By Golem XIV
It's Jackson Hole time again. The best of the best are gathering to, as MarketWatch describes it, 'brainstorm' ways of dealing with the economy. God help us. MarketWatch goes on to exclusively reveal that,
"The biggest puzzle of all is the sudden demise of the U.S. recovery.
Sometimes there is no satire nor irony strong enough. Two rounds of QE, the second telegraphed at last year's Jackson Hole meeting, both 'guarenteed' by those clever FED chaps, to solve what we were told over and over was just a 'liquidity problem'. And the result is that another year and several Debt Ceiling hikes later, the banks are back at the Fed's table once again, banging their knives and forks. Famished fat men demanding to be fed.
The questions we have to ask is why, after so much money in the last three years, they still need more? Why, if this policy is the correct, the only one, are the banks selling each other's stocks? What has caused the sudden collapse in European and American banks stocks? We need to find answers because it is obvious our financial experts are lost, but too arrogant and too afraid to admit it.
Until early August, Fed officials gave no sign that they were worried about the economy. They had forecast a pickup in activity for the second half and said that weakness in the first half was due to temporary factors."
Not one official forecast of the last three years has been worth a pin. And the financial press, because they follow the same disastrously wrong ideological assumptions as those they report on, are equally clueless. Thus MarketWatch sincerely feels
A second puzzle is why the U.S. economy catches cold every time Europe sneezes.
So let me offer some thoughts.
The banks are want QE3. That much is obvious. At the start of this year Bank of America's market value was $143 billion. Today it is around $63 billion. Their share price along with most of the European banks has been slaughtered day after day after day. Banks are traditionally big owners of bank stocks. So who is selling do you think?
Will another injection of easy money into the banks save them or help the economy? Well the last three years shows us quite unambiguously that the money, your money that is, will save gorge the fat men one more time but do almost nothing to help the broader economy. QE has never, in any country in this crisis been a stimulus for the economy. That was has been one of those unrelentingly told lies.
If Bernanke or King or any other expert wants to stimulate the economy - the real economy - they could easily do it, but NOT by putting the money in to the banks.
The US banks are not lending but not because they don't have the money. The Big US banks have $1.7 trillion on overnight deposit in the NY FED. Most of that is QE money. It is doing nothing for anyone except the banks. 'US tax payers 'gave' it to them and the banks are now being paid interest on it ... by the tax payer. Nice deal.
But why the sudden collapse of bank stocks in the US and Europe? The financial press says it is due to worries about the slow down in the American economy and over debt worries in Europe. I think these are weaselly half truths at best, but let's look at them anyway. MarketWatch claims they and the Fed have been surprised at the slow down in the US. I find that hard to believe. Unless these people really never, ever get out of their gated communities and sound proofed offices they cannot really have thought that two years of barely a pulse at all and even what there being purely due to two previous massive injections of QE - they cannot have thought this was evidence of a roaring recovery?
So why the sudden and massive decline in bank stocks? Of course the short answer is 'the exact same reasons every other time the banks have reached the point of panic'. They are insolvent, their assets are rotting, their debts are increasing and they are not making enough real profit (as opposed to those conjured up by accounting jiggery pokery) to survive. But while I think think this is undeniably true it doesn't answer the question of why such a savage sell off and why no one will lend overnight to European banks, not even other European banks?
I think the answer is summed up in three words - "Risk Weighted Assets."
When 'stress tests' or risk managers, regulators or investors look at the health of a bank they look at what capital it has relative to it liabilities, debts and potential losses. Two such measures are The Capital Adequacy Ratio (CA) and the Tangible Common Equity (TCE) Ratio. Both are the ratio of Capital (what people have put in to the bank and which the bank must be able to pay back) over Assets (what the bank has loaned out and from which it expects a return from which it will pay off its investors).
People make a lot of the difference between these two measures. How they differ is in what they count as Capital. Basically Capital Adequacy counts all sorts of things as Capital, including deferred tax rebates on past losses. Tangible Common Equity is far stricter and is a far more accurate measure of how much equity there is in the bank for investors in the case of the bank going down.
Needless to say banks prefer to talk about Capital Adequacy and so do their political and regulatory fluffers. But last year Deutsche Bank did a study of the stricter TCE of European Banks. What they found was while all the banks, of course, passed the European Stress Tests their real state was not good.
Deutsche found that on average Europe's banks had a TCE ratio of a mere 3.2%. They should have about 6-8%. The study's authors concluded - this is a year ago before things 'started to get bad' - that European banks would have to raise between €600 billion and €1 Trillion in new capital. Since then the banks, and particularly those most vulnerable such as UniCredit, have raised very little if any.
