So here we are on another September 11th.
Today I’m pondering next week’s expected beginning of the removal of government subsidies from the U.S. banking system. The stock market has been showing off its’ new found love for driving up equities regardless of the fact that computed stockholder’s equity numbers are now driven not by top line revenue improvements but by the modeled mathematics of cutting back on expenses. According to the Wall Street Journal, economists buoy about the world getting better. Exactly for whom I’m not quite sure because unemployment benefits are soon to permanently run out on people (and their families) for whom these same economists say no jobs are forthcoming for at least another year. I'm not sure I would advise the President to stand between the pitchfork wielding public and the “Black Swan” academicians with Christmas approaching.
And so into this "theoretically improving" world President Obama is expected to inform Wall Street next week that the one of the government's bank subsidy programs ends in October. The Troubled Loan Guarantee Program (TLGP) is a less well known subsidy vehicle than the Troubled Asset Relief Program (TARP) but it is nevertheless one of the pillars of the rescue plan that was put into place by the combined efforts of the Bush/Obama administrations.
TLGP is another one of those things that never really took off in the way people imagined it would. Like TARP it was meant to encourage banks to continue to lend under extraordinarily stressful conditions. However, we’ve all seen that credit availability dried up anyway because ultimately banks backed away from subprime lending as they collectively de-leveraged and shut down the exposure manufacturing aspects of their business models. So because there was no new lending the opportunities to make use of TLGP by the industry were relatively sparse.
So now here’s where it gets a little interesting.
Over the past year we’ve been tracking the system wide trends in defaults, non-accruals and finally other assets owned by banks and we’ve been seeing continued degradations in net lending assets quality. That means that the business need to eventually take advantage of trouble loan guarantees has been growing not receding. The TLGP concept may have been instituted before it’s time and that time may be still be in the future, probably not that far. One might ask, “are we pondering confiscating subsidy tools just as banks might be on the verge of using them?” And of course the even more fun questions "Why?" and “Is this a good idea?”
Of the 8,800 or so active bank units reporting to the FDIC around 3,500 or so have formally opted-out of the TLGP. Yes there’s a list floating around out there that has double that number but if you look real closely people that list has many banks listed twice, once under its’ FDIC Certificate ID and again under its’ Federal Bank Holding Company identifier. So that means 5,300’ish of the brethren have stayed silent on their intentions. This includes most of the bigger banks by the way. It they all activated under the program the Unites States government could quickly find itself running out of another kind of clunker money pool. TLGP extension by exception means a lot of case-by-case evaluation workload for the FDIC’s staff.
Could you put that in English please Mr. Santiago, "I think it means someone is setting up a high hurdle filter."
To be honest one can argue that banks have had ample time these past months to ponder their business positions and make their plans on how they will steer their way into the second decade of the 21st century. Apparently it’s time to test their mettle and let the forces of competition winnow the winners from the losers. If this is so, making TLGP extensions available only to those with true survivor potential as opposed to keeping the program open for zombies actually has national policy merit … as long as it’s applied objectively that is.
To me this means that the administration may be preparing to send a potentially uncomfortable message to Wall Street that it wants to begin to divert capital away from obsessing on artificially floating up the DJIA and redirect it back into economy building uses of private capital. By making it so that banks will soon need such private capital to survive the anticipated loss scenarios of 2010 it means that only collective and focused investment as a cadent nation of citizens can stave off the further withering of a weakened broader economy. It’s a glitch that changes the where and how the nation’s wealth reserves are to be employed. Pretty gutsy move. Wake up and smell that coffee!
“A déjà vu means they’ve made a change in the matrix.”
Friday, September 11, 2009
Monday, August 31, 2009
After Six Months, Deja Vu
The first half of 2009 has certainly seen an extraordinary outpouring of big government flexing the power of treasure and policy to alter the course of a business cycle. U.S. taxpayers and the world have been asked to participate in a massive co-investment of mind over matter. So has it worked? Has the government indeed shifted the stress profile of the banking system to safer ground?
Unfortunately looking at the 2Q2009 industry stress distribution numbers based on the latest FDIC research master file the numbers tell a tale of doubt. Table 1 shows the population distribution of IRA bank stress indices computed over the weekend. The data includes every active bank in the United States for the end of 2Q.
At first glance you might not see much change. The return to 2008 reveals dramatically looking at the asset values of the institutions in each stress bucket. One does indeed see a bump of improvement at the end of 1Q2009 no doubt due to the combined gallant efforts of the administration and the one before it. But I have to report with what I will admit is a sinking heart that it's all but evaporating according to the second quarter results. We are back to the stress patterns of 2008.
So where are we? Where are the big banks in all this one might ask? Generally, that would be them beginning to pile up in and around column B country. The regional and community banks remain split in a barbell pattern that's been emerging for some time.
Mission Element Need Assessment
Any analyst who isn't in complete denial about being on planet earth should clearly see at this point that a one size fits all unified theory of problem solving is a load of hooey. We now have on our hands a much more complex battle with at least three elements that need to be maneuvered cleverly if this is to turn out alright.
The A+/A's are our economy's anchor. We need to make sure they are advantaged to capture market share and rebuild our foundation to good operating standards. They aren't necessarily the politically connected. But I do not believe the other two legs of banking can survive without them. Left to me, this is where I'd design the most favorable incentives to encourage private investments. Why here? Because it creates implied financial forces to herd the other two groups towards safer and sounder outcomes.
The B/C banks are the one's still carrying excess leverage from the prior business cycle. We need to bring them back to earth in a controlled fashion. Destroying them is not an option. Though wounded, they are still a tool with a real purpose in our economic landscape. Rather, we need to mend and reposition them so that their penchant for chasing great opportunities can be recycled to help power the next leap of the American dream.
