Euro Banks Up on Stress Test Farce

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Euro banks rallied nicely on Monday after results of the EU's stress test indicated there are essentially no problems in the European banking system. The stress tests have been heavily criticized as a whitewash and a cynical PR maneuver however. Nevertheless, rallies in bank stocks are continuing today on earnings reports from UBS, Deutsche Bank, Societe Generale and Credit Agricole.

Of the 91 EU banks analyzed for the stress tests, only 7 failed - five in Spain, one in Germany and only one in Greece. No bank in Portugal, Ireland or Italy failed the test and was deemed to be in need of raising more capital. The 7 banks that did fail were supposedly only short $4.5 billion. An alternative result produced by an analyst at JP Morgan indicated at least 54 banks should have failed the stress tests and at least $100 billion in new capital needed to be raised. Even that view may be optimistic.

Although considering the great earnings out today for UBS (UBS), Deutche Bank (DB), Societe Generale and Credit Agircole perhaps enough money is being poured into the euro banks from the ECB that it is irrelevant what condition they are in. After all, another bailout is potentially always around the corner. The UBS earnings were the most telling in this regard. One reason stated for UBS doing so well was that "withdrawals in the private banking arm have continued to slow". Yes, losing business at a slower rate is certainly bullish. The stock was up 7% on the news.

In a separate report released today, lending to non-financial companies was down 1.9% year over year in the EU. So euro bank earnings are rising even though less lending is taking place to businesses. Interesting, to say the least. Mortgage lending in the EU is going up at a 3.4% annual rate however. So maybe some minor reinflation of the real estate bubble is taking place in Europe while the economy slows down. That certainly bodes well for the future.

The stress tests show once again that any number, no matter how outrageously manipulated or false, will be accepted by the market as gospel.  We saw this last week with the UK second quarter GDP figures. The construction spending number was up by an amount indicating a major building boom was taking place even though there is no other evidence of a big pick up in construction. The fact that the reported numbers didn't match up with reality apparently didn't disturb anyone. You would think it would have since the current EU financial crisis that necessitated the stress tests was cause by Greece lying about its fiscal state. Greece's numbers were off by more than 400%, but no one in EU headquarters noticed any problem with them.

When economic or business numbers are fantasies, but are accepted anyway, a major crisis will invariably follow. Before the Greek debt crisis, there was a the subprime crisis in the U.S. Bundles of subprime loans - loans from borrowers who had no job, no assets, and no history of paying their bills - were believed to be triple A credits because some authority said they were. This allowed common sense to be thrown out the window and complete absurdity to be regarded as wisdom. This type of behavior though isn't as bad right now as it was during the subprime era - it's actually much worse.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Banking Bloodbath Covers Wall Street in Red

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The bloodletting on financial stocks was almost relentless in U.S. trading yesterday. Trouble began in Europe the day before with the collapse of Royal Bank of Scotland stock, a collapse which took place despite (and some are now saying because of) a second bailout of the banking system by British authorities. The U.S. markets were closed for the Martin Luther King holiday, but when they reopened banks and brokers were cut to pieces. It was not a propitious beginning for the new Presidency.

Action in the market overall was ugly Tuesday and while financials led the way down, selling wasn't isolated to just that sector. While the Dow was down 4.0% and closed below the psychologically key support level of 8000, the technology laden Nasdaq suffered even more. The Nasdaq's 5.8% loss was a crash level drop. While the rest of the market fell apart, the gold ETF GLD gapped up sharply for the second day in the row, showing incredibly strong technical strength. As it has done throughout history, gold was shining once again in the midst of a crisis.

To say the drop in some financial stocks was a crash would actually be understating the situation. State Street was cut in half with a 50% drop. PNC was down 41%. Even though Bank of America was down 'only' 29% it hit yet another yearly low and without additional intervention (it was bailed out only a few days ago) the stock looks like it is headed toward oblivion . Citi, down 20% on the day, also managed to hit a yearly low and dropped below $3. The detailed action in the financials below:

State Street down 50 percent to 21.46.
PNC down 41 percent to 22.00.
Bank of America down 29 percent to 5.10.
Wells Fargo down 24 percent to 14.03.
Suntrust Banks down 24 percent to 15.07.
Citigroup down 20 percent to 2.80.
JPMorgan Chase down 20 percent to 18.09.
Goldman Sachs down 19 percent to 59.20.
Deutsche Bank down 19 percent to 21.00.
U.S. Bancorp down 16 percent to 15.34.
Morgan Stanley down 16 percent to 13.10.
UBS down 16 percent to 10.00.
Credit Suisse down18 percent to 19.76.
HSBC down 15 percent to 33.83.

