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Banks' Surging Cash Holdings Indicative Of Future Writedown Concerns
In a note earlier, JPMorgan expressed its concerns at the burgeoning cash balances held by banks which anticipate major writedowns in the future, and are fortifying themselves appropriately. "Key changes seen thus far in 4Q for large banks are the slowdown in growth in securities and the large 28% qoq increase in cash, while loans continue to decline at a little faster rate led mainly by C&I loans and also to some extent residential mortgages. We expect this shift will hurt net interest income into 2010." When the worm turns, look for this cash to evaporate promptly as massive upcoming losses need to be funded, and as equity raises will be out of the question, banks better pray they have enough cash in store for the really rainy days. Also, somehow the term "Too Big To Fail" was lost in translation, and according to JPM is now defined as "Flight To Quality."
More forward looking observations: "Looking ahead, we expect credit card oriented banks to be better positioned whereas banks with greater proportion of commercial-related loans will be little more pressured by faster decline in loans and shift in composition of foreclosure-related expenses to greater share from construction/land versus residential mortgages. These items are likely to pressure core earnings (excluding securities and one-time gains) relatively more at regional banks, because the larger banks would have partial offset to this increased pressure from reduced credit card losses."..With the increased earnings pressure on the weaker regional banks and recent relative outperformance by these banks, we prefer the “flight to quality” banks, which we think provide better
upside with lower risk than the weaker quality regionals.
Yet the biggest highlight is the expansion in cash holdings:
Midway through 4Q, cash has grown the fastest of all assets, up about 28% qoq on average to 9% of total assets at large banks. Securities growth has slowed sharply, flattish qoq excluding unrealized losses vs. 2-3% qoq growth in each of the last two quarters. Loans continue to shrink at the same pace, down 3% qoq (ex Fed Funds & reverse repos), led by continued large decline in C&I loans at about 6.5% qoq on average and 4.5% decline in resi mortgages. Deposits are flattish but with a positive mix shift with growth in non-CD deposits offsetting sharp further decline in CDs. All these growth rates are unannualized.
And some additional warnings, this time focusing on REO losses, which will only become visible once foreclosure moratoria finally unleash the dam of witheld available housing.
Stealth credit costs, i.e., foreclosure (REO) related expenses, are likely to continue to accelerate – they rose 45% qoq on average, up much faster than in prior quarters and added about 30 bp to net chargeoff ratios on average among our banks. The composition of REO is also shifting to increase in proportion of construction and land (albeit still at lower level) versus little decline in share of residential mortgages.
The charts below indicate just how terrified banks are of the unknown and their corresponding desire to build record cash buffers as financial institutions are well aware that you can only extend and pretend so long before you have to pay the piper.
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3 short videos here from Howard Davidowitz, the only retail analyst who does not appear to live inside a government bird cage.
http://www.fundmymutualfund.com/2009/12/howard-davidowitz-being-howard.html
While he makes a lot of sense, and seems to know more about basic economist than 90% of the pundits on financial entertainment teevee his commentary will only lose you money in a market that can only go up. But still fun for those who need help coping with madness ;)
Back to your regularly scheduled melt up.
Thanks for that find Mark.
The first video is MUST SEE TV.
Always liked Davidowitz, especially compared to the dingbat mannequen (Dana Telsey?) CNBS always wheels out in front of the cameras.
Why do you think they've manipulated this market and sold off their Grandmother's wooden leg? As long as this idiots are willing to pay the taxes and the obscene valuations, they'll keep selling it to the dingbats. Nevermind that 20% of daily volume is manipulated by programs and 60% by stupidity.
So now we are hearing banks are hoarding
cash. Banksters are getting guns. Next
we'll be hearing about food hoards, water
hoards, and bankster redoubts. We might
even hear about bankster gold caches.
You forgot central banks hoarding gold bars. ;)
August 24,2009 in response to Jesse on NakedCapitalism blog:
The conventional wisdom is that if the FED were to lower IOER than the banks would lend.
Of course without an audit of the FED and granularity on FICC 'winnings' discerning whether the funds are 1)sitting waiting for Don Quixote to show up with all that pent-up demand or 2)short-term financing for all the crappy paper cause no one else wants the overnight risk is problematic ..although my bias is that I favor the latter argument.
The Jackson Holies chanting in unison that they see signs of stabilization but still 'just to be prudent' still have the zero-bound machine set to perpetuity should cause one to consider that perhaps it isn't the boogeyman of 1937 motivating such angst but rather a dear understanding of a financial system where the excess reserves are little more than DIP financing.
Here is a link to an artical about credit card companies charging inactivity fees. So if you are in good standing and don't need to use it then they are going to charge you for not using it :-)
http://www.bloomberg.com/apps/news?pid=20603037&sid=aCLzni_O63h8
This makes perfect sense. The regional and smaller bansk MUST hoard cash because they can't all get governement bailouts; in the next downturn many will simply evaporate. The TBTF banks can get all the handouts they want but they suspect it might cost them their "right" to payout the massive bonuses everyone "needs" to survive.
