agree 2010 will be just fine. 2010 aside, the consensus for the big three are 2009 GDP drops in the 4 % – 6+ % range.
Here is an extract of the baseline forecasts used by the Stress tests, contained in their methodology document for SCAP (Supervisory Capital Assessment Progam).
The short view is that the assumptions for GDP growth in 2009 are approximately 1/3 of the latest forecasts. Put another way 2009 is going to be 3 times worse than the forecast used in SCAP. This is only May, so one can only assume that on a probability scale the opportunity for additional downward revisions are as possible as any other prediction at this stage.
The debate amongst BofA, Citi and the government on whether they ought to raise $5Bn in capital is ridiculous, and counterproductive. As the economic forecasts show, the amounts required are not going to be debated in the $1 Bn range – this needs vision that produces 10′s or 100′s of billion in improvement such that the organisation can leap ahead of the economic crisis and look out 10 years, not 1 month, which seems to me to be the current landscape for banks.
Incidentally, to place $5Bn in perspective, Merrill Lynch paid out $3.6 bn in bonuses at the end of 2008. Geithner should not even take a phone call from any bank who wishes to discuss anything thats less than $20 bn. A debate over $5bn is ludicrous.
All this to say, that banks are stuck in a classic rat hole and surrounded. Which bank and which leader will step up with vision for the future that carries banks on beyond 2011?
Relevance to Bankwatch:
Banks need to take a leaf out of Sergio Marchionne, Fiat chief executive’s book. He is in Germany this morning proposing a deal that will take advantage of the current climate, and look to take advantage of infrastructure provided by Vauxhall, Chrysler, Opel and Fiat to structure an effective platform around car types that consumers actually want and need, ie smaller, cheaper and more efficient. Already he is getting positive reaction to his plan, and these meetings only took place today (Monday).
He hopes to complete the transaction by the end of May, and list shares of the new company, tentatively called Fiat/Opel, by the end of the summer.
Mr Marchionne said Fiat and Opel would reap synergies of €1bn a year by merging their small B and midsize C segment car platforms, and absorbing Fiat’s ultra-small A platform and Opel’s upper-middle D platform.
Note the timing – he is going to do this in one month. This new conglomorate will involve hard decisions and layoffs. This is the hard reality of the adjustment required for the new economy. Getting through the crisis is not a return to 2007. It is a fundamental shift to a smaller and different economy.
Where are the bank visionaries now? Are they becoming so bogged down worrying about beaurocratic discussions with their new government masters and defending bonuses and perks that they have lost sight of the real goal?
The only word for this document is breathtaking. It is breathtaking because it touches a large amount of the US economy, and the largest businesses in the economy. It deals with:
- Auto sector
- executive compensation
- Executive replacement
- ‘luxury’ purchases, (eg corporate jets)
- SIGTARP administration
And the detail contained in the 247 pages is work that is substantially net new since January this year. I say this in defence of Geithner, and his quiet approach at first. He has been rather busy. But to the report to Congress today.
Summary of Geithners testimony at FT. He descirbes the Stress test results as mixed. A quick review of the report tells me that the answer is not captured in a sentence, so have to dig further to find out what mixed means.
Tim Geithner acknowledged that evidence of improved liquidity as a result of the bank bail-out was “mixed”, but defended the $700bn troubled assets relief programme against charges that it gave an easy ride to the financial sector.
Appearing before a Congressional oversight panel on Tuesday, the Treasury secretary said interbank lending, corporate issuance and credit spreads showed signs of a thaw in credit. “To date, frankly, the evidence is mixed,” he said.
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.
This weeks leader in the Economist sums up my perspective well. Its not great that taxpayers have to include those pesky Wall Street types in the scheme to sort out the Banks, but its better than all the alternatives of flat out bankruptcy, flat out nationalisation, or doing nothing. Each of those three alternatives have significant knee jerk ramifications for US and the world economies.
Banks, and particularly US banks are perceived to be over-valued on their assets, and no amount of debate can cure that impression now. With asset values down by 60% (Equities) to 30% (real estate) its a safe bet there are some bad loans out there.
The Geithner approach will flush those out, and coupled with the stress testing under way right now, will bring back some elusive certainty to bank valuations, ergo the financial system.
