The Bankwatch

Tracking the consumer evolution of financial services

Posts Tagged ‘geithner

No consumer driven economy in US | Geithner in China

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.

  1. no consumer purchase driven economy in US – with the implication of extended higher Government spending for some time to counter
  2. US consumers save (increasing savings accounts and paying down debt)
  3. China’s manufacturing supply is sold more and more within China, not Wal-Mart

Speech by Secretary Geithner – The United States and China, Cooperating for Recovery and Growth

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.

Written by Colin Henderson

June 1, 2009 at 09:11

Posted in economy, US

Tagged with , , , ,

Where are the bank visionaries when we need them?

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.

spring-forecast-2009-publication15048_en [pdf]

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).

SCAP Economic Assumptions

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?

Written by Colin Henderson

May 4, 2009 at 09:09

SIGTARP report and report to Congress on stress tests | Apr 19th, 2009

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:

  1. Banks
  2. Auto sector
  3. executive compensation
  4. Executive replacement
  5. ‘luxury’ purchases, (eg corporate jets)
  6. 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.

The report sigtarp-april2009_quarterly_report_to_congress:   SIGTARP site.

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.

Written by Colin Henderson

April 21, 2009 at 12:42

Posted in Uncategorized

Tagged with , , ,

A lesson from Japan in management of toxic assets planning

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.

Written by Colin Henderson

April 4, 2009 at 12:05

“Hold your nose, however. Mr Geithner’s proposal is worth a try” | Geithner

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.

Written by Colin Henderson

April 1, 2009 at 23:04

“But the big ‘if’ is the speed of the cleaning up of [bank] balance sheets”

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”.

Written by Colin Henderson

April 1, 2009 at 22:07

Disaster Myopia and other causes of banks’ problems

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:

Disaster Myopia

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.”

Network externalities

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.”

Misaligned incentives

“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:

  1. Set a stress scenario that is sufficiently extreme
  2. Regularly evaluate the scenarios
  3. Keep the process dynamic and iterative
  4. Translate the results into impact on bank liquidity and capital planning
  5. 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.

Written by Colin Henderson

February 16, 2009 at 15:47

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