The D/F banks are the great turnaround opportunity of our economy. These are the institutions whose business models have become so mismatched to current conditions that it's showing in red ink net incomes, hazardous exposures to government advances, and unsightly loan loss scenarios. These are the banks that will require the iron hand of the Banking Act reborn to restore discipline to safe and sound principles. Turn them around we must for the sake of our own peace of mind. Mark my words, for each 5% of them we fix we'll feel a quantum of joy better about life in these United States.
The search for solutions goes on.
Unfortunately looking at the 2Q2009 industry stress distribution numbers based on the latest FDIC research master file the numbers tell a tale of doubt. Table 1 shows the population distribution of IRA bank stress indices computed over the weekend. The data includes every active bank in the United States for the end of 2Q.
Table 1: IRA Bank Stress Index (BSI) Grade Distributions
|
At first glance you might not see much change. The return to 2008 reveals dramatically looking at the asset values of the institutions in each stress bucket. One does indeed see a bump of improvement at the end of 1Q2009 no doubt due to the combined gallant efforts of the administration and the one before it. But I have to report with what I will admit is a sinking heart that it's all but evaporating according to the second quarter results. We are back to the stress patterns of 2008.
Table 2: IRA Bank Stress Assets Distributions
|
So where are we? Where are the big banks in all this one might ask? Generally, that would be them beginning to pile up in and around column B country. The regional and community banks remain split in a barbell pattern that's been emerging for some time.
Mission Element Need Assessment
Any analyst who isn't in complete denial about being on planet earth should clearly see at this point that a one size fits all unified theory of problem solving is a load of hooey. We now have on our hands a much more complex battle with at least three elements that need to be maneuvered cleverly if this is to turn out alright.
The A+/A's are our economy's anchor. We need to make sure they are advantaged to capture market share and rebuild our foundation to good operating standards. They aren't necessarily the politically connected. But I do not believe the other two legs of banking can survive without them. Left to me, this is where I'd design the most favorable incentives to encourage private investments. Why here? Because it creates implied financial forces to herd the other two groups towards safer and sounder outcomes.
The B/C banks are the one's still carrying excess leverage from the prior business cycle. We need to bring them back to earth in a controlled fashion. Destroying them is not an option. Though wounded, they are still a tool with a real purpose in our economic landscape. Rather, we need to mend and reposition them so that their penchant for chasing great opportunities can be recycled to help power the next leap of the American dream.
The D/F banks are the great turnaround opportunity of our economy. These are the institutions whose business models have become so mismatched to current conditions that it's showing in red ink net incomes, hazardous exposures to government advances, and unsightly loan loss scenarios. These are the banks that will require the iron hand of the Banking Act reborn to restore discipline to safe and sound principles. Turn them around we must for the sake of our own peace of mind. Mark my words, for each 5% of them we fix we'll feel a quantum of joy better about life in these United States.
The search for solutions goes on.
Monday, June 1, 2009
300 or 2,000? How can we change destiny?
At the end of every nightmare, a new day dawns. - D. Santiago
This observation about bank stress trends from the IRA Newsletter garnered some attention.
"At the current rate of deterioration, that could put the Stress Score for the entire industry over 10 by Q4 2009 or a full order of magnitude above the 1995 baseline. Such a worst case scenario suggests that we could see one in four US banks merged or resolved through the cycle. In the event, that suggests that over 2,000 institutions, large and small, will be resolved. Put that into context with the FDIC's "official" dead pool of 300 or so institutions and that gives you a tangible measure for how much "spin" might live within the official version of the problems facing the US banking industry."
One email from a respected reporter asked,
"Is this the same thing as saying one in four banks may fail? How realistic is it to assume what the data suggests? What specificially would drive so many banks out of existence? In other words, what's their Achilles heel in your judgment?"
When a bank fails it is resolved, that is, merged by government edict into another "healthier" institution. Yes it is possible that we will see a good portion of now weakened banks become the subject of a merger feeding frenzy later this year. This could indeed lead to the emergence of a smaller industry populated by larger more economically resilient and politically powerful companies. Some people believe that it's a good thing to concentrate banking power into a more consolidated industry. Me? I just see fewer banks charging higher fees for basic services.
What the IRA analyis of 1Q2009 FDIC data is saying is that lacking any improvement in the infrastructure that supports banking, our analysis indicates that the deterioration of the industry will continue to spread potentially affecting a larger population of institutions as the year progresses.
As has been stated in previous observations, banks have been migrating down the path towards weaker net incomes as a result of stalled lending engines and ballooning anticipated losses on existing loans. The pursuit of good lending begins to look more like balance transferrals instead of true blue new loans that expand the U.S. economy. Anything riskier carries the stigma of being just another balance sheet item eventually headed for the REO pile. It's not easy to make a living under such conditions and the biological sustainment capacity answer is that the population must shrink to equilibrate with the environment.
Dude I don't like that answer either. There's no reason why a country like the United States of America should "equilibrate" to a lower quality of life at this stage in our history. It just does not make sense to me that we'd let something like this happen when we have it in our power to create a different destiny.
The Achilles heel in this equation is the bastard cousin of banking ... finance. Finance is the leverage we create to make our money do more for us. It is a powerful and dangerous tool that can both create and be driven by good and evil. Behind banking's ailments is the fact that securitization, a central element in leveraging the operational processes of main street banking, is now dormant. Driven by greed and excess, it's caretakers have been driven into discredit and trust in it has evaporated. Entire industries that enabled it have ceased to exist in the last 24 months. What's left of it is stored in Federal financial toxic meat lockers. We've done all this at the very peril of our quality of life.
