[patientrenter]

Allan,

Sorry about the confusing sentence. I read it over, saw it was confusing, and decided to be lazy and just post anyway. Bad idea.

I meant to say that most banks have equity that is less than 10% of their liabilities. Another way to say it is that assets are less than 110% of liabilities. In reality, the %’s are lower for most of the big banks. I just wanted to point out how thin the banks’ safety margins are. Their margins are designed to withstand shallower, or more scattered, downturns than the deep and broad one we have now.

A few might be lucky enough to withstand the downturn regardless (I am being generous here), but most of the ones that survive will probably do so only by virtue of superior current and future earning power, together with no worse than average initial negative equity, and booster shots of free money from taxpayers for the interim period.

Is there enough room in our economic future for very good earnings at 90-100% of today’s banks? I doubt it. I’d guess that we are overbanked by 20-40%. I am assuming here that the illusion of sustainable high investment yields that we experienced for many years now is dead for a couple of decades. That illusion helped make a lot of investment intermediaries look more valuable than they were. We could still get back to that illusion through persistently high inflation, and that is a real possibility, but I think even then the banks are going to have to shrink.

And the assumption I make about the current assets of many banks being less in value than their current liabilities? I am exposed in my line of work to valuations of various assets and liabilities, including the major IB valuations of large and varied bond portfolios, and I have my own sense of how the financial community is valuing certain assets versus what I can see on the ground, like any other Pigg (e.g. mortgages, commercial rents and vacancies, fiscal and trade deficit pressures etc). I see people living in two different worlds, each hoping the others are dreaming.

[patientrenter]

Allan,

Sorry about the confusing sentence. I read it over, saw it was confusing, and decided to be lazy and just post anyway. Bad idea.

I meant to say that most banks have equity that is less than 10% of their liabilities. Another way to say it is that assets are less than 110% of liabilities. In reality, the %’s are lower for most of the big banks. I just wanted to point out how thin the banks’ safety margins are. Their margins are designed to withstand shallower, or more scattered, downturns than the deep and broad one we have now.

A few might be lucky enough to withstand the downturn regardless (I am being generous here), but most of the ones that survive will probably do so only by virtue of superior current and future earning power, together with no worse than average initial negative equity, and booster shots of free money from taxpayers for the interim period.

Is there enough room in our economic future for very good earnings at 90-100% of today’s banks? I doubt it. I’d guess that we are overbanked by 20-40%. I am assuming here that the illusion of sustainable high investment yields that we experienced for many years now is dead for a couple of decades. That illusion helped make a lot of investment intermediaries look more valuable than they were. We could still get back to that illusion through persistently high inflation, and that is a real possibility, but I think even then the banks are going to have to shrink.

And the assumption I make about the current assets of many banks being less in value than their current liabilities? I am exposed in my line of work to valuations of various assets and liabilities, including the major IB valuations of large and varied bond portfolios, and I have my own sense of how the financial community is valuing certain assets versus what I can see on the ground, like any other Pigg (e.g. mortgages, commercial rents and vacancies, fiscal and trade deficit pressures etc). I see people living in two different worlds, each hoping the others are dreaming.

[patientrenter]

Allan,

Sorry about the confusing sentence. I read it over, saw it was confusing, and decided to be lazy and just post anyway. Bad idea.

I meant to say that most banks have equity that is less than 10% of their liabilities. Another way to say it is that assets are less than 110% of liabilities. In reality, the %’s are lower for most of the big banks. I just wanted to point out how thin the banks’ safety margins are. Their margins are designed to withstand shallower, or more scattered, downturns than the deep and broad one we have now.

A few might be lucky enough to withstand the downturn regardless (I am being generous here), but most of the ones that survive will probably do so only by virtue of superior current and future earning power, together with no worse than average initial negative equity, and booster shots of free money from taxpayers for the interim period.

Is there enough room in our economic future for very good earnings at 90-100% of today’s banks? I doubt it. I’d guess that we are overbanked by 20-40%. I am assuming here that the illusion of sustainable high investment yields that we experienced for many years now is dead for a couple of decades. That illusion helped make a lot of investment intermediaries look more valuable than they were. We could still get back to that illusion through persistently high inflation, and that is a real possibility, but I think even then the banks are going to have to shrink.

