Financial topics

[John]

CNBC Earnings Central Stats

As of Friday, January 30th:

The blended earnings growth rate for the S&P 500 for Q4 2008,
combining actual numbers for companies that have reported, and
estimates for companies yet to report, fell to -35.2% from -28.1% due
in part to downward estimate revisions for Financials such as Fifth
Third and Capital One.

On July 1st, the estimated growth rate for Q4 was 59.3%, and by
October 1st, the estimated growth rate had fallen to 46.7%. (Data
provided by Thomson Reuters)



Date 4Q Earnings growth estimate as of that date
------- -------------------------------------------
Feb 6: 50.0%
Jul 1: 59.3% Start of previous (3rd) quarter
Oct 1: 46.7% Start of quarter
Dec 5: 10.0%
Dec 12: 5.9%
Dec 19: 0.5%
Dec 26: -0.9% End of quarter
Jan 2: -1.2%
Jan 9: -15.1%
Jan 16: -20.2%
Jan 23: -28.1%
Jan 30: -35.2%

[Higgenbotham]

Meredith Whitney on the banks again:

http://money.cnn.com/2009/01/30/news/ec ... /index.htm

Whitney says it would be better to force big institutions like Citibank (C, Fortune 500) and Bank of America (BAC, Fortune 500) to sell the marquee pieces of the business that they can, fill the hole, and shrink.

"That's what people like you and me, what taxpayers have to do when we are in financial distress. We have to sell whatever it is we can, which is almost always our best assets, and deal with it. We can't just sell what we want to, which would of course be our bad stuff."

It's a punitive measure that banks are trying to avoid, and they argue that there are no buyers out there for even the good, stable pieces of their businesses. But Whitney disagrees.

"There is always a buyer at the right price, be it private equity or a rival business or another bank," she says. "If the government provides a facility through which people can get long-term funding, then buyers will come to the market for the 'crown jewels' assets of these banks."

Similar to what Freddy and I were saying awhile back--if a bank is too big to fail, then it was too big to exist to begin with and needs to be chopped up and sold off for whatever the market will bear.

[John]

Dear Higgie,

> Similar to what Freddy and I were saying awhile back--if a bank is
> too big to fail, then it was too big to exist to begin with and
> needs to be chopped up and sold off for whatever the market will
> bear.

The thing is that it doesn't make any difference. If the ten biggest
banks had been 100 smaller banks instead, then the 100 banks would
have invested in the same phony mortgage-backed securities, and would
still have sold them to clients, and taken fat commissions off the
top. The problem wasn't the size of the banks. The problem was the
lethal combination of nihilistic, destructive, greedy Gen-Xers,
managing stupid, arrogant, greedy Boomers, and creating these phony
securities.

Here's something from Time Magazine:

> But do the math, and you can begin to understand how really
> botched this bailout has been. Since October, the government has
> deposited $165 billion into the accounts of the nation's eight
> largest banks. Yet those same financial firms are now worth $418
> billion less than they were four months ago, and the Congressional
> Budget Office estimates that the government's preferred shares are
> worth at least $20 billion less. In Wall Street terms, that's
> throwing good money after bad. All told, the government's
> annualized rate of return on its investment in the nation's
> largest banks is -1,096%. That's well beyond Bernie Madoff
> territory; he topped out at a mere -100%. (See pictures of the
> demise of Bernie Madoff.)

> So how could $438 billion — $418 billion of their money and $20
> billion of ours — go poof, just like that? Here's the easiest
> explanation: our banking system has sprung a leak.
> http://www.time.com/time/business/artic ... 02,00.html

The way that I interpret this is that it supports the view that the
government cannot possibly pump money into the banks as fast as the
money is "leaking" out. With trillions of dollars "leaking" out all
the time, there isn't enough money in the world to stop the
deflationary spiral.

President Obama has really led a change in the country's mood this
week, by his highly visible condemnation of Wall Street bonuses. I
believe that the political calculation has to do with blaming the
Bush administration, but the problem is that it's not going to be
practically impossible for the government to "save" a bank. This is
interesting because a lot of people blame the whole problem on the
Lehman collapse.

President Obama had hoped to duplicate FDR's success after taking
office in 1933, in blaming the collapse on his predecessor. But in
1933, the market had already bottomed out six months earlier. This
time, the market is still at least a couple of years from completely
bottoming out.

FDR jumped from one populist action to another, and it worked. Obama
is jumping from one populist action to another, and it won't work
because it's too early. It'll be interesting to see it unfold.