The fact of the matter is that unless we get the financial engines supporting our banking product inventory restarted in some rational fashion banking will continue to de-leverage. Does that mean giving the greedy back their licenses to steal candy from babies? Of course not. What I think it does mean is making a national effort to construct the apparatus to deliver a new range of financial vehicles to enable banking to do it's job again. And do it at a quality of life target design point at oh say "the pursuit of happiness" once more.
And so begins the search for a new dawn.
This observation about bank stress trends from the IRA Newsletter garnered some attention.
"At the current rate of deterioration, that could put the Stress Score for the entire industry over 10 by Q4 2009 or a full order of magnitude above the 1995 baseline. Such a worst case scenario suggests that we could see one in four US banks merged or resolved through the cycle. In the event, that suggests that over 2,000 institutions, large and small, will be resolved. Put that into context with the FDIC's "official" dead pool of 300 or so institutions and that gives you a tangible measure for how much "spin" might live within the official version of the problems facing the US banking industry."
One email from a respected reporter asked,
"Is this the same thing as saying one in four banks may fail? How realistic is it to assume what the data suggests? What specificially would drive so many banks out of existence? In other words, what's their Achilles heel in your judgment?"
When a bank fails it is resolved, that is, merged by government edict into another "healthier" institution. Yes it is possible that we will see a good portion of now weakened banks become the subject of a merger feeding frenzy later this year. This could indeed lead to the emergence of a smaller industry populated by larger more economically resilient and politically powerful companies. Some people believe that it's a good thing to concentrate banking power into a more consolidated industry. Me? I just see fewer banks charging higher fees for basic services.
What the IRA analyis of 1Q2009 FDIC data is saying is that lacking any improvement in the infrastructure that supports banking, our analysis indicates that the deterioration of the industry will continue to spread potentially affecting a larger population of institutions as the year progresses.
As has been stated in previous observations, banks have been migrating down the path towards weaker net incomes as a result of stalled lending engines and ballooning anticipated losses on existing loans. The pursuit of good lending begins to look more like balance transferrals instead of true blue new loans that expand the U.S. economy. Anything riskier carries the stigma of being just another balance sheet item eventually headed for the REO pile. It's not easy to make a living under such conditions and the biological sustainment capacity answer is that the population must shrink to equilibrate with the environment.
Dude I don't like that answer either. There's no reason why a country like the United States of America should "equilibrate" to a lower quality of life at this stage in our history. It just does not make sense to me that we'd let something like this happen when we have it in our power to create a different destiny.
The Achilles heel in this equation is the bastard cousin of banking ... finance. Finance is the leverage we create to make our money do more for us. It is a powerful and dangerous tool that can both create and be driven by good and evil. Behind banking's ailments is the fact that securitization, a central element in leveraging the operational processes of main street banking, is now dormant. Driven by greed and excess, it's caretakers have been driven into discredit and trust in it has evaporated. Entire industries that enabled it have ceased to exist in the last 24 months. What's left of it is stored in Federal financial toxic meat lockers. We've done all this at the very peril of our quality of life.
The fact of the matter is that unless we get the financial engines supporting our banking product inventory restarted in some rational fashion banking will continue to de-leverage. Does that mean giving the greedy back their licenses to steal candy from babies? Of course not. What I think it does mean is making a national effort to construct the apparatus to deliver a new range of financial vehicles to enable banking to do it's job again. And do it at a quality of life target design point at oh say "the pursuit of happiness" once more.
And so begins the search for a new dawn.
Wednesday, May 6, 2009
Preliminary Q1 2009 Stress Test Results: Significant Increase in Stress Across the Banking Industry
UPDATED: May 6, 2009
“Young man sometimes the only way to win is to lose gracefully.”
Technology Innovation That Actually Works
We admire the Federal Deposit Insurance Corporation for many reasons. This month, we applaud them once again for the fine job they have done to bring the Central Data Repository (CDR) online in a way that serves the growing public demand for timely US bank data. Made operational just in January of 2009, we’ve just collected Q1 2009 CALL reports for over 7,600 reporting units, a goodly portion of which came out of submittal confirmation only a couple of days ago.
These CALL reports are submitted to the FDIC during a 30 day submission window beginning the first day of the quarter. We’ve been testing a variation of IRA’s ratings analyzer on these Q1 CALL’s since April 1st. The result is that IRA is now positioned to deliver preliminary bank stress estimates for the new quarter roughly two to three weeks ahead of the FDIC’s mid-quarter research master file release. Based on this maiden run, we are pleased to report that the FDIC’s CDR engine has the potential to enable a quantum leap in granularity looking at the U.S. banking industry.
Coupled with our analyzers, it’s possible to generate analysis on bank units as they file their CALL’s and, based our findings, generate a industry picture in around 36 to 48 hours after the close of the CALL submittal window. That’s pretty good!
Stable Pie Slices, But Dramatic Increase in Banking Industry Stress
Based on looking at sample set of around 91% of the test population used in Q4 2008, we observe that the distribution of IRA Bank Stress Rating grades for Q1 2009 retains the roughly 2/3rd to 1/3rd ratio of banks with A+/A grades versus elevated stress institutions IRA detected was characteristic of the banking industry throughout 2008.
We see indicators of a continued migration of banks from the A+ range where stress fall below the index Dec-1995 = 1.0 start mark into the A range indicating more banks are now feeling the effects of economic conditions regardless of the business practice models they’ve had in place.
At this time we do not know what the disposition of the remaining 750 or so institutions that are not in the CDR as of 5/3/2009. We have not yet had a chance to determine who these missing units are.
At first glance the situation as of Q1 2009 may seem to be getting better. But it’s not. In prior quarters, banks wound up getting “F” grades because they were barely making money; that is, they had small but positive net incomes that produced ROE’s sufficiently below industry averages to indicate elevated business operating stress. A lot of these institutions were suffering due to mark-to-market accounting, goodwill write-downs and other ROE issues.
