Busted: Bankers and The Global Economy

June 5, 2008

U.S. Banking Pressures Continue Unabated

Uncertainties in today’s economic environment continue to pose significant challenges for the banking industry, households and bank regulators. Banks continue to experience increased pressure on earnings resulting from a deterioration in credit quality noted first in higher-risk nontraditional mortgage loans and now evident in other sectors. Construction and development loans have continued to deteriorate in quality and threaten to destabilize lending.

Many American citizens know that economic life is tough. The FDIC recognizes that economic weakness combined with rising food and energy costs have increased risks to banking because of the suffering consumer/home buyer. The FDIC anticipates a rise in the number of problem institutions over the next few quarters, but so far the number of under-capitalized institutions remains well below levels seen during previous economic downturns.

This news is not entirely surprising considering that the Federal Reserve put a new floor into the banking system with banking auctions (TAF) and with the rescue of Wall Street. The actions of Federal Reserve have allowed the beleaguered U.S. banking system to tread water, but little more so far. As a result, bank failures have been very limited.

Because of difficulties arising from problems in the housing sector, financial markets and the overall economy, the FDIC fears that the insurance fund could suffer losses that are significantly high than projections. Bankers have cleverly learned to mask many of their debts with an increasingly complex system. For example, brokered deposits are a recent complexity in recent bank failures that have cost the FDIC dearly in the effort to maintain consumer confidence.

The FDIC has re-evaluated the banking system in the last year in order to restructure risk and the cost of required insurance to banks. Problem banks are many and the FDIC is zealously protecting the banking community from public knowledge and individual scrutiny.

Interestingly, the FDIC has admitted to developing projections of expected failures and is hiring new staff to coordinate with those projections. Like other government agencies, they expect to hire private contractors and the perils that third-party hiring brings to the mix. In the face of significant risks from economic conditions, the fallout from recent unsustainable mortgage lending practices and disruptions in the credit/capital markets, the FDIC insists that most banks are well capitalized.

On a similar note, the Federal Reserve Board announced approval of Bank of America Corporation to acquire Countrywide Financial Corporation and some non-banking subsidiaries. The Federal Reserve has admitted that it is still learning about the increased complexity in financial products and markets.

Reflecting deterioration in the mortgage industry, nonperforming assets more than doubled over the past year from $37 billion to $81 billion. This number is notoriously small considering the huge wealth within the industry and yet threatens to destabilize the country by the admission of many experts. The shows the severity of the bad management and gambles for profitability of the last 8 years or so.

The Federal Reserve admits that they and bankers have failed dismally at determining actual risk. They claim that lessons have been learned, but have failed to gain a complete understanding of what the actual breakdowns are and how to deal successfully with the result.

With all the finger-pointing, could outright graft and fraud be so outrageous that it looks like ignorance? Could this scenario be the real answer for U.S. bankers, Wall Street and their institutions? As Bugs Bunny often said, “Eh-h, could be doc.”

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January 10, 2008

Credit Crunch: Is World Banking in Trouble?

creditcrunch.jpgIn the eyes of many financial experts, the recent weakness in the world banking system is a regional symptom in that market and not a systemic problem. Right now financial firms that have exposed themselves to “subprime” mortgages face much larger losses on the surface than other banking and finance firms. On a regional basis, the value of homes in the U.S. market as well as other assets like stocks and bonds, have been adversely affected. As a result, bank losses have multiplied and lending has been sharply curbed as a result of defaults on loans and the devaluation of bonds. These loans and bonds are the profitable mainstay of banking. These banking declines continue to be revealed in the United States and worldwide. The news is now reporting job losses and continuing expected job losses as a result of the economic slump in the United States.

Economic analysts have been quick to lay blame on policymakers. The trend of “deregulation” has created a climate with little oversight by bankers and regulators. It is natural that “the industry” would want to spread the risk and increase profits by seeking bond investors throughout the world. When the crisis hit from relentless profiteering and the crumbling base of the “subprime” mortgage bonds, the investment world was sent into a tail spin. Naturally, the goal of the industry is to detract attention from the crisis along with any responsibility, while shifting as much of any catastrophic loss as possible. The history of the banking and finance industry shows that the Federal Reserve and other central banks will ultimately take care of everything, acting much like a large safety net to bolster the system. Any financial instability dramatically risks increasing the national debt for the region along with devaluation of regional monetary value. The Federal Reserve and other central banks will play a reassuring role by trimming short-term interest rates and creating new channels of commercial credit.

Jean-Claude Trichet, president of the European Central Bank disclosed the need to watch continued uncertainty in the money markets to ensure smooth functioning. The theory of the Federal Reserve is to reduce interest rates more aggressively to prevent the current credit crisis from evolving into a recession that would deepen the credit crisis currently underway. The weakness in the banking industry lies in the size of the U.S. market as well as the fact that hundreds of billions in U.S. mortgage debt have been invested in by overseas investors.

The banking system does have systemic problems. Banks have bet heavily on the continued boon of their market through the use of creative internal loan schemes. They are being forced to absorb losses and lower the value of their banking assets. As credit ratings on bonds are lowered, asset values continue to deflate. Contracts called credit default swaps were designed to insure against loan losses, but are in reality untested theory. As a result, banks are now very fearful to lend to one another. The reality is that interbank lending is a routine part of the world economy and is required for status quo operations to continue. The irony is that what bankers fear most is exactly what they must face on a daily basis.

On the surface, most bankers and their mouthpieces are optimistic. They say that the global economy will escape major damage. Behind the scenes, they are shaking in their boots from enacting new profit-generating policies that threaten to swallow banking reputations and liquidity whole.

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