And the assumption I make about the current assets of many banks being less in value than their current liabilities? I am exposed in my line of work to valuations of various assets and liabilities, including the major IB valuations of large and varied bond portfolios, and I have my own sense of how the financial community is valuing certain assets versus what I can see on the ground, like any other Pigg (e.g. mortgages, commercial rents and vacancies, fiscal and trade deficit pressures etc). I see people living in two different worlds, each hoping the others are dreaming.

[patientrenter]

Allan,

Sorry about the confusing sentence. I read it over, saw it was confusing, and decided to be lazy and just post anyway. Bad idea.

I meant to say that most banks have equity that is less than 10% of their liabilities. Another way to say it is that assets are less than 110% of liabilities. In reality, the %’s are lower for most of the big banks. I just wanted to point out how thin the banks’ safety margins are. Their margins are designed to withstand shallower, or more scattered, downturns than the deep and broad one we have now.

A few might be lucky enough to withstand the downturn regardless (I am being generous here), but most of the ones that survive will probably do so only by virtue of superior current and future earning power, together with no worse than average initial negative equity, and booster shots of free money from taxpayers for the interim period.

Is there enough room in our economic future for very good earnings at 90-100% of today’s banks? I doubt it. I’d guess that we are overbanked by 20-40%. I am assuming here that the illusion of sustainable high investment yields that we experienced for many years now is dead for a couple of decades. That illusion helped make a lot of investment intermediaries look more valuable than they were. We could still get back to that illusion through persistently high inflation, and that is a real possibility, but I think even then the banks are going to have to shrink.

And the assumption I make about the current assets of many banks being less in value than their current liabilities? I am exposed in my line of work to valuations of various assets and liabilities, including the major IB valuations of large and varied bond portfolios, and I have my own sense of how the financial community is valuing certain assets versus what I can see on the ground, like any other Pigg (e.g. mortgages, commercial rents and vacancies, fiscal and trade deficit pressures etc). I see people living in two different worlds, each hoping the others are dreaming.

[patientrenter]

Most of the banks undergoing the stress tests have assets that are worth less than 10% more than their liabilities. With such a thin margin, to believe one of these banks is adequately capitalized you would have to believe that most of their loans can, and will, be repaid in full. Given how much of their loans were used to make purchases of homes or companies at the peak of the market, with little money put in by the ‘buyers’, it is very hard to believe that these banks really are solvent without taxpayer money being pumped in, directly or indirectly (by boosting the ‘market’ value of their assets, or guaranteeing repayment of the loans).

In brief, these tests are not credible unless a decent % of banks fail. At 10% (about 2 banks out of 19), I’d say the credibility is pretty marginal. At 40%, I’d say credibility is 100%, but the lobbyists and Larry and Tim would be very unhappy. It sure sounds like Larry and Tim actually hope to get away with none, or maybe one if they are pushed really hard. If so, they will have no credibility except with the less informed members of the general public (and some anxious industry insiders).

[patientrenter]

Most of the banks undergoing the stress tests have assets that are worth less than 10% more than their liabilities. With such a thin margin, to believe one of these banks is adequately capitalized you would have to believe that most of their loans can, and will, be repaid in full. Given how much of their loans were used to make purchases of homes or companies at the peak of the market, with little money put in by the ‘buyers’, it is very hard to believe that these banks really are solvent without taxpayer money being pumped in, directly or indirectly (by boosting the ‘market’ value of their assets, or guaranteeing repayment of the loans).

In brief, these tests are not credible unless a decent % of banks fail. At 10% (about 2 banks out of 19), I’d say the credibility is pretty marginal. At 40%, I’d say credibility is 100%, but the lobbyists and Larry and Tim would be very unhappy. It sure sounds like Larry and Tim actually hope to get away with none, or maybe one if they are pushed really hard. If so, they will have no credibility except with the less informed members of the general public (and some anxious industry insiders).

[patientrenter]

Most of the banks undergoing the stress tests have assets that are worth less than 10% more than their liabilities. With such a thin margin, to believe one of these banks is adequately capitalized you would have to believe that most of their loans can, and will, be repaid in full. Given how much of their loans were used to make purchases of homes or companies at the peak of the market, with little money put in by the ‘buyers’, it is very hard to believe that these banks really are solvent without taxpayer money being pumped in, directly or indirectly (by boosting the ‘market’ value of their assets, or guaranteeing repayment of the loans).