In Q1 2009, the data indicates a dramatic climb in the industry aggregate average Bank Stress Index from 1.8 at the end of Q4 2008 to a whopping 5.57 coming out of 1Q 2009 or half an order or magnitude above the 1995 benchmark. The reason for this is the number of banks who delivered negative net incomes in the first quarter of 2009, one thousand five hundred fifty-seven (1,557) of them as updated on our system after the data run on May 5, 2009.
Keep in mind what the Q1 2009 FDIC data is saying: Even with the change in the FASB rule for M2M accounting, and Fed liquidity programs, the leading factor driving higher industry stress scores remains ROE degradation, not charge-offs or operational factors such as efficiency. When charge-offs are the leading factor in the IRA Banking Stress Index, then the industry will be through the worst.
The Q1 2009 results calculated by IRA are looking a little like a table from the CDC’s H1N1 confirmed laboratory cases page. Our overall observation is that U.S. policy makers may very well have been distracted by focusing on 19 large stress test banks designed to save Wall Street and the world’s central bank bondholders, this while a trend is emerging of a going concern viability crash taking shape under the radar.
We’ve noted in the past that US banks have been migrating down the quality slope taking an average of 9 months to complete the journey from “A” to “F” on the stress scale. The story is predictable. It begins with business losses and recriminations. This is followed by lending engine contraction as the propensity to create exposure narrows towards risk aversion and “quality lending” exclusivity. This is a rare diet to try to live on in these times. The bank, which makes its’ living wage from the interest it collects from its’ lending engine slowly starves.
At a certain point the carry cost of the infrastructure outweighs the earnings rate. Then you start to see strange shifts to seek incremental income from service fees, a move that often only serves to increase customer reluctance and mistrust. The end result is a stressed business model that can only be remedied by getting the core business, its’ lending engine, running again.
Counting the fourth quarter of 2007 when IRA’s data indicates this phenomenon began to emerge, we are now eighteen (18) months or one-half of a business cycle dragging this massive boat anchor the behind the US economy. We may have wasted valuable time trying to save Wall Street at the cost of Main Street.
At this point the reasons no longer matter. It’s time to win by thinking gracefully. The numbers indicate we need to seriously ask the question as to whether economic recovery for the United States can still come just from repairing Wall Street – or whether instead we should be worried about addressing the underlying loss rates that are driving the provisioning behind these poor ROE results. Has the time come to shift the policy focus away from the things that we love, namely big zombie banks, to tackle things that are truly hurting us?
Readouts on all 7,519 bank units collected by IRA to date are now available to our Advisory Clients. The Beta version of unit level preliminary indicators now appears in the IRA Bank Monitor for Professionals. Preliminary grade indicators appear in pink if available. It will begin to appear in the IRA Bank Ratings Service for Consumers as soon as Beta testing is completed. IRA is presently working on adapting the accompanying bank-holding company (BHC) extension of our ratings system to also feed from CDR collected preliminary data. We continue to support our “prime solution” philosophy that it takes everyone with fair, equal and transparent access to risk information to collectively guide our economy to recovery.
“Young man sometimes the only way to win is to lose gracefully.”
Gen. Bill Creech, Commander,
USAF Tactical Air Command
to Dennis Santiago years ago
Technology Innovation That Actually Works
We admire the Federal Deposit Insurance Corporation for many reasons. This month, we applaud them once again for the fine job they have done to bring the Central Data Repository (CDR) online in a way that serves the growing public demand for timely US bank data. Made operational just in January of 2009, we’ve just collected Q1 2009 CALL reports for over 7,600 reporting units, a goodly portion of which came out of submittal confirmation only a couple of days ago.
These CALL reports are submitted to the FDIC during a 30 day submission window beginning the first day of the quarter. We’ve been testing a variation of IRA’s ratings analyzer on these Q1 CALL’s since April 1st. The result is that IRA is now positioned to deliver preliminary bank stress estimates for the new quarter roughly two to three weeks ahead of the FDIC’s mid-quarter research master file release. Based on this maiden run, we are pleased to report that the FDIC’s CDR engine has the potential to enable a quantum leap in granularity looking at the U.S. banking industry.
Coupled with our analyzers, it’s possible to generate analysis on bank units as they file their CALL’s and, based our findings, generate a industry picture in around 36 to 48 hours after the close of the CALL submittal window. That’s pretty good!
Stable Pie Slices, But Dramatic Increase in Banking Industry Stress
Based on looking at sample set of around 91% of the test population used in Q4 2008, we observe that the distribution of IRA Bank Stress Rating grades for Q1 2009 retains the roughly 2/3rd to 1/3rd ratio of banks with A+/A grades versus elevated stress institutions IRA detected was characteristic of the banking industry throughout 2008.
| Q1 2009 Preliminary IRA Bank Stress Rating Grade Distribution (Based on data for 7,519 bank units from the FDIC CDR*) Source: FDIC/IRA Bank Monitor | ||
| IRA Bank Stress Grade | 2009 Q1* | 2008 Q4 |
| A+ | 3362 | 3918 |
| A | 1909 | 1705 |
| B | 135 | 119 |
| C | 411 | 390 |
| D | 87 | 98 |
| F | 1615 | 2003 |
| There were an additional 108 banks in the initial data set that were found to have some holes in the data thus preventing computation for the preliminary analysis run. | ||
We see indicators of a continued migration of banks from the A+ range where stress fall below the index Dec-1995 = 1.0 start mark into the A range indicating more banks are now feeling the effects of economic conditions regardless of the business practice models they’ve had in place.
