Friday, January 30, 2009

Meredith Whitney Joins Roubini & Soros in Smothering the Kool Aid

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First let's discuss the cost of the "bad bank" - remember how I said the original floated $1.2 Trillion won't be enough. Well overnight it's gone from $1.2 Trillion to $1-$2 Trillion (per WSJ story "New Bank Bailout Could Cost $2 Trillion") It's a worthy story to check out but I'm just copying over the pertinent fact for this blog entry
  • The so-called "bad bank" that would buy these assets could be seeded with $100 billion to $200 billion from the TARP funds, with the rest of the money -- as much as $1 trillion to $2 trillion -- raised by selling government-backed debt or borrowing from the Federal Reserve.
I still think that's too low and economists agree - they are now tagging the cost as up to $4 Trillion. That sounds more realistic. But we'll basically have doubled our national debt after this is all said and done when you throw in TARPs, bailouts, stimulus plans. And the now dawning reality of the scope of the problem is exactly why as each prior bailout has rolled out, I've been saying it's just a bandaid for a severed body part. (didn't stop the market lemmings for yelling in joy and bidding up stocks) This amount is simply scary but it's better than the normal politics in this country to sell an idea at one cost and then 5 years later find out its 2-4x the cost.

This amount might be so staggering that even the not paying attention American public might revolt. Hopefully Rush talks about it; that will cover 40% of the country. Maybe Oprah can bring it up to cover the other 60%. (can she squeeze in a minor topic like this? I mean it's only the next 5 generations of Americans that it affects)
  • The cost of restoring confidence in U.S. financial firms may reach $4 trillion if President Barack Obama moves ahead with a "bad bank" that buys up souring assets. The figure far exceeds even the most pessimistic estimates of how great the loan losses might be because there is so much uncertainty about default rates, which means the government may need to take on a bigger chunk of bank debt to ease concerns.
  • Goldman Sachs economists said ideally the public sector would step in to remove the hardest-to-value assets, which would alleviate nagging worries about future losses and hopefully help get lending going again.
  • "Unfortunately, with an unprecedented meltdown in mortgage credit and a deep recession in the broader economy, there is a great deal of uncertainty about the value of almost every asset," they wrote in a note to clients.
  • Goldman Sachs estimated that it would take on the order of $4 trillion to buy troubled mortgage and consumer debt. That number could shrink if the program were limited to only certain loans or banks, but it could also grow if other asset classes such as commercial real estate loans were included.
  • New York Sen. Charles Schumer has said that a number of experts thought that up to $4 trillion may be needed to buy the bad assets, an estimate that a Senate aide said was based on informal conversations with people in the industry.
  • At $4 trillion, that would be the equivalent of nearly 1/3 of U.S. gross domestic product.
  • The government would not necessarily have to spend the full $4 trillion to buy the assets. If it follows the model used in a Federal Reserve program to support consumer and small business loans, the government could potentially put up just 10 percent of the total. (yes, until the losses come month after month)
  • That money could buy bad assets, which would then be repackaged and sold to investors to raise more money which could then by recycled to buy more assets. Stephen Stanley, chief economist at RBS Greenwich Capital, said although that sounds similar to the sort of financial engineering that spawned the credit crisis in the first place, it would be structured so that the central bank or whichever agency oversees the program is last in line to take losses. (exactly - we already have a bad bank called the Federal Reserve - no need to make another one) "If things turn out so bad that the Fed ends up on the hook for $1 trillion in losses, then the financial sector, the economy, and everything else will be dead anyway," he said.
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Well, the thesis Wednesday was we're going to dump oodles of bad loans onto generations of taxpayer's backs - that's GREEEEAT! for banks. Of course we have no details... just like we had no details of a stimulus plan but that did not stop people from running up infrastructure stocks 100%+ in 4 weeks on "thesis". And now the House proposal says a measly 3.5% of the total boondoggle will be for infrastructure. I digress... let's get back to "help the banks, destroy the taxpayers" thesis.

One analyst who has been dead on all along has been Mrs. Whitney. I've been with Meredith on this whole train ride... any gal who is so anti Kool Aid, is my type of gal. It is starting to feel like Groundhog Day; the feds come up with a way of "saving us" - the rats in the market rush to eat the cheese, than the market snaps the trap. Yet the rats brain never adapts - they are ever hopeful. And keep getting their neck snapped by the "hope" trap.

We did this game after Bear Stearns [Mar 26, 2008: I'm on Meredith Whitney's Side] again in summer during FranFredron [Aug 4, 2008: Meredith Whitney Continues to be Negative on Financials (and Housing)] and during the Lehman/AIG saga[Sep 23, 2008: Meredith Whitney and I Continue to Agree, Bailout or No Bailout] So why stop now? The same rats who denounce government for placing any regulation on them now worship at government's altar. As long as their pockets are lined. Pathetic.

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All the hype did was screw over people with legitimate short positions (Goldman Sachs skid marks still found on my behind) and drive up insurance companies and banks 30% on hopes they can screw over the tax payer. Bravo. "Mission Accomplished" Some gambling daytraders made their Etrade account go up 27% in 1 session - only going to cost us a few trillion. I've lost count how many "missions" of this type have been accomplished since August 2007 when Uncle Ben surprised us with a premarket Fed cut that blasted legitimate shorts out of their pants. (hand raised)

Via Clusterstock - let's see what Meredith is saying now. Hint, it sounds a lot like Soros and Roubini [Roubini & Soros on Bad Bank]

Meredith Whitney today punches a big hole in the notion that creating a bad bank to buy up troubled assets will rescue our financial system. And it certainly won't prop up failing banks. The problems at banks are deeper and broader than just too many bad structured mortgage products on the balance sheets.

  • Financials have lots of loans that are likely to default.
  • They don't new have a revenue model to replace the old, broken one.
  • They won't start lending just because you buy the bad assets.

Here's the report from Meredith Whitney:

Talks of creating a "bad bank" are once again gaining momentum, and accordingly, we feel compelled to repeat and review our thoughts on the subject. In brief, simply removing "toxic" assets from bank balance sheets will not directly cause banks to increase lending. Lending standards have tightened dramatically, and there is an unavoidable restructuring of risk taking place. Such causes money to come out of the system and lending to contract, with or without this "bad bank" structure. Lower asset bases, higher credit losses, and bloated expense structures will continue to pressure banks' earnings power and capital creation. We remain cautious on the group.

KEY POINTS
  • Capital contraction is accelerating throughout the U.S., and the economy is clearly showing the results of such. The economy will recover when the capital base or "denominator" reverses course. We do not believe a "bad bank" structure addresses the root problem of contracting system capital.
  • Writedowns from structured securities and illiquid assets is only one challenge related to the commercial banks. A challenge of equal importance is rising defaults from on balance sheet loans. Due to the pro-cyclical nature of loss reserving, banks are required to build reserves when their earnings power is weakest.
  • If a bank were to sell its "bad" assets into a "bad bank," it would still be left with lower earnings power from higher losses on "good loans" and the requirement to build reserves, lower earnings power from lower assets and a higher legacy expense structure, or both.
  • The greatest unknown regarding the "bad bank" is at what price the gov't would pay for "toxic assets." If the government elects to pay fair market value, the banks will likely not elect to participate as capital hits would be too dear; however, if the gov't pays above market, the burden on an increasingly "taxed" taxpayer grows.

  • We would be most encouraged by banks selling "crown jewel" assets to cover their own losses. We believe private capital will readily invest in businesses that make money and grow. However, the banks do not fit this description. We remain cautious on the group.

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