In brief, these tests are not credible unless a decent % of banks fail. At 10% (about 2 banks out of 19), I’d say the credibility is pretty marginal. At 40%, I’d say credibility is 100%, but the lobbyists and Larry and Tim would be very unhappy. It sure sounds like Larry and Tim actually hope to get away with none, or maybe one if they are pushed really hard. If so, they will have no credibility except with the less informed members of the general public (and some anxious industry insiders).

[patientrenter]

Most of the banks undergoing the stress tests have assets that are worth less than 10% more than their liabilities. With such a thin margin, to believe one of these banks is adequately capitalized you would have to believe that most of their loans can, and will, be repaid in full. Given how much of their loans were used to make purchases of homes or companies at the peak of the market, with little money put in by the ‘buyers’, it is very hard to believe that these banks really are solvent without taxpayer money being pumped in, directly or indirectly (by boosting the ‘market’ value of their assets, or guaranteeing repayment of the loans).

In brief, these tests are not credible unless a decent % of banks fail. At 10% (about 2 banks out of 19), I’d say the credibility is pretty marginal. At 40%, I’d say credibility is 100%, but the lobbyists and Larry and Tim would be very unhappy. It sure sounds like Larry and Tim actually hope to get away with none, or maybe one if they are pushed really hard. If so, they will have no credibility except with the less informed members of the general public (and some anxious industry insiders).

[patientrenter]

Most of the banks undergoing the stress tests have assets that are worth less than 10% more than their liabilities. With such a thin margin, to believe one of these banks is adequately capitalized you would have to believe that most of their loans can, and will, be repaid in full. Given how much of their loans were used to make purchases of homes or companies at the peak of the market, with little money put in by the ‘buyers’, it is very hard to believe that these banks really are solvent without taxpayer money being pumped in, directly or indirectly (by boosting the ‘market’ value of their assets, or guaranteeing repayment of the loans).

In brief, these tests are not credible unless a decent % of banks fail. At 10% (about 2 banks out of 19), I’d say the credibility is pretty marginal. At 40%, I’d say credibility is 100%, but the lobbyists and Larry and Tim would be very unhappy. It sure sounds like Larry and Tim actually hope to get away with none, or maybe one if they are pushed really hard. If so, they will have no credibility except with the less informed members of the general public (and some anxious industry insiders).

[patientrenter]

[quote=aldante]I think that the FBI is probably hoping that with such a big bust they can relax their investigation. [/quote]

I agree. There were hundreds of thousands of people, maybe millions, signing fraudulent loan applications during the bubble. There is no intention of going after these people. Instead, the idea is to make a public show of prosecuting a handful of the worst, and then move on.

[patientrenter]

[quote=aldante]I think that the FBI is probably hoping that with such a big bust they can relax their investigation. [/quote]

I agree. There were hundreds of thousands of people, maybe millions, signing fraudulent loan applications during the bubble. There is no intention of going after these people. Instead, the idea is to make a public show of prosecuting a handful of the worst, and then move on.

[patientrenter]

[quote=aldante]I think that the FBI is probably hoping that with such a big bust they can relax their investigation. [/quote]

I agree. There were hundreds of thousands of people, maybe millions, signing fraudulent loan applications during the bubble. There is no intention of going after these people. Instead, the idea is to make a public show of prosecuting a handful of the worst, and then move on.

[patientrenter]

[quote=aldante]I think that the FBI is probably hoping that with such a big bust they can relax their investigation. [/quote]

I agree. There were hundreds of thousands of people, maybe millions, signing fraudulent loan applications during the bubble. There is no intention of going after these people. Instead, the idea is to make a public show of prosecuting a handful of the worst, and then move on.

[patientrenter]

[quote=aldante]I think that the FBI is probably hoping that with such a big bust they can relax their investigation. [/quote]

I agree. There were hundreds of thousands of people, maybe millions, signing fraudulent loan applications during the bubble. There is no intention of going after these people. Instead, the idea is to make a public show of prosecuting a handful of the worst, and then move on.

[patientrenter]

Trillions of dollars are being poured into the mortgage loan market, so it’s hardly surprising that it has an impact, some places more than others. I still think even Berkeley prices will decline.

[Author]

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