Some recovery is taking place today in the banks and brokers because of Geithner's statements about more banking bailouts. Of course, that approach hasn't worked well so far. However, nothing succeeds like failure in recent U.S. economic policy.

NEXT: Volatility is Back

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

When the Lender of Last Resort Becomes the Only Resort

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

In the current credit crisis, central banks and governments in the U.S. and Europe are making the transition from supporting the financial system to becoming the financial system. There seems to be no ruined financial company that governments won't bail out (at least if its large enough or if the impact of its failure would have some significance), nor any limit to the amount of money that central banks will lend. The complete dependency relationship on governments that now exists among financial institutions is the ultimate outcome of Moral Hazard - banks have repeatedly been bailed out in the past, so they take on greater and greater risks until a total systemic failure takes place requiring a government takeover.

The latest bank bailouts include UBS last week and ING this weekend. After UBS declared a surprise profit, the Swiss government announced it would be injecting up to $60 billion into the bank and would get a 9% stake in return (apparently the Swiss government doesn't even believe their accounting figures). The UBS bailout was predicted long ago by the New York Investing meetup. The Dutch government today announced it would be giving ING Groep NV $13.4 billion in exchange for non-voting preferred stock, but would nevertheless be getting two seats on the board. Yesterday, the Korean government announced a blanket $100 billion backing for its bank's foreign currency debts.

As for cash injections into the financial system, these hit a record last week in the U.S. with banks and dealers direct borrowing from the Fed reaching $438 billion per day. This was up from the $420 billion per day the week before. The only Fed program that had less lending last week was the one that allows banks to purchase asset backed securities ($123 billion versus $139 billion the previous week). The U.S. Treasury sold $499 billion in T-bills for the Fed's Supplementary Finance Account to support all of this lending. Meanwhile, the Bank of England started implementing a new framework to provide emergency funds to banks. The new facility cuts the penalty for banks borrowing funds directly from it overnight. Why go elsewhere under those conditions? Ditto in the U.S. where funds from the Fed are plentiful and cheaper than can be gotten elsewhere.

If only one government was engaging in increased lending, a case could be made that it could borrow the money from other more financially sound countries. However, in the current crisis, all the developed countries are increasing available funds substantially. They do so by selling bonds. But if everyone is selling more bonds, who's left to buy them? Only an increase in the supply of the world's major currencies can make this possible, which means they are all being devalued in this crisis. By how much, only time will tell.

NEXT: The Fed Should Be Careful What It Wishes For

Daryl Montgomery

Organizer, New York Investing meetup

http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Banks and Brokers Most Likely to Fail - The Big Players

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our video for this posting can be found at: http://www.youtube.com/watch?v=sBhEO14lwMg

Other videos on this topic: http://www.youtube.com/watch?v=ZIxTlP5FU_Q

At our September 8th meeting, the New York Investing meetup presented a talk on the 'Banks and Brokers Most Likely to Fail'. This was a follow up to material that was already presented in our April meeting 9th meeting talk, 'The Dirtiest Dozen Financial Companies' (the notes for both of these talks were posted on our web site at: http://investing.meetup.com/21/files). Putting together all the criteria that should be considered in determining whether or not a bank of broker could be insolvent or heading in that direction the following list of large banks or brokers resulted (how much their stock was down from the high is the figure next to their name):

Washington Mutual -down 93%
Lehman - down 91%
Wachovia - down 87%
Merrill Lynch - down 78%
Citibank - down 75%
UBS - down 73%
Royal Bank of Scotland - down 73%
Keycorp - down 82%

With the exception of Wachovia, the Royal Bank of Scotland and Keycorp, these companies had already appeared on our April list.

Washington Mutual and Lehman were obviously both in desperate shape and jocking for the number one position of who would be gone first. Washington Mutual had the highest one-year CD rates in the U.S and the willingness to pay a lot more for funds than its rivals indicated how urgently it needed funds. It could also not raise capital because it had sold stock at $8.75 a share with an agreement to reimburse the buyer for the price difference if it sold stock again at a lower price. It's price had fallen so low (it's price dipped to $1.75 a share the day of our meeting) that if it sold new stock, it would have to pay more to this purchaser per share than it would from the sale. Lehman on the other hand, had been in serious trouble since March and would have gone under right after Bear Stearns failure except for Federal Reserve cash infusions into the company from the newly established PDCF (Primary Dealer Credit Facility). It had just released its earnings and had lost $5.62 a share in the third quarter versus $5.19 a share in the second quarter. Its stock was falling rapidly and would close at $3.65 on Friday.

