Thursday, December 03, 2009

I told you it would work!

I've said it before and gotten all sorts of criticism, but the simple fact is that the Supervisory Capital Assessment Program, a.k.a. the bank stress tests, worked. Period. Bank of America's plan to repay the TARP is just more evidence proving this point.

You have to judge any endeavour on its own merit. That is, judge it on whether it achieved its goals. For example, its unfair to judge the Clone Wars cartoon series for what a moronic character Asoka is or for how Anakin doesn't seem to be a consistent character with the movies. Hell, I was watching with my 5-year old and at one point Yoda seems to imply that the clone troopers might be Force sensitive. Seriously? But its all OK, because my 5-year old loves it, and that's for whom the show is targeted.

Similarly, the SCAP was never meant to cure all that ailed the banking system. The purpose was to make it possible for banks to raise private capital. Before the SCAP, no one knew how much capital the big banks needed. Not just because of potential losses on balance sheet (which the SCAP did nothing to address), but because no one knew how regulators were going to react to those losses. No one had any idea that Fannie and Freddie were about to be nationalized and suddenly preferred and common shareholders were wiped out. Rhetoric was coming from all corners that banks needed to be nationalized as well, including from a certain Nobel-prize winning economist who many thought could be influential with the in-coming president.

Plus remember that the big banks were forced to take TARP money regardless of their financial conditions. What was stopping the government from simply declaring that it didn't like a certain bank's balance sheet and forcing it to take even more dilutive government investment? How could anyone invest in new bank common equity with such a high degree of uncertainty?

The only way to re-open access to private capital was to tell the market exactly how much capital the government thought a given bank needed. You knew that if the government said it was comfortable with a capital ratio of x, then investors didn't need to fear sudden nationalization if the capital ratio were actually x + 1. Sure, a bank could start out at x and then the situation deteriorates to x - 1 but that's the kind of thing analysts are comfortable with calculating. The whims of government? That's something else.

What happened after the SCAP? Investors knew that if bank losses were in the range of those projected by the tests, they didn't need to worry about dilution. Only about profitability. And with bank book values so low and the yield curve so steep, investors were willing to make that bet. Even with sketchy banks like Regions and Fifth Third.

Now is everything bright and bi-sun shiny in banking? Obviously not. I've written several times that I still think banks are quite vulnerable. But as a tax payer, I'm pretty happy to be getting out of banks. The alternative was much worse.

18 comments:

Anonymous said...

The banks are in quite bad shape. The fed looks to artifically keep near term rates at zero for the next year. This is a direct subsidy of banks since they profit from the short term vs long term interest rate spread.

Bright spots though exist in AIG possibly splitting into three companies: life insurance, aircraft leasing, and all else.

Anonymous said...

It worked so well that gold rallied all the way up to $1200/ounce.

Jakedeez said...

Gold? Red Herring much?

krb said...

You are cherry picking your data to support a position you took. Follow the circular logic of several of the govt support programs.....

Govt provided capital that was not loaned out as promised but instead used to speculate in the markets and run them up....which allowed the banks to issue and sell new shares to raise capital.

Govt provided capital that was not loaned out as promised but instead redeposited with the Fed in order to earn risk free interest on the reserves.

Artificially depressed interest rates to keep yield curve steep to ramp up bank profits at the expense of the near-retired and elderly who invest primarily in interest earning products.

Follow the circular logic and you'll see that the new share issues and sales was nothing more than a direct govt handout.

Follow the circular logic and you'll see that the interest paid on the reserves that were originally provided to the banks from the govt is nothing more than a direct handout from the govt.

The artificially low interest rates that would otherwise be much higher in a time of scarce capital is nothing more than stealing from the elderly to give to the banks.

Follow the circular logic of all the above and "as a tax payer, I am happy to be getting out of banks" I can agree with. But the positive tone of your piece is completely unjustified.....by almost any objective review of what has transpired, we tax payers have absolutely been fleeced. Is that what you were in support of at the time of the "stress tests"? And the argument of "the alternative was much worse" is getting old........this is nothing more than a common political tactic.....claim the unprovable.....like promising "millions of new or saved jobs". It's all quite pathetic. Please don't be so intellectually lazy in the future when claiming a position you argued for "has worked". Best regards, krb

But What do I Know? said...

Somehow I can't help but believe that this announcement was timed to help Chancellor Valorum win reconfirmation. Let's see what actually happens. . .

Anonymous said...

yeah everyone's an expert with hindsight, i thought you wrote it was kind of a lame stress test at the begining

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