At this time we do not know what the disposition of the remaining 750 or so institutions that are not in the CDR as of 5/3/2009. We have not yet had a chance to determine who these missing units are.
| IRA Historical Bank Stress Grade Distributions based on FDIC Research Master Files Source: FDIC/IRA Bank Monitor | ||||||
| Period | A+ | A | B | C | D | F |
| 2008 12 | 3,918 | 1,705 | 119 | 390 | 98 | 2,003 |
| 2008 09 | 4,498 | 1,325 | 283 | 356 | 63 | 1,793 |
| 2008 06 | 4,884 | 1,248 | 404 | 326 | 66 | 1,458 |
| 2008 03 | 5,167 | 1,042 | 578 | 334 | 68 | 1,233 |
| 2007 12 | 5,556 | 610 | 884 | 315 | 70 | 1,029 |
| 2007 09 | 5,931 | 395 | 950 | 274 | 37 | 902 |
| 2007 06 | 6,056 | 354 | 972 | 273 | 60 | 824 |
| 2007 03 | 6,075 | 304 | 1,057 | 284 | 63 | 795 |
| 2006 12 | 6,370 | 134 | 1,165 | 204 | 39 | 697 |
| 2006 09 | 6,666 | 29 | 1,108 | 198 | 44 | 628 |
| 2006 06 | 6,729 | 0 | 1,155 | 194 | 35 | 613 |
| 2006 03 | 6,752 | 2 | 1,131 | 187 | 39 | 608 |
At first glance the situation as of Q1 2009 may seem to be getting better. But it’s not. In prior quarters, banks wound up getting “F” grades because they were barely making money; that is, they had small but positive net incomes that produced ROE’s sufficiently below industry averages to indicate elevated business operating stress. A lot of these institutions were suffering due to mark-to-market accounting, goodwill write-downs and other ROE issues.
In Q1 2009, the data indicates a dramatic climb in the industry aggregate average Bank Stress Index from 1.8 at the end of Q4 2008 to a whopping 5.57 coming out of 1Q 2009 or half an order or magnitude above the 1995 benchmark. The reason for this is the number of banks who delivered negative net incomes in the first quarter of 2009, one thousand five hundred fifty-seven (1,557) of them as updated on our system after the data run on May 5, 2009.
Keep in mind what the Q1 2009 FDIC data is saying: Even with the change in the FASB rule for M2M accounting, and Fed liquidity programs, the leading factor driving higher industry stress scores remains ROE degradation, not charge-offs or operational factors such as efficiency. When charge-offs are the leading factor in the IRA Banking Stress Index, then the industry will be through the worst.
| Number of Bank Units with Negative Net Income in 1Q2008 by State updated as of May 5, 2009 Source: FDIC CDR/IRA Bank Monitor | |
| AL | 27 |
| AR | 11 |
| AZ | 39 |
| CA | 135* |
| CO | 27 |
| CT | 12 |
| DC | 4* |
| DE | 11 |
| FL | 149* |
| GA | 139* |
| HI | 1 |
| IA | 29 |
| ID | 5 |
| IL | 108* |
| IN | 10 |
| KA | 1 |
| KS | 37 |
| KY | 20 |
| LA | 11 |
| MA | 27 |
| MD | 16 |
| MI | 53 |
| MN | 77 |
| MO | 64* |
| MS | 7 |
| MT | 10 |
| NC | 36* |
| ND | 10 |
| NE | 27 |
| NH | 4 |
| NJ | 26 |
| NM | 5 |
| NV | 23 |
| NY | 30* |
| OH | 22 |
| OK | 19 |
| OR | 14 |
| PA | 41 |
| PR | 2 |
| RI | 3 |
| SC | 18 |
| SD | 8 |
| TN | 33* |
| TX | 89* |
| UT | 23* |
| VA | 20 |
| WA | 49* |
| WI | 22 |
| WV | 1 |
| WY | 2 |
| * items updated since 5-3-2008. Please note that th FDIC CDR system continues to release data. The definitive lock down of quarterly numbers happens when the research masterfile is released later this month. | |
The Q1 2009 results calculated by IRA are looking a little like a table from the CDC’s H1N1 confirmed laboratory cases page. Our overall observation is that U.S. policy makers may very well have been distracted by focusing on 19 large stress test banks designed to save Wall Street and the world’s central bank bondholders, this while a trend is emerging of a going concern viability crash taking shape under the radar.
We’ve noted in the past that US banks have been migrating down the quality slope taking an average of 9 months to complete the journey from “A” to “F” on the stress scale. The story is predictable. It begins with business losses and recriminations. This is followed by lending engine contraction as the propensity to create exposure narrows towards risk aversion and “quality lending” exclusivity. This is a rare diet to try to live on in these times. The bank, which makes its’ living wage from the interest it collects from its’ lending engine slowly starves.
At a certain point the carry cost of the infrastructure outweighs the earnings rate. Then you start to see strange shifts to seek incremental income from service fees, a move that often only serves to increase customer reluctance and mistrust. The end result is a stressed business model that can only be remedied by getting the core business, its’ lending engine, running again.
Counting the fourth quarter of 2007 when IRA’s data indicates this phenomenon began to emerge, we are now eighteen (18) months or one-half of a business cycle dragging this massive boat anchor the behind the US economy. We may have wasted valuable time trying to save Wall Street at the cost of Main Street.
At this point the reasons no longer matter. It’s time to win by thinking gracefully. The numbers indicate we need to seriously ask the question as to whether economic recovery for the United States can still come just from repairing Wall Street – or whether instead we should be worried about addressing the underlying loss rates that are driving the provisioning behind these poor ROE results. Has the time come to shift the policy focus away from the things that we love, namely big zombie banks, to tackle things that are truly hurting us?
