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Frontrunning: October 19
- Must read Abelson: A whiff of reality (Barron's)
- BB&T reports slumps as credit issues weigh (Reuters)
- Dutch DSB Bank bankrupt after sale failure (BBC)
- CIT's changes do little to enhance debt swap, according to CreditSights (Bloomberg)
- Gennett ad sales still dropping despite Q3 profit (AP)
- C'mon Ben - it's time to raise rates (Barron's)
- Business-jet demand likely to skid before regaining lift: time for another strong upgrade of Textron by Goldman which disagrees with the industry (WSJ)
- How Moody's sold its ratings - and sold out investors (McClatchy)
- FDIC failed to limit commerial real estate loans, reports show (Bloomberg)
- California Budget and HAMP: Is the Home Affordable Modification Program Helping? (Dr. Housing Bubble)
- How Raj's associates helped build case (WSJ)
- And more - colleagues finger billionaire (WSJ)
- JAL shares surge on government rescue report (AP)
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FROM THE ECONOMIST INTELLIGENCE UNIT
The Western financial system is in better shape than seemed likely a year ago during the panic following the failure of Lehman Brothers, a US investment bank. But despite a return to relative stability, improving financial-market indicators and buoyant conditions in some areas of business, the banking industry faces an uncertain and difficult future in the years ahead.
Political controversy still rages over the radical steps governments and central banks have taken to stabilise the financial system in the past year. But policymakers can take heart from the fact that things would almost certainly have been much worse without their intervention, and that their emergency policies have worked. These measures have included guaranteeing banks' liabilities, removing toxic assets from their balance sheets and exerting pressure on them to recapitalise (sometimes with public funds). Widespread bank failures have been avoided, and the interbank market is functioning almost normally again.
As fears of wholesale nationalisations receded in the spring, bank shares embarked on a powerful rally. Large US and European banks have raised equity and issued debt without government guarantees. Access to private financing, together with booming profits from trading in recent months, is enabling banks to repay all or part of the emergency public funds that they received. Some banks have been making large profits. Controversially, amid rising unemployment and a deep recession, large sums are being allocated to bonus pools.
So is it a return to "business as usual" for the banking industry? The Economist Intelligence Unit believes that this is unlikely for a number of reasons, and that the industry will undergo profound changes in response to a difficult operating climate and tougher regulations. Key issues and challenges include the following:
Monetary policy
Given banks' basic business of borrowing short and lending long, keeping policy rates close to zero in the developed world is a politically uncontroversial way of boosting banks' profitability and enabling them to rebuild their capital. However, when central banks begin to withdraw monetary stimulus, normalising rates, the yield curve will become shallower, squeezing margins.
Also, the high profits posted by some banks in recent months have been generated by investment-banking operations that have benefited from exceptionally wide bid-offer spreads, a boom in high-grade primary bond issuance, and record volumes in flow business such as foreign exchange. None of these conditions is likely to last.
Write-downs
For commercial banks, further write-downs are in prospect on assets ranging from corporate debt to credit cards to commercial property. Total write-downs globally since the onset of the crisis are currently running at US$1.6trn. Some private analysts estimate the final bill at US$2.2trn, which would imply that banks are more than two-thirds of the way through the losses. But the IMF puts the final bill as high as US$4trn. In fact, the scale of future write-downs is unknowable and will depend on the strength and durability of the economic recovery. Whatever the outcome, commercial banks will need to raise more capital to cover losses; under the more pessimistic scenarios, the amounts needed may exceed the availability of private financing.
State ownership
A legacy of the crisis is that the state now owns large stakes in the Western financial system. This creates a risk of governments interfering in banks' affairs and lending decisions being made on the basis of political rather than commercial criteria. This would impair banks' asset quality further. Granting mortgages on overvalued houses or prioritising lending to domestic borrowers (financial nationalism) are examples of such political pressures.
Regulation
Changes to the regulatory framework will take time to be decided and implemented, in part because regulators wish to show forbearance to banks until their balance sheets are stronger. But there is no doubt that banks will face a tougher regulatory regime in future, including the following:
* Higher capital requirements.
* Better-quality capital requirements (i.e. more pure equity, less use of hybrid debt/equity instruments such as preference shares).
* Procyclical capital requirements (i.e. requirements to set more capital aside during the up phase of the credit cycle, when banks are expanding credit, so that they have a bigger cushion to draw on in the down phase of the cycle).
* Increased capital requirements for larger institutions to reduce the risks posed by sheer size (and thus to mitigate the "too big to fail" problem).
* Restrictions on the use of special investment vehicles to shield parts of banks' balance sheets from regulatory capital requirements. (This will curb the "shadow banking" system, which drove the increase in credit expansion during the boom.)
* Higher liquidity requirements (i.e. banks will have to hold more safe assets, such as government bonds and cash). The crisis again demonstrated the crucial role of liquidity and how it can evaporate overnight, confounding the assumption of liquid, continuous markets on which value-at-risk (VAR) models are based.
* Less reliance on statistical models and more reliance on judgement.
* Corporate governance reforms. These will include measures to ensure non-executive directors have the experience and knowledge to challenge managers on risk management; and reforms of pay and bonuses to insure against excessive risk-taking by traders (e.g. pay in the reform of restricted stock, vesting over a period of years).
* "Living wills" designed to ensure that banks can be wound up in an orderly fashion. An important part of this is the forced conversion of unsecured debt into equity when institutions fail.
Despite political pressure to be seen to be tough on banks, governments are wary of putting domestic banks at a competitive disadvantage. But several of these regulatory changes will be introduced. Their effect will be to make banking safer (although the power of regulation to reduce risk should not be overestimated) and less profitable.
At the same time Western banks will be facing a more difficult operating climate as households and corporates (including banks themselves) pay down debt. Reduced demand for credit and lower returns on equity will see the financial services sector shrink from the oversized proportions it reached during the boom.
The Economist Intelligence Unit Source: ViewsWirei do not think Alan Abelson has been right since the fateful day of October 19 1987. I consider him less useful than a broken clock.
Senior management at BBT, while perhaps a notch above that of regional partisans like STI or RF, still got some work to do. Those commercial / construction portfolios gonna weigh em down a while yet.
Maybe, just maybe, there exists 1 large US bank headquartered in North Carolina that could thrive in the future. It's a low hurdle anymore (thank you, Ken Thompson !).
WSJ headline: Colleagues Finger Billionaire
Then I scroll down to see the pic of Raj and Paulson.
(Not so new) Matt Taibbi article in Rolling Stone - historical tidbits on Bear and Lehman. Nothing tremendously unexpected, but an entertaining read:
http://www.rollingstone.com/politics/story/30481512/wall_streets_naked_swindle/1
Page 8 wrap-up is on the money.
Front-run this: the funniest political commercial this year. In NJ ex-Goldman banksta Jon Corzine against fatso Chris Christie; along comes a third party candidate Chris Daggett.
http://daggettforgovernor.com/wordpress/2009/09/06/preview-daggett-tv-commerical/