By the way, you deleted your question about China before I had a
chance to answer it, but I'll answer it now because it belongs in the
category of "be careful what you wish for."

I started writing about the Chinese riots and "mass incidents" in
2004.

** Up to 50,000 workers riot and clash with police in southeast China
** http://www.generationaldynamics.com/cgi ... 26#e041226

There are tens of thousands per year, possibly by now over 100,000. A
typical scenario is that there's a busy shopping area, someone bumps
into somebody -- or worse, somebody bumps into somebody's wife.
There's an argument, it turns out that one is a member of the wealthy
élite, such as a member of the Chinese Communist Party (CCP), and the
other is an ordinary worker. People gather around and take sides, and
then start using their cell phones to call or message their friends.
Soon hundreds, or even thousands, of people are involved.

What's so amazing about this is that if even ONE similar incident
occurred in the US, it would be worldwide news. But in China, it
happens hundreds of times per day, and the CCP's worst fear is that
it will develop into a nationwide rebellion, leading to a huge civil
war.

The chances of that happening are astronomically higher today,
because tens of millions of people are suddenly unemployed. This is
the CCP's worst fear.

** China approaches Civil War
** http://www.generationaldynamics.com/cgi ... hina050116

One of the most important stories of the decade, in my opinion, was
the anti-Japan rioting in China in 2005.

** Chinese rage at Japan grows - fear of uncontrolled rioting
** http://www.generationaldynamics.com/cgi ... 16#e050416

** Neither China nor Japan backing off from increasing confrontation
** http://www.generationaldynamics.com/cgi ... 20#e050420

The authorities diverted anti-CCP sentiment, and changed it to
anti-Japan sentiment. So a civil war in China would almost certainly
lead quickly to a world war.

Sincerely,

John

[Higgenbotham]

Dear Higgie,

> Similar to what Freddy and I were saying awhile back--if a bank is
> too big to fail, then it was too big to exist to begin with and
> needs to be chopped up and sold off for whatever the market will
> bear.

The thing is that it doesn't make any difference. If the ten biggest
banks had been 100 smaller banks instead, then the 100 banks would
have invested in the same phony mortgage-backed securities, and would
still have sold them to clients, and taken fat commissions off the
top. The problem wasn't the size of the banks. The problem was the
lethal combination of nihilistic, destructive, greedy Gen-Xers,
managing stupid, arrogant, greedy Boomers, and creating these phony
securities.

Here's something from Time Magazine:

> But do the math, and you can begin to understand how really
> botched this bailout has been. Since October, the government has
> deposited $165 billion into the accounts of the nation's eight
> largest banks. Yet those same financial firms are now worth $418
> billion less than they were four months ago, and the Congressional
> Budget Office estimates that the government's preferred shares are
> worth at least $20 billion less. In Wall Street terms, that's
> throwing good money after bad. All told, the government's
> annualized rate of return on its investment in the nation's
> largest banks is -1,096%. That's well beyond Bernie Madoff
> territory; he topped out at a mere -100%. (See pictures of the
> demise of Bernie Madoff.)

> So how could $438 billion — $418 billion of their money and $20
> billion of ours — go poof, just like that? Here's the easiest
> explanation: our banking system has sprung a leak.
> http://www.time.com/time/business/artic ... 02,00.html

The way that I interpret this is that it supports the view that the
government cannot possibly pump money into the banks as fast as the
money is "leaking" out. With trillions of dollars "leaking" out all
the time, there isn't enough money in the world to stop the
deflationary spiral.

You've opened up a big subject that I didn't intend to and, before getting into the larger issue of size, let me state what that originally was. As you stated, the banking system is "leaking" and the intent of my statement was to show that Meredith Whitney has also come to the conclusion (although not stated explicitly it's pretty clear) that the best way to minimize the "leaking" is not by putting forth the "bad bank" but to instead force the banks to sink or swim. I'm not talking about taking a large bank and chopping it up into 10 smaller banks. Banks are engaged in a variety of businesses outside of core banking and some of those businesses are profitable and can be sold to generate cash in lieu of bailouts. Based on my experience, that would minimize leakage in the general economy in a number of ways and I can enumerate some of them if this doesn't make any sense.

With regard to size and whether it makes any difference, that is a more big picture and fascinating subject.