Saving America’s banks | Economist
Hold your nose, however. Mr Geithner’s proposal is worth a try, not least because, as any leader at the Group of 20 summit in London next week will tell you, fixing American banks is one of America’s—and hence the world’s—most urgent economic priorities. However unpalatable it is to shower public largesse on big vulture funds, one of the few ways to see if there is any residual value in all the toxic waste left on the banks’ books is to induce someone to buy it. Without a subsidy, there are many reasons for private investors to hold back. Above all, they do not have the same information advantages as the seller, which is only too keen to offload the worst assets on its balance-sheet while hanging on to the good stuff. The trouble is, the proposal barely has a hope unless banks agree to sell assets, and therein lies Mr Geithner’s unfinished task: arm-twisting them to do so. Many banks value their assets well above the prices they would fetch in an open (albeit illiquid) market. They have incentives to keep them there: the lower the price, the more capital they need to raise; in these capital-constrained times, that means the closer banks are to insolvency.
The head of the IMF continues to rightly focus on the need to clean up bank balance sheets. To ignore them remains a central cause of lack of confidence which will hinders economic prospects due to the uncertainty caused by doubtful asset values.
The more reason to adopt and move forward with Geithners measures right away.
Hard times call for hard measures | Financial Times
While there is no doubt that the forces for recovery are powerful, risks remain. Dominique Strauss Kahn, managing director of the IMF, told the Financial Times yesterday he expects recovery during the first half of 2010, “but the big ‘if’ is the speed of the cleaning up of [bank] balance sheets”.
Andrew Haldane, Executive Director for Financial Stability, Bank of England diagnoses the failure of bank stress tesing in this speech given at the Marcus-Evans Conference on Stress-Testing. He speaks of the Oct 87 crash, the LCTM hedge fund 98 failure as well as the 2007/8 crash.
Why Banks Failed the Stress Test: Bank of England pdf
He sees three categories of failure:
Essentially this is positive thinking that increases the longer since the last disaster. He only somewhat jokingly wonders whether “10 years is the threshold heuristic for risk managers.”
He speaks of the financial system as a network of connected parties. “When assessing nodal risk, it is not enough to know your counterpart; you need to know your counterparty’s counterparty.”
“Financial innovation lengthened the informational chain from ultimate borrower to end-investor. The resulting game of Chinese whispers meant that, by the time information had reached the investors at the end of the chain, it was seriously impaired”
“There was absolutely no incentive for individuals or teams to run sever stress tests and show those to management”.
He draws on the recent experience at HBOS whereby the whistleblower who dared suggest the bank was growing too fast was summarily fired by Sir James Crosby. Sir James went on to become deputy head of the FSA and advisor to Gordon Brown till he was forced to resign last week.
Based on work at the FSA and is own assessments, he puts forward a five point plan:
- Set a stress scenario that is sufficiently extreme
- Regularly evaluate the scenarios
- Keep the process dynamic and iterative
- Translate the results into impact on bank liquidity and capital planning
- Employ transparency with the regulators and the financial markets
Finally, the charts contained in the appendix are illuminating showing one view that indicates the ‘golden decade’ of 1998 – 2007 was sufficiently out of sync with the period 1857 – 2007 to indicate imminent disaster. While this is armchair economist thinking, it is sobering to realise that this is based on the same data that was available to us all during the last 10 years. The first problem of ‘disaster myopia’ is very real.
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.
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.
In something that is a bit ironic, the Democratic US government is looking the most conservative in management of banks amongst the G-7 scheduled next week in Italy. Geithner is also looking the most thoughtful of the finance ministers, alongside Lagarde in France.
This is seriously not a time for grandstanding as Brown and Darling continue to do too often. Time to get it right with a sustainable approach that will not relegate banks to becoming permanent financial utilities which I fear is happening when you read this dire summary of the current state.
Could we have a system in the future that has the private (and presumably innovative) banks existing only in North America?
Ireland injected €7 billion, or $9 billion, into its two largest banks Wednesday. In return, it gained the right to appoint four directors, limit executive pay, set lending parameters, require the suspension of home foreclosures, as well as an option to buy a 25 percent equity stake at fire sale prices some time in the future. The government already owns 75 percent of Anglo Irish bank.
