Meredith Whitney: The banks are not looking good
I got wind of this interesting analysis from John Hussman’s post over here. In it he commented that Whitney appeared on tuesday’s CNBC to talk about what she thinks of the banks now:
“In the second quarter, you had banks recapitalizing themselves with huge equity volumes, you had a lot of write-ups throughout the year, but the core loan books have been declining dramatically, so what’s left? The toxic assets have all been written up. There’s a very limited cash market for them. You would never know about the degradation in asset quality (of loans backed by Fannie Mae) because the government has been buying the paper. The paper has never traded higher. There’s still time (for toxic assets to become a major problem again). They have to because there are not cash flows to support the payments on those bonds, and the bonds will break covenants. What’s happening is that the banks are going to have to start selling stuff, and so you’ll start seeing a yard sale to raise capital.”
One of the main concerns Whitney expressed was the collapse in credit availability. “In the last cycle in the early 1990′s, the economy slowed and banks stopped lending but the securitization market was really getting started, so consumers actually had more liquidity. Now, consumers and businesses are being stuck by – banks aren’t lending and there’s no securitization. So you haven’t had this amount of credit contraction. There has been a trillion and a half of credit taken away from credit card lines, and that is accelerating with all the regulatory changes. So the numbers just aren’t big enough from a government standpoint to mitigate the decline in credit, which is ultimately going to influence behavior. The component parts do not add up. You cannot get to a robust economic recovery with so many states under duress.”
Looking forward to next year, Whitney warned of a 2010 outlook “which is so disturbing on so many levels to have so many Americans be kicked out of the financial system, and the consequence both political and economic of that is a real issue – you can’t get around. It’s never happened before in this country or in the modern economy. The biggest trend in 2010 will be seeing who gets kicked out of the banking system.”
Meanwhile, in January, new accounting rules will kick in which will force banks to move off-balance-sheet “structured investment vehicles,” “trust preferred assets” and other beasts onto their balance sheet, which is expected to result in some sharp hits to bank capital. In response, regulators such as the FDIC will most probably be called upon to look the other way for a while.
Floyd Norris of the New York Times refers to these off-balance-sheet assets as “a black hole that regulatory rules had ignored in assessing how much capital the banks needed to hold. The beauty of those securities was that they were really debt that the holding companies could call capital. Having that “capital” meant the bank could take on more debt. A system that lets a bank borrow more money because it has already borrowed money – rather than because it has sold stock – is hardly a wise one.”
Related posts:
- Lloyd’s, ‘RBS of 15 Years Ago,’ Teaches the banks of today a lesson
- OCBC,UOB and DBS are the world’s strongest banks
- Don’t Blame the Central Banks — Thank Them
- Warrants, Buffett rumor boost banks
- The Banks owns the customers:How banks kills customers’ hopes
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