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Monday, April 28, 2008

Bull Markets and Busted Banks

Equities continue to find a bid pre-market with the S&P 500 over 1400.

Naturally, there is talk in the air of a new Bull market. If it weren’t so sad, it would be funny. A new Bull market would require a GROWING economy. A growing economy requires an expansion of credit and borrowing. This is NOT happening and worse CANNOT. The banks are maxed out and are desperately scrambling to find more capital just to keep from having to aggressively shed their balance sheets.

U.S. Banks' Earnings May Fall 26% in 2008, Morgan Stanley Says: “U.S. banks' earnings may fall 26 percent this year and a further 15 percent in 2009, as credit continues to deteriorate and trim profit, according to analysts at Morgan Stanley.

Bank earnings will decline by $17 billion this year and a further $13 billion in 2009, driven by higher borrowing expenses and bad loans, analysts including New York-based Betsy L. Graseck wrote in a note to investors today. Lenders will probably cut dividends and raise capital to offset the losses, she said.

Banks are scaling back loans and raising cash amid a credit-market slump triggered by the collapse of the U.S. subprime mortgage market. The world's biggest financial firms have posted more than $300 billion in writedowns and credit losses in the past year and announced plans to raise more than $210 billion selling stakes.

Earnings may fall further if the U.S. Federal Reserve doesn't cut interest rates, Graseck wrote.”

“We are only in the 3rd inning of the credit cycle and expect it will be worse than 1990-91. Credit deterioration will accelerate and banks will raise more dilutive equity and cut dividends.” –Betsy L. Graseck

I’ve been posting some pretty scary charts on the health of the banking system. All the data was directly sourced from the Federal Reserve Bank of St. Louis. Until recently, I haven’t come across anybody else that has taken a keen interest in the matter. Finally somebody has picked up on it. Check out this great post over at the Market Ticker: The Lies And Obfuscation We Tolerate – Why?
Our banking systems "Non-borrowed Reserves" are deeply negative, implying that the banking system in the United States has no reserves at all, essentially gaining all their operating funds from The Fed after having burned through all their ACTUAL reserves!

That graph, by the way, although the latest available from The Fed directly, is out of date - the current number is $90 billion, or more than twice the total amount of required reserves in the banking system.

Banks are supposed to hold reserves in actual money against deposits, you see. That's because there is a chance you might show up and want the money you let them borrow, like your direct-deposited paycheck, and they have to be able to pay you in that event.

The amount required, in aggregate, is $40 billion as of the present time. The total shown "in reserve" is claimed to be $42 billion, again, as of the 23rd of April.

However, the "non-borrowed" amount, that is, the amount of reserves that are represented by actual deposits from customers, is negative $90 billion dollars.

In other words United States banks, instead of having $40 billion worth of deposits from people like you and me on reserve (not loaned out) instead have burned through all of that, then borrowed $90 billion more, in order to meet their reserve "requirements."

$130 billion dollars, in the hole, all-in.

And what did they post as collateral? To a large degree, dodgy mortgage-backed securities and even, in some cases, perhaps CDOs!

That's fantastic isn't it?

Is this talked about on Bubble TV? Oh hell no. Its just a good time to buy financial stocks, never mind the fact that our banks appear to be in as fine a financial condition from this report as is a subprime borrower in California who was handed an eviction notice as his house was foreclosed upon this morning!

When did this foolishness start?

At the same time the "Term Auction Facility" did.

Now you know why the "TAF" was "needed", eh? Gotta pay that light bill, plus those bonuses and dividends, since we lost all of our customer's deposited money gambling on bum mortgages written against a $500,000 house that we gave to a hairdresser making $8/hour at SuperCuts.

Never mind the other borrowings from The Fed to prop up the system. Oh no, let's not talk about the other $30 billion or so through primary (discount window) and PDCF credit. Naw, nothing to see here with the banks $130 billion in the hole .vs. what are supposed to be reserved deposits from customers, move right on along.

Are there any reserves at all?
Well, from that table it certainly appears not, eh? Negative $130 billion in aggregate (from "required" level) eh?
Can you really believe in a new Bull market while the banks are busted?


Thai said...

Ben said... "A new Bull market would require a GROWING economy"

Tecnically this is not correct, it just requires growing profits on the part of companies.

Big proeductivity improvements could do the same even in the setting of a shrinking economy

Ben Bittrolff said...


You're correct of course Thai.
I should have been more specific.
I meant in this case, as of right now, to launch a new Bull market we would need a growing economy.

Although, it would be hard to imagine a shrinking economy and the simultaneous, massive productivity improvements that would result in a general Bull market on a grand scale.

I could see a shrinking economy where certain sectors outperform because of specific productivity improvements.

scott said...

though ive not been observing the thursday money supply data as of late, i remember seeing it turn south FAST in DEC. It is really quite impressive - everyone should have a look here

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