Readouts on all 7,519 bank units collected by IRA to date are now available to our Advisory Clients. The Beta version of unit level preliminary indicators now appears in the IRA Bank Monitor for Professionals. Preliminary grade indicators appear in pink if available. It will begin to appear in the IRA Bank Ratings Service for Consumers as soon as Beta testing is completed. IRA is presently working on adapting the accompanying bank-holding company (BHC) extension of our ratings system to also feed from CDR collected preliminary data. We continue to support our “prime solution” philosophy that it takes everyone with fair, equal and transparent access to risk information to collectively guide our economy to recovery.
Friday, May 1, 2009
Mary Schapiro's SEC
In reference to,
SEC's Schapiro Shows Little Interest in Cox's Pet Projects
http://blogs.reuters.com/summits/2009/04/28/secs-schapiro-shows-little-interest-in-coxs-pet-projects/
Personally, I applaud SEC head Mary Schapiro's caution. Technology (old or new) is not a substitute for policy and it seems right that the SEC should pause and assess initiatives on an ongoing basis.
Supplement? Yes. Replace? That's a stretch.
While much work has been put into XBRL, stepping back given the present economic cycle, I can see no driving national interest why the United States needs to rush to catch up to a vision of replacing a body of material encompassing accounting, legal and forward looking commentary people can read with a narrower set of digital files as the primary evidentiary source for corporate reporting.
Proof of efficacy is essential. Within the SEC itself, has the question of the utility of this wonder tool been properly assesed? I respectfully submit that it's not unreasonable to demand that an investment of this magnitude must at least be shown to streamline and magnify effectiveness of the case load work within the Corporate Finance and Enforcement Divisions of the SEC as a stringent proof of concept. I mean is that kind of payback hurdle too much to ask of something that could impact corporate America like the second coming of Sarbanes-Oxley?
Does this mean XBRL won't happen? No. Does it mean that in the end it's just another data file format and not as some would hope a fundamental business language and process sea change? Speaking as both a CEO and a techie, I hope so.
Changing technologies, with regards to the internet versus the wire services, visceral reactions aside, it's likely best to consider all sides of the argument when it comes to the dissemination of corporate action data. Fairness is a process of constantly finding ways so that everyone gains access to information equally. Wire services, for all their synchronization, always reach professionals first. Enabling and encouraging pathways that allow individuals to negate this long time Wall Street advantage seems to be something always worth pondering. ... Tweet!
And finally, grander reporting and regulation topics seem ripe for one of those restart buttons like Secretary of State Clinton uses to manage foreign policy. The Obama White House has already stated its' intent to a process of review for financial markets regulation for the remainder of 2009. Make it so!
SEC's Schapiro Shows Little Interest in Cox's Pet Projects
http://blogs.reuters.com/summits/2009/04/28/secs-schapiro-shows-little-interest-in-coxs-pet-projects/
Personally, I applaud SEC head Mary Schapiro's caution. Technology (old or new) is not a substitute for policy and it seems right that the SEC should pause and assess initiatives on an ongoing basis.
Supplement? Yes. Replace? That's a stretch.
While much work has been put into XBRL, stepping back given the present economic cycle, I can see no driving national interest why the United States needs to rush to catch up to a vision of replacing a body of material encompassing accounting, legal and forward looking commentary people can read with a narrower set of digital files as the primary evidentiary source for corporate reporting.
Proof of efficacy is essential. Within the SEC itself, has the question of the utility of this wonder tool been properly assesed? I respectfully submit that it's not unreasonable to demand that an investment of this magnitude must at least be shown to streamline and magnify effectiveness of the case load work within the Corporate Finance and Enforcement Divisions of the SEC as a stringent proof of concept. I mean is that kind of payback hurdle too much to ask of something that could impact corporate America like the second coming of Sarbanes-Oxley?
Does this mean XBRL won't happen? No. Does it mean that in the end it's just another data file format and not as some would hope a fundamental business language and process sea change? Speaking as both a CEO and a techie, I hope so.
Changing technologies, with regards to the internet versus the wire services, visceral reactions aside, it's likely best to consider all sides of the argument when it comes to the dissemination of corporate action data. Fairness is a process of constantly finding ways so that everyone gains access to information equally. Wire services, for all their synchronization, always reach professionals first. Enabling and encouraging pathways that allow individuals to negate this long time Wall Street advantage seems to be something always worth pondering. ... Tweet!
And finally, grander reporting and regulation topics seem ripe for one of those restart buttons like Secretary of State Clinton uses to manage foreign policy. The Obama White House has already stated its' intent to a process of review for financial markets regulation for the remainder of 2009. Make it so!
Monday, April 27, 2009
Statement on Relative Positioning Buckets for the Nineteen Stress Test Banks
Statement Date: 23 April 2009
What is bank stress? The question is complex and anyone who attempts to simplify the answer probably is doing themselves more harm than good. There are operational stresses, financing stresses, and regulatory stresses that play like a noisy orchestra keeping bankers up at night and sadly sometimes driving them beyond the edge of despair.
In the U.S. government’s bank stress test, the question being asked is essentially “how well can a particular institution withstand the stresses of certain economic scenarios designed by the government”. As Fed Chairman Ben Bernanke stated in his testimony to Congress on February 25, these tests are not designed to pass or fail a bank. Rather, they are designed to help identify to what degree and in what areas each key institution participating in the stress process shows strengths or weaknesses so that the government can better determine how to use its’ resources to help alleviate the crisis.
That’s the plan and so far that’s also where the Federal Reserve and Treasury seem headed. We see no reason not to expect that a genuine attempt will be made to use the results of the stress testing process to help allocate government resources with greater precision.
Regardless, America and the world has a never ending obsession with picking winners and losers; or lacking closure, making odds. Right now if you want good odds probably better to place your bet on Susan Boyle. What follows is our response to the press asking for some way to shed a little more light on who likely stands where in the landscape.