It all signals to me that the banksters are expecting a serious downturn in 2010 and have circled the wagons.
cougar
It more precise than that cougar...
The banks have been TOLD to hoard cash because there will be a further downturn, and less of a guarantee that the Fed will be about to provide blank checks.
The Fed/Treasury has bough the finanacial system almost a year to raise capital by manipulating risk assets. Banks that go under from this next wave have only themselves to blame if reserves aren't up to snuff.
@AMan: "The banks have been TOLD to hoard cash..."
I missed that memo.
Unless you are talking about the spooky AutoEarth Ilargi rumor? There's not so much backing that up, afaik.
Agree. And the comment - "Deposits are flattish but with a positive mix shift with growth in non-CD deposits offsetting sharp further decline in CDs" is not so positive as JPM says. People are moving in more liquid products (savings, MMDA, etc) instead of CDs because of all the uncertainty surrounding banks. Banks call these “Core Deposits” but we’ll see how “core” these are when they begin the death spiral of sharpening losses, earnings erosion, capital ratio deterioration, shut out of wholesale funding markets, retail deposits lose trust, regulatory order…then on to the Friday Failure list.
.... provided the balance sheets can be trusted and not made up in parts.
Looks like when the next shoe drops, the banks, having learnt their lesson the first time, wont be caught with their pants down for the second time. All the while most of the people who still have access to a credit card and lining up at Best Buy at 5am in the morning, eagerly waiting to get their 42 inch plasma for their second washroom, will be defaulting on their credit. This looks like a death spiral that will never end.
extend and pretend so long before you have to default on the piper
there, fixed that for ya...
Bo Cutter’s Indictment of the Finance Industry
By William K. Black|Dec 1, 2009, 1:43 PM
“Virtually non-existent … particularly in this [era].” This phrase comes from the head of President Obama’s OMB transition team. Bo, an Obama Democrat, believes that Geithner represents the epitome of Obama appointees. President Obama’s other appointees are far worse than Geithner. That is an extraordinary indictment of the administration.
Bo’s indictment is compelling, but his logic proves a deeper failure. There is no reason to restrict his indictment to “the last two years.” The senior managers’ and directors’ failure did not begin with the recession. They failed throughout the expansion of the bubble, the backdating of stock options, after-hours trading, the collapse of the auction rate securities market, the “epidemic” of mortgage fraud by lenders, the massive scandals of the Enron and Worldcom era, and the savings and loan debacle. The financial sector has been in recurrent, intensifying scandals for decades.
By early 2006 – roughly four years ago – “everyone” agreed “we were headed to a cliff” and that the banks’ “major loans” were “nuttiness of epic proportions.” An industry, whose claimed expertise is the sophisticated evaluation of risk and value, universally failed to come remotely close to valuing either. As Bo emphasizes, these were massive errors. These managers got immensely wealthy because – not despite – their willingness to make hundreds of thousands of loans that were certain to crash and burn as soon as the bubble ceased to inflate (which it did in 2006). Bo knows them, and Bo says that every independent (sic) director betrayed their fiduciary duties to shareholders. Every senior officer at the major banks failed. Bo portrays them as incompetents, cowards, and moral failures.
http://tinyurl.com/yadguou
So we have banks getting free money that taxpayers are paying for. Most taxpayers are probably paying 20-30% interest on that same money we lent to the banks if the bank is nice enough to share with us. If the government is letting this happen after promising that our bailouts would help Main Street in the long run, the only thing that makes sense is that this was the only way to falsely capitalize our financial system for the next major downturn. Otherwise we would be getting a lot more resistance from the government towards current bank policies that take our money and make us pay for the privelege.
The purported "cash holdings" in banks is a lie. A fraud. They are at record low cash holdings. The numbers are fictitious. You have a real mental disorder if you believe banks have excess cash.
Let's us see here, there WILL be more credit card defaults, more jingle main from home buyers and.... oh yeah, that lil thing called commercial RE. The banksters will be boatloaded with defaults that will easily topple their 'reserves'. Then comes the 'too-big-to-fail' and massive dollar infusions. Of course the 'small' guys not well connected to the mafia, I mean Federal Reserve, will either get swallowed up by JPM, GS, etc or be liquidated.
Oh, and then there is the paper BS links to junk CRE, RE, etc that will implode and there is not enough money to even try to over their ASSetes of those. Basically, the Fed and their cartel WANT to consolidate, it is akin to a mafia family seeking to eliminate their competition.
The game is rigged, and I for one choose not to play along. Got gold?
Do what they Do not what they say
Don't horde gold
Horde Cash
One small briefcase can hold a million dollars
Green backs
When the depression hits ---- you will not need a bank
You can buy at depressed prices