You have to ask why not? Especially as now they really need to raise that money and can't because they are completely locked out. Genius and Prudence both equally absent.
This chart published recently by ZeroHedge looking at the health of Canadian Banks also happens to show how horribly exposed to ruin and loss the investors in Europe's 'Super banks' are, should the banks go under. Suddenly you can see why certain banks have been hammered by investors dumping their stock in the recent weeks.
But I want to suggest that the real cause of the huge sell off and collapse in bank share price is due not the change in the top half of the ratio, the Capital, but to a collapse in the much less talked about bottom of the ratio - the 'assets' - the loans.
The key is that these are not 'assets' they are 'risk weighted assets'. Banks are purveyors of and experts in managing risk - or so they have told us. They have whole departments of 'Risk Managers'.
But in a nut shell this is what I think has happened.
Risk and Reward are directly related. The lower the risk the lower the Reward, the higher the Risk the higher the Reward. The ideal is to somehow get high return but not have any risk. Pure fantasy of course. Except that banks being banks it can be done. And has been. Take Sovereign debt. It is usually considered zero risk. In all the tress tests they state quite clearly they do not model a sovereign default - because it can't/won't happen. And if you ask a bank's risk manger he/she will tell you how Sovereign Bonds are generally considered risk free from a Risk Manager's point of view.
And yet, we have all heard the news about how the cost of CDS on Spain's or Italy's and even now France's Sovereign bonds has been going up. Think about that for a second. The Risk Manager's office in the bank says Sovereign debt is a risk free asset. While just down the corridor in the Bond trading room they are buying and selling insurance on those 'risk free' assets. And 'of course' the riskier ones form Spain or Italy come with a much more attractive coupon (Interest payment).
Son one part of the bank says - Sovereign bonds are a risk free asset and counts them as such if asked - by a regulator for example. While down the corridor they know they are anything but risk free because they are buying and selling insurance on those bonds and getting a handsome reward from trading the riskier ones. Risk free and rewardingly risky at the same time. The alchemy of modern banking.
Which, as this article form the Wall Street Journal breezily notes,
This can incentivize banks to build up their balance sheets during times of stability by holding assets whose risk weightings don’t accurately reflect the bank’s exposure during times of stress.
Exactly. During the two years of QE-heroine induced good times Banks wanted to get maximum growth but be able to have lots and lots of 'risk weighted' assets to underpin the health of their business, at the same time. And so they all bought 'risk free' but in actual fact very lucratively risky, 'can't ever default but we'll insure them for lots of money for you just in case' assets. They speculated on the riskiest Sovereign bonds they could find. Why else, when the sovereign debt crisis has been so obviously brewing for over a year, are the big banks all still holding billions upon billions of Euros of it?
But during the 'good times' when all the bank looked at the 'recovery' and made their bone headed growth forecasts and basically smoked their own dope - they thought there was no 'risk' and their Risk Managers' confirmed it. But now, when the fiction of growth can no longer be sustained, suddenly everyone has remembered with a start, that the assets are 'Risk Weighted'.
Hundreds of billions with zero risk weighting is zero. But go from zero to any number at all no matter if its still fairly small and the answer goes from zero to 'A LOT' in an instant. And that is what I think has happened in the risk Manager's office of every bank in Europe and America. The denominator of the Capital Adequacy Ratio and the Tangible Common Equity Ratio just went through the roof. And when it did the ration went to zero. Suddenly the Risk Managers are telling everyone that the 'safe' banks are actually virtually insolvent. Quelle surprise! I think we'll find Bank of America is in the same or worse state.
And for once they are right. They all know the only thing that will stop this sell off is another round of 'rape the tax payer'. Will Bernanke tell the Americans that while there is 'no money' for paying for social services' - like schools and police - hundreds of billions can be found for the banks...again. And will the ECB and the BoE say the same to their people?
What really bothers me is that this game has been going on all during the time when our 'regulators' and the banks and the governments were all telling us how they had learnt their lessons. how we must let by-gones be by-gones and stop bashing the poor bankers etc etc, they were ALL conniving to play this game.
They all knew the banks and others were buying up sovereign debt of 'unhealthy' nations. Spanish banks were encouraged to buy Spanish debt. Greek banks Greek debt, Italian banks Italian debt and they all got it on with each other as well. So that the French banks obliged everyone.
They had learned nothing. They have not changed. The banks never intended to. The regulators are still gurning, toothless cowards and mountebanks and our political leaders just did what they do - they lied. AGAIN.
Just like last time, they have all been caught by their own lies and they want us to bail them out again. And our leaders will do it, if we do not say clearly "This was not in your mandate from us at the last election." The time is upon us for civil disobedience.