Exposed to the Big Squeeze
√¢‚Ǩ≈ìIn a world of businessmen and financial intermediaries who aggressively seek profit, innovators will always outpace regulators; the authorities cannot prevent changes in the structure of portfolios from occurring. What they can do is keep the asset-equity ratio of banks within bounds by setting equity-absorption ratios for various types of assets. If the authorities constrain banks and are aware of the activities of fringe banks and other financial institutions, they are in a better position to attenuate the disruptive expansionary tendencies of our economy.” -Hyman Minsky, 1986
I came across a chart from Citigroup equity research that illustrates the high risk lending exposure of the leading banks. On average the number is about two times equity, with several such as WB, JPM, and BAC even more heavily exposed to debt with poor collateral. The stock market still values these companies at a fairly high two times overstated book value, barely accounting for the exposure here. The second chart is a nice overview of the cost of money for bank capital infusions. 8-9% like rates, highly dilutive stock offerings, and two times book for companies with 200% high risk assets/tangible equity, does not add up one iota. Loss assumptions are shockingly modest (see Rout, not a Crisis).
click to enlarge:
The most pernicious aspect of this “credit crunch” is the nature of prices right now. First we have hyperinflation or serious inflation in essential goods, and imports. Although the propagandists would have you believe that it is just a gasoline issue, as non-petroleum import prices clearly show, it is much more. This empties out consumer pocketbooks.
Coupled with this is a deflation in the goods bought on credit and where fuel is used. These are the assets that financial institutions need to repossess and foreclose on to recover on their loans. Included are toys like SUVies, pickup trucks, boats, and overstuffed houses. Was there is Bubble in automobile demand too? Absolutely, in my view, and an excellent WSJ article supporting this theory.
Like investors who sent dot-com stocks or house prices to unsustainable levels, auto manufacturers in the U.S. have pushed their sales volumes to new peaks over the past decade. They invited customers to buy cars at employee prices, extended no-interest loans for up to six years and sold unprecedented numbers of vehicles to rental fleets — all strategies that some analysts say drove U.S. auto sales to artificial highs.
While the banks go around with tin cups and try to foreclose on deflating toys, the hot bubbly crack-up boom material sector is also flooding the market with offerings, in this case Nucor for a cool $2 billion.
SAN FRANCISCO (MarketWatch) — Nucor Corp. said late Monday it started a secondary offering of 25 million shares of common stock. Underwriters will get about 3.8 million added shares to cover overallotments.
One of the category that is not even on the high risk list, and where potential losses are considered to be nearly nil are prime mortgages. There are now increasing signs that is about to change. Whodathunk?
About 2.3% of prime loans were 60 days’ past due in February, the highest level in at least a decade, according to data from FirstAmerican CoreLogic LoanPerformance. That’s up from 1.4% a year ago. Some economists, such as Brian Bethune of Global Insight and Dean Baker of the Center for Economic and Policy Research, say they think delinquencies on prime loans have likely risen further since then.
And I wrap with a look at bank net interest spreads. In a nutshell it has been too low, and even a normal adjustment is resulting in both tighter conditions and higher rates for businesses and consumers. The pre-credit bust period was an abnormality, and adjusting to normal conditions is devastating for a Ponzi finance based economy.
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