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Stop, Sheila! Stop!
By Jeff Harding
Most economists in the government think they have saved the world from economic collapse. Recently Larry Summers said that on the White House blog. Sadly he touted the benefits of J.M. Keynes's economic philosophy ("The wisdom of Keynesian policies has been confirmed by the performance of the economy over the past year."). He must be looking at different data that's not available to me.
My premise is that government action causes depressions.
Recently I wrote on the differences between Japan's deflation and ours. In my article I stated that by letting banks fail we would have a much quicker recovery, and that we would avoid the 19 year decline and deflation that Japan suffered. The big "if" was what the government would do or not do to thwart that process. I believe that preventing banks from failing and allowing them to stay alive with bad debt on their books will result in the "zombie" institutions that plagued Japan.
Well, here is Sheila Bair, FDIC chair, leading us into deflation:
Commercial real estate is seen widely as one of the biggest dangers facing the banking industry, as heavy losses in this area are crushing many community banks and eating into bank capital. These loans often prove more difficult for banks to work out than residential mortgages.
“The agencies recognize that lenders are borrowers face challenging credit conditions due to the economic downturn, and are frequently dealing with diminished cash flows and depreciating collateral values,” Ms. Bair will say. “Prudent loan workouts are often in the best interest of financial institutions and borrowers, particularly during difficult economic circumstances and constrained credit availability. This guidance reflects that reality, and supports prudent and pragmatic credit and business decision-making within the framework of financial accuracy, transparency, and timely loss recognition.”
Unless she is prepared to fund these banks with additional capital, then letting banks rewrite loans only increases the risk of bank failures. Since commercial real estate values are falling like the proverbial rock, that means banks will keep debt alive on projects that aren't worth the amount of the loan on them.
What CRE debtors are facing is a credit crunch. Their loans put in place five years ago are coming due and they can't refinance them because loan-to-value ratios are falling and underwriting standards have tightened. CRE debtors will have to come up with more equity or lose the properties in foreclosure. Raising money in a falling market is tough to do. The Fed says we'll see 40% loan losses next year.
So you end up with banks with bad loans allowed to stay on the books on terms that fail any bank solvency test. Who would deal with these banks? Would you withdraw your deposits because their books were phony? Would another bank make an interbank loan?
This policy will put off the inevitable, cause more banks failures, and cause tighter credit.
Sheila, stop!
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You are all correct but there is another side to the coin. Small banks all over the country are refusing to roll perfectly good performing loans because the examiners are classifying them or have told them to reduce their exposure. They did the same thing in the early 80's and ended up doing more harm than good - the result was FIMSA and other agencies imploded values and then sold all the loans ( performing and non performing ) for cents on the dollar with the buyers then often collecting full face value. So somewhere there is a balance.
Wouldn't these re-write rules mitigate that?
Your only real protest is to stop your discretionary consumption.
But then, for every dollar you don't borrow, the federal government will borrow three.
Sheila cannot stop. She takes orders from Timmy through the CC. Timmy is trying to help Ben salvage his train wreck. Ben is trying to make things look good because he is about to lose his confirmation to be Fed Chairman in January.
For me what Sheila is saying is forget risk management and prudent lending rules because they pose a systemic risk. The risk being that commercial real estate values will continue to decline increasing the losses at the bank. Doing this because of the cash flows and depreciating collateral values means the banks will eventually take loses anyway. This is a gamble for banks that the economy will pick up and it only takes a sizeable minority of banks to not play the game for those that do to get hammered. Lets face it if you are a well run bank with good capital you are not going to be playing Sheila's game. It is an admission that the FDIC/Treasury does not have the firepower left to deal with a big fallout from a commercial real estate collapse. My take would be that banks in difficulty will play the game, kicking the can down the road, leaving a even bigger mess for the FDIC to sort out later.
"It's worth whatever I say it is, whenever I like" means that biz transactions are worth s**t if no one has any rationale basis for valuing anything anymore.
There is no plan. The masters of the universe are managing this mess like a couple of frat boys (and girls) making it up as they go along.
The goal is not to "fix" anything, it's to loot and pillage before the bottom drops out and the pitch forks and torches come out.
Brought to you by the makers of cocaine.
"So you end up with banks with bad loans allowed to stay on the books on terms that fail any bank solvency test. Who would deal with these banks?"
One thing I think some people are missing is the fact that these insolvent banks are attempting to make themselves solvent at the expense of their customers. Look at credit card companies, changing terms 4 times this year with 4 rate increases. They are gouging the customers that can pay and forcing those that can’t pay into default. So customers/taxpayers are getting screwed both ways, higher interest rates and higher taxes. Aren’t you glad the taxpayers are keeping these F-ers afloat so they can screw us with more fees, higher finance charges and forced defaults? They get to borrow at near zero so they can “performance price” a credit card loan to 29.99% if a payment comes in 1 dollar or 1 day late. Not to mention we get two lost decades out this and more suffering and misery for everyone.
To address the second question above, banking is the most uncompetitive industry around. Most businesses compete with lower prices, etc. Those in the banking industry just follow each other’s lead. One bank raises the late fee to $39 and the rest follow. I’m getting ready for the $49 late fee, its coming. There is no competitive pricing only a race to the top and the banks know they will lose a certain amount of customers, but they also know they will gain customers from their competitors for the same reason they lost them. There is no better choice in the banking market, unless you choose a credit union.
If the banks get to continue to “Mark to Fantasy” then you can expect to get gouged for the long haul until the banks make themselves solvent again.
Fixing things is too painful...I think the administration might actually having been thinking about taking a fix it a approach back in January/February. But that was proving to be a real downer for the newly crowned administration. So scrap that plan and get on with just make it all go away...
It's kind of like asking your kid to clean their room -- for the 100th time -- the next time you go by you are so shocked at how good it looks and that makes you feel so good, I mean you're such a great parent, your kid is perfect, etc...that is until the next time you look under their bed.
It will happen, it just might take a long time. I am actually thinking at this point we might see another refi boom -- can't honestly believe it but has anyone else noticed the increase in refi/home equity commercials?
From what I've seen lately, this will only drive bank stocks higher. It's bizarro world where you greet with 'goodbye' and leave with a 'hello".