In Britain, four of the most troubled financial institutions — two of them were officially nationalized — are already under the de facto control of a newly formed government holding company.
Officials are pushing Lloyds Bank and the Royal Bank of Scotland, among others, to pare bonuses and increase lending to British homeowners and businesses.
Both countries’ actions conform to a growing sense in Europe that the best way to revive banks is to put them on the tightest possible leash. But in an interview in advance of the Friday and Saturday G-7 meetings, a senior Treasury official reiterated that the Obama administration is committed to the proposition that banks must remain in private hands.
Two minutes to go – running a little late. This set of announcements to talk about the plans for the remaining $250 Bn TARP money.
Expect to see these dramatic developments.
- A public / private investment fund
- a new pre-requisite requirement for banks before receiving for government aid
- major expansion to consumer / business lending programme
I will update this post every few minutes.
Here we go. Sen Chris Dodd, D Banking, Housing and Urban Affairs Committee Chairman introduces Geithner.
Treasury Department Financial Markets Assistance Plan.
Notes listening to him:
“Introduction has talked about unfreezing credit 5 times – interesting that is the focus. Anyhow here is Geithner.
Economic strength is derived from the makers and do-oers of things. The financial system is central to that process, finance for first home and new car. Immediately speaking on new credit.
Credit markets are not working – borrowing costs risen sharply.
Many banks are reducing lending and tightening terms. Referring to job losses, demand dropping. Trade between nations drying up. Credit worthy borrowers having trouble. Financial ssystme working against recovery and against banks.
Unless we restore the flow of credit problem will be deeper. Today as Congress passes the stimulus we are implementing the market assistance plan.
banks and investors took risks they did not understand. Systematic failures by Board of Directors, and Rating Agencies. Insufficient constraints to limit risk. These failures laid the groundwork for the worst crisis in generations. The emergency actions taken so far have added to anxiety and failed.
Las fall Congress acted quickly and pulled the system back from the edge of catastrophic failure and were essential but inadequate. Distrust has turned to anger as senior execs – lavish perks. American people have lost faith in leaders of fincancial institutions. This has to change.
Policy has to be comprehensive and forceful. Not gradualism. Must be sustained until recovery is established. In Japan etc governments applied the brakes too early. We cannot make that mistake.
Need transparency to see the impact of those investments. Must support not replace private capital. US must send a clear message to replace the current programme with a new one to support recovery.
The Dept of Treasury and Finance Reserve must work together but we are one government serving the American people.
Here is what we will do. financialstability.gov - Site setup underway. There is a link 02/10/2009 – Financial Stability Plan Fact Sheet that goes nowhere. Link now live. This is work in progress as we post.
Talking a lot about transparency to American people.
1. Stress test for Banks. Consistent review of Banks balance sheets. New funding mechanism. Every dollar will generate a level of lending, New Trust to manage. [Need to understand better]
2. Financing for bad assets. Private capital and market managers to manage these assets. A programme. $1 trillion in capacity – beginning at $500 bn.
3. Jointly with the Federal Reserve kick start lending and get credit flowing again.
Housing: some borrowed beyond their means. Government should have moved more forcefully. Houseing prices fall, and we should find a new balance, but foreclosures and deepening crisis mean we must do something. Focus will be to bring down mortgage payments and mortgage interst rates. Next couple of weeks.
Working in preparation for London G20 in April. International co-operation on regulation.
Wrapping up now. His speaking style is very direct clear, and no hesitation. However he is not taking questions. Thats weird.
Relevance to Bankwatch:
The messages above clearly add to notion of highly regulated banks. The stress test remarks mean that banks will be under direct scrutiny and intervention. Financial utilities are coming closer to fruition.
It appears that in the the internal debates between Obama’s aids and Geithner (thanks @modernmod) that Geithner was able to introduce some compromises that are critical. The stress test 9refer below) appears to be a pro-active measure that allows the government to step in and insist on banks taking capital in the form of preferred share injections. This with a view to retaining confidence in the banking system. The compromise is that they are first of all preferred and not common shares. Secondly they will be managed through a trust that is handled by private instment managers, and will be supported by private capital.