Nothing in the list that follows represents an assessment by IRA as to how any of these institutions will fare with respect to the government’s stress tests. The question posed to us is how would IRA rank these nineteen banks relative to each other using our IRA’s independent benchmarking processes. It is quick analysis based on using some of IRA’s top level criteria to identify where these banks sit relative to each other in their ability to respond to the stresses we feel are of most concern under the current economic climate. At best, these figures could provide some visibility as to what the government may decide is the right individual prescription one by one.
Two Criteria, Three Buckets
For this we elect to focus on two criteria. The first is our IRA Bank Stress Index which is a measure of the operating stresses on a bank viewed as a going concern. The objective of this measurement is to identify whether an institution’s business model is working or potentially in need of adjustment. The criteria used are based on bank safety and soundness principles and have little to do with assessing the equity attractiveness of a bank. Remember only 900 or so banks are publicly traded out of the over 7,500 that report to the FDIC. The second criteria we focus on is financial leverage and for this we use another IRA proprietary measurement based on Economic Capital versus Tier One Risk Based Capital. The combination of the two gives a rough approximation of the business stresses a banker must contend with.
So from these two criteria we make three buckets – buckets that roughly align with the four buckets reportedly being used by regulators in the bank stress tests. They are:
• Upper Bucket – the institution metric measure well on both criteria.
• Middle Bucket – the institution is good on one out of the two criteria.
• Lower Bucket – the institution flags on both criteria.
We now present 4Q2008 information on 17 out of the 19 stress test banks. The arbitrary cut-off criteria for bucketing is the number 2. We did not have data for GMAC and American Express available for this snapshot.
Anyone familiar with the banking industry is unlikely to be surprised by the above relative positioning of these banks. Good operating performance combined with limited economic leveraging most likely translates into greater ability to withstand the stresses of economic shock scenarios. As combinations of leverage and operations positioning degrade there’s less business as usual wiggle room and thus greater need to implement more extensive strategies to respond to shocks. Do not count any of them out. All of these institutions are large businesses capable of a great deal of flexibility in responding to even the most massive business environment challenges.
Take Goldman Sachs. It sits at the bottom of the list because it’s a brand new bank holding company fresh from being an almost pure investment bank. It has little in the way of the kinds of classic bank operations that contribute to traditional operating stability and soundness measurements. More, it has no deposits to speak of and is entirely market funded, like American Express and Morgan Stanley. One could look at them and just as easily ask the question why they should be a BHC at all if they can find a business model that doesn’t require depositor backed lending engines to round out their operations.
The point is that the government is right to treat these institutions as individual cases each of which will have independent paths to journey their way back to being confident contributors to the economy.
Yes there will be commonalities and hopefully guidance templates that can use the information exposed by the process of close scrutiny to guide government policy with regards to other institutions beyond these nineteen few. That would be the best outcome of the process. We wish the government the best in their efforts and stand ready to assist in whatever way we can.
But if you plan to go long or short on any of the above, nothing in what you just read will mean much. Remember that at the start of this note that there were three stresses listed; operational, financial and regulatory. It’s the third one that’s the real wild card in the deck. Normal market forces are not the driving coefficient at the moment.
What is bank stress? The question is complex and anyone who attempts to simplify the answer probably is doing themselves more harm than good. There are operational stresses, financing stresses, and regulatory stresses that play like a noisy orchestra keeping bankers up at night and sadly sometimes driving them beyond the edge of despair.
In the U.S. government’s bank stress test, the question being asked is essentially “how well can a particular institution withstand the stresses of certain economic scenarios designed by the government”. As Fed Chairman Ben Bernanke stated in his testimony to Congress on February 25, these tests are not designed to pass or fail a bank. Rather, they are designed to help identify to what degree and in what areas each key institution participating in the stress process shows strengths or weaknesses so that the government can better determine how to use its’ resources to help alleviate the crisis.
That’s the plan and so far that’s also where the Federal Reserve and Treasury seem headed. We see no reason not to expect that a genuine attempt will be made to use the results of the stress testing process to help allocate government resources with greater precision.
Regardless, America and the world has a never ending obsession with picking winners and losers; or lacking closure, making odds. Right now if you want good odds probably better to place your bet on Susan Boyle. What follows is our response to the press asking for some way to shed a little more light on who likely stands where in the landscape.
Nothing in the list that follows represents an assessment by IRA as to how any of these institutions will fare with respect to the government’s stress tests. The question posed to us is how would IRA rank these nineteen banks relative to each other using our IRA’s independent benchmarking processes. It is quick analysis based on using some of IRA’s top level criteria to identify where these banks sit relative to each other in their ability to respond to the stresses we feel are of most concern under the current economic climate. At best, these figures could provide some visibility as to what the government may decide is the right individual prescription one by one.
Two Criteria, Three Buckets
For this we elect to focus on two criteria. The first is our IRA Bank Stress Index which is a measure of the operating stresses on a bank viewed as a going concern. The objective of this measurement is to identify whether an institution’s business model is working or potentially in need of adjustment. The criteria used are based on bank safety and soundness principles and have little to do with assessing the equity attractiveness of a bank. Remember only 900 or so banks are publicly traded out of the over 7,500 that report to the FDIC. The second criteria we focus on is financial leverage and for this we use another IRA proprietary measurement based on Economic Capital versus Tier One Risk Based Capital. The combination of the two gives a rough approximation of the business stresses a banker must contend with.
So from these two criteria we make three buckets – buckets that roughly align with the four buckets reportedly being used by regulators in the bank stress tests. They are:
• Upper Bucket – the institution metric measure well on both criteria.
• Middle Bucket – the institution is good on one out of the two criteria.
• Lower Bucket – the institution flags on both criteria.
