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Archive for the ‘Economy’ Category

Monday morning brought forth a more honest appraisal of the financial condition of banks which caused a reversal of last weeks ridiculous celebration of mark to model nonsense.

According to a bank analyst’s report prepared by Mike Mayo of Calyon Securities the amount of loans that banks will need to write off will exceed levels seen during the Great Depression.

Mike Mayo gave the banking industry an “underweight” rating, citing “the ongoing consequences” of banks’ increased risk-taking. Suffering U.S. banks face a three-fold problem: higher structural risk, cyclical pressures, and “catch-22 government actions,” Mayo said

“The seven deadly sins of banking include greedy loan growth, gluttony of real estate, lust for high yields, sloth-like risk management, pride of low capital, envy of exotic fees, and anger of regulators,” Mayo said in the report.

These “sins” created front-load earnings and pushed costs further down the line, Mayo said. Now those costs are appearing and many of the current problems being experienced are only midstream, he added.

With residential real estate prices still falling and commercial real estate starting to crumble, with record credit card defaults occurring, and unemployment soaring, those who think that changing accounting rules to mark to model from mark to market are going to save the banks are delusional.

The deteriorating assets being reevaluated by the banks own models do not in the least change the quality of the assets. All it does is to defer the day of reckoning, make public a dishonest accounting of the banks true exposure to questionable and in some cases worthless assets, and delay any hope of recovery.

In spite of the government’s frantic efforts to prevent it many of the banks are toast. If you buy into a bank rally you had best be taking very short term positions and kick the stocks out of your portfolio fast. Investors taking long term positions in financial stocks, thinking that depressed prices make such purchases safe are taking on huge risks. Shareholders will be wiped out when the day of reckoning comes.

That will probably be in late 2009 or early 2010 as further losses become too large to hide, even with mark to model accounting rules in effect.

Do you have confidence in Tim Geithner to solve the many financial problems now confronting the United States? How do you feel about his plans to bailout the banks?

Tim is probably a very nice fellow and I’m sure to have reached the position of Chairman of the New York Federal Reserve Bank before being appointed by President Obama as the US Secretary of the Treasury he must be a smart fellow as well.

Unfortunately, Geithner seems to always have a perplexed, even confused look about him. Like a deer suddenly smack dab in the middle of the headlights of a big old eighteen wheeler. Perhaps he is still is dazed by the financial collapse that started while he was Chairman of the NY Fed. Like Fed Chairman at the time Alan Greenspan, how could he have known that straight up lines on housing price charts represented a housing bubble? Gee, who could have known?

There seems to be no doubt that Geithner is confused as to whose interests he now represents. While at the Fed he must have enjoyed some cozy relationships with Wall Street and the arrogant high profile bankers who served the Wall Street crown so well. He seems not to have yet realized that his role has shifted a bit and now he should be looking after the interests of the American taxpayer.

As Secretary of the Treasury Geithner makes me a bit nervous. But perhaps that’s just me in these volatile times.

What do you think? Does Geithner’s actions so far inspire confidence?