Lehman had been trying to sell some of its operation or part of the company for the previous several weeks. The Korean Development bank finally withdrew from negotiations claiming they were asking too much. Lehman had deteriorated so much that an emergency meeting was held at the New York Fed's office starting Friday evening and going into Sunday. The Treasury secretary and all of Wall Street's movers and shakers were there. Even then, nothing could be worked out for Lehman. For the first time, the Treasury refused to offer government guarantees. This should not be interpreted as the Fed and Treasury finally realizing the danger of Moral Hazard, or that no one voted for the U.S. becoming a socialist state, but rather that they themselves are out of funding sources.

Without a government rescue, Lehman was forced to declare bankruptcy Monday morning. Ironically, Bank of America agreed to buy Merrill Lynch as a result of the emergency meeting (both were there), apparently with some prodding from government officials. Elsewhere, insurance giant AIG requested access to the Fed's lending facilities, in order to stave off its own impending bankruptcy.

NEXT: Lehman, Merrill Lynch, and AIG - the Morning After

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.


























































































































NEXT: The Banks and Brokers Most Likely to Fail








Daryl Montgomery
Organizer, New York Investing meetup







http://investing.meetup.com/21








This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Sovereign Wealth Funds Bail Out the Banks

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

As the credit crisis unfolded in the fall of 2007, a number of big banks and brokerage houses were desperate for capital - far more desperate than was ever admitted publicly. While they needed large cash infusions to continue operating, a number of sovereign wealth funds in the oil-rich Gulf and the Far East had swollen coffers of dollars that they needed to place somewhere. It was therefore almost inevitable that some of the first bailouts (an insolvent financial institution requires multiple bailouts) of struggling financial institutions would be done by sovereign wealth fund purchases. By the end of 2007, it was estimated that these funds would make at least $37 billion of investments in Western financial companies.

The idea of foreign investment as a means of providing capital was not a completely new one. Prince Alwaleed Bin Talal of Saudi Arabia had purchased 5% of Citibank (then Citigroup) when it was reeling from the Savings and Loan Crisis in the early 1990s. Earlier in 2007, China purchased a $3 billion stake in Blackstone's IPO, which debuted just before the collapse of the private equity bubble and promptly plummeted in price. By November, Abu Dhabi had bought a 4.9% stake in Citibank for $7.5 billion. At the time of the purchase, rumors were circulating on Wall Street that Citi might be insolvent. U.S. government officials admitted being involved in the transaction, which begs the question as to whether or not they would have allowed the deal to go through if it wasn't absolutely necessary for Citibank's survival.

In early December, the Government of Singapore Investment corporation got 9% ownership in UBS for a little less than $10 billion and an unnamed middle eastern investor (thought to be Oman) bought a 2% stake. China then bought a 9.9% stake in Morgan Stanley only days before Christmas. Singapore's Temasek Holdings then helped bail out Merrill Lynch on December 24th. By mid-January, Citibank was already in need of a second bailout by the sovereign wealth funds, only two months after the first one had taken place. The Government of Singapore, the Kuwait Investment Authority and Price Alwaleed were part of a $12.5 billion capital infusion for which they got some ownership of the bank in return. On the same day, only weeks after its first cash infusion from a sovereign wealth fund, Merrill Lynch received an additional $6.6 billion from parties including the Kuwait Investment Authority and the Korean Investment Corp.

None of these deals had to undergo scrutiny by the U.S. Committee on Foreign Investment, which only examines whether acquisitions by overseas buyers compromise national security when their stakes rise above 10%. Given the large number of sovereign wealth funds and wealthy individuals in the Gulf States and Far East, it would be possible for their aggregate ownership to reach 100% without a review ever taking place.