The 64 thousand dollar question remains to what extent those private managers will be directed by politics and political intervention. This becomes important as we see banks that would otherwise be bankrupt, continue to operate with this quasi government support. Again the important point will be the resulting motivation of the Banks’ managers and the impacts on the customers. As we progress towards the notion of banks managing government arranged and guaranteed loan programmes the notion of financial utilities comes ever closer.
Here is an extract from the online version outlining the Bank stress test and trust mechanisms.
Financial Stability Trust: A key aspect of the Financial Stability Plan is an effort to strengthen our financial institutions so that they have the ability to support recovery. This Financial Stability Trust includes:
A Comprehensive Stress Test: A Forward Looking Assessment of What Banks Need to Keep Lending Even Through a Severe Economic Downturn: Today, uncertainty about the real value of distressed assets and the ability of borrowers to repay loans as well as uncertainty as to whether some financial institutions have the capital required to weather a continued decline in the economy have caused both a dramatic slowdown in lending and a decline in the confidence required for the private sector to make much needed equity investments in our major financial institutions. The Financial Stability Plan will seek to respond to these challenges with:
Increased Transparency and Disclosure: Increased transparency will facilitate a more effective use of market discipline in financial markets. The Treasury Department will work with bank supervisors and the Securities and Exchange Commission and accounting standard setters in their efforts to improve public disclosure by banks. This effort will include measures to improve the disclosure of the exposures on bank balance sheets. In conducting these exercises, supervisors recognize the need not to adopt an overly conservative posture or take steps that could inappropriately constrain lending.
Coordinated, Accurate, and Realistic Assessment: All relevant financial regulators — the Federal Reserve, FDIC, OCC, and OTS — will work together in a coordinated way to bring more consistent, realistic and forward looking assessment of exposures on the balance sheet of financial institutions..
Forward Looking Assessment – Stress Test: A key component of the Capital Assistance Program is a forward looking comprehensive “stress test” that requires an assessment of whether major financial institutions have the capital necessary to continue lending and to absorb the potential losses that could result from a more severe decline in the economy than projected.
Requirement for $100 Billion-Plus Banks: All banking institutions with assets in excess of $100 billion will be required to participate in the coordinated supervisory review process and comprehensive stress test.
Capital Assistance Program: While banks will be encouraged to access private markets to raise any additional capital needed to establish this buffer, a financial institution that has undergone a comprehensive “stress test” will have access to a Treasury provided “capital buffer” to help absorb losses and serve as a bridge to receiving increased private capital. While most banks have strong capital positions, the Financial Stability Trust will provide a capital buffer that will: Operate as a form of “contingent equity” to ensure firms the capital strength to preserve or increase
lending in a worse than expected economic downturn. Firms will receive a preferred security investment from Treasury in convertible securities that they can convert into common equity if needed to preserve lending in a worse-than-expected economic environment. This convertible preferred security will carry a dividend to be specified later and a conversion price set at a modest discount from the prevailing level of the institution’s stock price as of February 9, 2009. Banking institutions with consolidated assets below $100 billion will also be eligible to obtain capital from the CAP after a supervisory review.
Financial Stability Trust: Any capital investments made by Treasury under the CAP will be placed in a separate entity – the Financial Stability Trust – set up to manage the government’s investments in US financial institutions.
Public-Private Investment Fund: One aspect of a full arsenal approach is the need to provide greater means for financial institutions to cleanse their balance sheets of what are often referred to as “legacy” assets. Many proposals designed to achieve this are complicated both by their sole reliance on public purchasing and the difficulties in pricing assets. Working together in partnership with the FDIC and the Federal Reserve, the Treasury Department will initiate a Public-Private Investment Fund that takes a new approach.
Public-Private Capital: This new program will be designed with a public-private financing component, which could involve putting public or private capital side-by-side and using public financing to leverage private capital on an initial scale of up to $500 billion, with the potential to expand up to $1 trillion.
Private Sector Pricing of Assets: Because the new program is designed to bring private sector equity contributions to make large-scale asset purchases, it not only minimizes public capital and maximizes private capital: it allows private sector buyers to determine the price for current troubled and previously illiquid assets