We now present 4Q2008 information on 17 out of the 19 stress test banks. The arbitrary cut-off criteria for bucketing is the number 2. We did not have data for GMAC and American Express available for this snapshot.
| December 2008 Bank Holding Company | IRA Bank Stress Index | IRA EC to T1 RBC Ratio | Is Stress Index > 2? | Is ECtoT1RBC > 2? | Probable Bucket | Simple Ranking via column B plus C |
| BB&T CORPORATION | 0.95 | 0.377 | No | No | Upper | 1.327 |
| U.S. BANCORP | 1.11 | 0.744 | No | No | Upper | 1.854 |
| COMERICA INCORPORATED | 1.4 | 0.563 | No | No | Upper | 1.963 |
| NORTHERN TRUST CORPORATION | 0.66 | 1.484 | No | No | Upper | 2.144 |
| SUNTRUST BANKS, INC. | 1.49 | 0.885 | No | No | Upper | 2.375 |
| PNC FINANCIAL SERVICES GROUP, INC., THE | 1.36 | 1.576 | No | No | Upper | 2.936 |
| BANK OF AMERICA CORPORATION | 1.61 | 1.908 | No | No | Upper | 3.518 |
| WELLS FARGO & COMPANY | 1.47 | 2.146 | No | Yes | Middle | 3.616 |
| CAPITAL ONE FINANCIAL CORPORATION | 2.33 | 1.495 | Yes | No | Middle | 3.825 |
| BANK OF NEW YORK MELLON CORPORATION, THE | 0.81 | 3.963 | No | Yes | Middle | 4.773 |
| STATE STREET CORPORATION | 0.62 | 4.975 | No | Yes | Middle | 5.595 |
| JPMORGAN CHASE & CO. | 1.3 | 4.513 | No | Yes | Middle | 5.813 |
| MORGAN STANLEY | 20.43 | 0.256 | Yes | No | Middle | 20.686 |
| KEYCORP | 21.17 | 0.623 | Yes | No | Middle | 21.793 |
| REGIONS FINANCIAL CORPORATION | 21.11 | 0.715 | Yes | No | Middle | 21.825 |
| FIFTH THIRD BANCORP | 21.57 | 0.961 | Yes | No | middle | 22.531 |
| CITIGROUP INC. | 21.54 | 4.588 | Yes | Yes | lower | 26.128 |
| GOLDMAN SACHS GROUP, INC., THE | 20.6 | 7.905 | Yes | Yes | lower | 28.505 |
Anyone familiar with the banking industry is unlikely to be surprised by the above relative positioning of these banks. Good operating performance combined with limited economic leveraging most likely translates into greater ability to withstand the stresses of economic shock scenarios. As combinations of leverage and operations positioning degrade there’s less business as usual wiggle room and thus greater need to implement more extensive strategies to respond to shocks. Do not count any of them out. All of these institutions are large businesses capable of a great deal of flexibility in responding to even the most massive business environment challenges.
Take Goldman Sachs. It sits at the bottom of the list because it’s a brand new bank holding company fresh from being an almost pure investment bank. It has little in the way of the kinds of classic bank operations that contribute to traditional operating stability and soundness measurements. More, it has no deposits to speak of and is entirely market funded, like American Express and Morgan Stanley. One could look at them and just as easily ask the question why they should be a BHC at all if they can find a business model that doesn’t require depositor backed lending engines to round out their operations.
The point is that the government is right to treat these institutions as individual cases each of which will have independent paths to journey their way back to being confident contributors to the economy.
Yes there will be commonalities and hopefully guidance templates that can use the information exposed by the process of close scrutiny to guide government policy with regards to other institutions beyond these nineteen few. That would be the best outcome of the process. We wish the government the best in their efforts and stand ready to assist in whatever way we can.
But if you plan to go long or short on any of the above, nothing in what you just read will mean much. Remember that at the start of this note that there were three stresses listed; operational, financial and regulatory. It’s the third one that’s the real wild card in the deck. Normal market forces are not the driving coefficient at the moment.
Tuesday, April 7, 2009
More Musings on the PPIP
Today I'm pondering the old adage "buy low/sell high". In this case as it applies to toxic asset speculators looking for arbitrage gain from buying troubled assets low hoping to reap gains selling same to the government high. That's a whopper of a gain for the club members who can pony up the ante, something that most taxpayers who are funding the public side of the PPIP cannot.
So here's a what if. What if the regulatory implentation of things like the PPIP were set up so that the government would only buy troubled assets from documentable non-speculators for say the first year of the program. This would focus taxpayer dollars towards flushing toxic assets from the operating institutions most in need of capital stress relief.
Then to further benefit the public what if the agency managing PPIP implementation followed a path where assets purchased for speculation would not be looked at until they seasoned a minimum 12-months holding period. This would allow truly skilled pool holders time to cherry pick promising items from the mix prior to disposal. The PPIP could also require the remainder collateral pool to be marked at the seasoning date prior to being purchased into the program. This would seem to be the right thing to do instead of relying on factors of a spreadsheet ... again.
Just thinking out loud.
- DS
So here's a what if. What if the regulatory implentation of things like the PPIP were set up so that the government would only buy troubled assets from documentable non-speculators for say the first year of the program. This would focus taxpayer dollars towards flushing toxic assets from the operating institutions most in need of capital stress relief.
Then to further benefit the public what if the agency managing PPIP implementation followed a path where assets purchased for speculation would not be looked at until they seasoned a minimum 12-months holding period. This would allow truly skilled pool holders time to cherry pick promising items from the mix prior to disposal. The PPIP could also require the remainder collateral pool to be marked at the seasoning date prior to being purchased into the program. This would seem to be the right thing to do instead of relying on factors of a spreadsheet ... again.
Just thinking out loud.
- DS
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