Next: Government Investment Pools Dry Up

Daryl Montgomery

Organizer, New York Investing meetup

For more about the New York Investing meetup, please go to our web site: http://investing.meetup.com/21

What Banks and Enron Had in Common

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

The Subprime Crisis began to take a serious toll on bank and broker earnings by the third quarter of 2007. Merrill Lynch led the pack with a $8.4 billion dollar write down. Citibank reduced its earnings by $5.9 billion, UBS by $3.4 billion, and JP Morgan by $3.1 billion. Deutsche Banks had $3.1 billion in write downs, but still amazingly managed to post a rise in earnings (one wonders who did their accounting). There was of course a lot of chatter from the talking heads in the media about whether or not these write downs were the final word in the impact of the Subprime Crisis on financial company earnings. Even the most casual knowledge of stock market history would have provided the answer - 'no they were not!' Whenever earnings in a group of stocks start to fall apart, the first write downs are never the last and usually aren't even the biggest for that matter. This was the pattern when the tech bubble burst only a few years earlier and yet many media commentators couldn't seem to remember even that far back.
Even without a knowledge of history, there was more than enough evidence to indicate that financial company write offs might get much bigger and go on for a long time. SIVs - structured investment vehicles - had already hit the news many weeks before November of 2007. These off-balance sheet items (think Enron) were so obscure that most people on Wall Street had never heard of them. Suddenly, there were an extra $400 billion of possibly bad debt that was not on the balance sheet of the banks, but would be winding up there eventually. Citibank alone had $100 billion in credit exposure to SIVs. This new wrinkle in the Subprime Crisis was viewed as so serious by the U.S. Treasury Secretary that he attempted to organize a bailout (how he had the authority to do so is unclear) by getting a number of large banks and brokers to create a pool that could buy up SIV assets and thereby support their prices. While much ballyhooed by the press, this effort went nowhere and was eventually abandoned by December.

While the Treasury Department's plans for SIVs fell through, the Federal Reserve created an alternative that could help out the big banks. It allowed them to borrow against their (highly questionable) assets, but this necessitated bringing the assets onto the books. In December, Citibank indeed brought $49 billion in SIV assets onto it balance sheet. It is presumed that the other $51 billion the Citi had originally in SIVs had disappeared because of reductions in value. Indeed, it was reported in December that the total value of SIVs was then only $298 billion (it was quite possible that even this was a significant overstatement of their actual worth). If Citi had lost approximate $50 billion in its SIV investments, it was not fully (if at all) reflected in write offs in its first quarter 2008 earnings report.

Although SIVs were considered a serious threat to the stability of the banking system, little did the public know in the fall of 2007, that they were not the sum total of all off-balance sheet items that the banks were holding. After all, why would a company have off-balance sheet items unless it wanted to hide what it was really doing? Since there purpose is secrecy, how does anyone know how many off-balance sheet items a company has, what assets they contain, and how much those assets are really worth? While it would be reasonable to assume that if there was one type of off-balance sheet item on a companies books, there could easily be others, there was little if any speculation on this matter by the financial media. Only in February of 2008 was it reported that SIVs were actually only one type of off-balance sheet items held by the banks - and the possible losses were much greater than had been previously imagined. The accountants who did Enron's book must have been envious.

Next: Mortgage Insurer Meltdown.

Daryl Montgomery
Organizer, New York Investing meetup

For more information about us, please see our web site: http://investing.meetup.com/21.

More Collateral Damage from the Fed's First Helicopter Drop

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

The impact of the Fed's September 18, 2007 rate cut was not limited to the panic sell off in the dollar and the incipient bubble in gold, silver, oil, and food commodities. The lower rates that were supposed to help the housing market didn't materialize. By the end of the month, mortgage rates were actually higher than they had been before the Fed's action. Instead of helping the beleaguered housing industry and homeowners , the Fed's rate cut was actually ineffective at best and did nothing to decrease costs for those struggling to deal with ballooning mortgage debt.
Of course, in reality it was the big banks and broker-dealers that were stuck with increasingly worthless securities backed by subprime loans that were the real target of the Fed's beneficence. It would prove to be too little too late however. By October, the first of a series of multi-billion dollar quarterly write offs would start - $5.5 billion for Merrill Lynch, $3.4 billion for UBS, $3.3 billion for Citibank, and $3.1 billion for Deutsche Bank. As bad as these write offs looked at the time, they were not nearly as bad as what was to come.

The Fed cuts also gave the Wall Street Pollyannas ammunition to game up the market, since Fed cuts were traditionally bullish for stocks. The financial media had wall to wall coverage of talking heads urging viewers to buy stocks now because they were at fantastic bargain prices (of course at a real bottom no one appearing in the media urges viewers to buy stocks). Any experienced trader looking at the market rally that ensued knew something was terribly wrong however. While the market had sold off in heavy volume in late July and the first half of August, it rallied on light volume and then hit new highs on even lighter volume. Trends on low volume are usually soon reversed and the September rally would prove to be no exception.

Next: The U.S. Government Goes from Lying with Statistics to Just Lying

Daryl Montgomery
Organizer, New York Investing meetup

For more about us, please see our web site: http://investing.meetup.com/21