Going back to the early to mid 1990s, I used to visit banks and ask for their financial statements, which you can get at the desk of any bank if you ask for it. One line of the statement has "cash and cash equivalents" and a percentage of assets that fall into that category. Sometimes I would drive out to small cities and towns in the surrounding area and get those statements. I noticed that the small town banks had higher percentages of cash and cash equivalents; one bank had 35%. I saved the financial statements from the most conservative banks. About 10 years later, as the derivatives bubble began to form, I took those statements out of my file with the intention of moving my money into one of those banks. Every single one of those banks had disappeared. One I was especially interested in had been bought out by a big city bank and was a branch of that bank. The new percentage of cash and cash equivalents was something less than 10% if I remember right. How were the big banks able to swallow up these small banks? Generational factors did play a part as larger banks wanted to take over this equity and use it to blow a bubble, but there were other factors at work too. Our small town banks didn't disappear in the 1920s so far as I know. Neither did our small town businesses (think Wal-Mart and Main Street)

With regard to toxic derivative assets, though, there is a lot of variation from bank to bank. The large banks contain almost all of the toxic assets. We don't hear anything about BB&T, for example, needing a bailout because they have toxic assets that they need to dump off. Or even US Bank for that matter because they don't have any. There are lists out there of the dollar value of derivatives on the books of the banks and they are concentrated among the big players who are now looking for the bailout funds. Granted, there are a percentage of smaller banks on the FDIC watch list (I found out we only know how many, not who they are) but they got themselves in trouble the old fashioned way so to speak.

With regard to the optimal size of any organization, optimal size changes with technology and especially the technology of mass destruction. We witnessed adjustments to the reality of nuclear weapons as powerful empires were constructed to appropriate revenue to win an arms race. They weren't very efficient, as efficiency wan't what was needed to win the race. Revenue generating power was needed and powerful structures like the Soviet Union and the United States fit the bill. As that happened, corporate structures assumed similar forms and became similarly powerful in relation to their competition. Citibank, with its global reach and connections in high places, was powerful, but not particularly efficient because they didn't need to be. Wal-Mart didn't need to be the most efficient business on the block or on the Internet either once their early advantages in efficiency made them large enough to be powerful. As just one recent example, Wal-Mart gets all kinds of goodies through lobbying efforts that squash more efficient competition. Witness the recent CPSIA law. Thousands of small businesses will be squashed out on February 10 and this doesn't even make the news. The large banks get the same kinds of goodies which enable them to squash their more efficient competition. That is playing itself out right before our eyes and that is accelerating the leakage because it destroys efficiency.

Earlier, I had mentioned Drucker. One statement he made is that the new ways of processing information and communications don't require the multi-layers in corporate structures. So what happens when someone could theoretically and practically run a small bank that can more quickly adapt to these changes, moving beyond previously existing efficiency advantages because the new technologies enable them to do so? They get crushed by a governmental structure that has a vested interest in maintaining power, but not efficiency. If business gets fundamentally restructured to conform to the new technologies (and nature will win out whether the government fights it or not--it is only a matter of time), then the government itself must downsize and restructure because these new business entities no longer have much need for the current governmental structure and don't want to carry the burden of it. What was once protective has become parasitic.

I'd lke to hear what the Millies have to say about this one too if they are out there because I feel they might have some fascinating insights. We don't hear from enough Millies on these kinds of subjects.

By the way, you deleted your question about China before I had a
chance to answer it, but I'll answer it now because it belongs in the
category of "be careful what you wish for."
....
The chances of that happening are astronomically higher today,
because tens of millions of people are suddenly unemployed. This is
the CCP's worst fear.

Yeah, I figured that one out before too long so deleted the question. I'm also hearing first hand reports from Chinese friends of mine who have called home that conditions are deteriorating rapidly.

[mannfm11]

John, I think I would side with Higgie on the big bank/small bank game. It doesn't appear the reginal banks got into this mess as bad as the big banks. Plus, I think the big banks have been hiding behind a political smoke screen for decades, maybe since the 1920's. In that video of RIchard Koo you posted a few weeks back, he said the entire group of big NY banks and I believe BAC as well, were insolvent due to international loans at that time. I don't believe they really ever got out of is, but let the regulators sweep it under the rug. You might note how they did away with Wachovia and even attempted to give it to Citi while Citi was many times broker than Wachovia. The mess is more about decades of stuff swept under the rug coming out at once. This isn't anything new, as the Garn-St. Germaine plan (I think that is the right name) for deregulating S&L's back in the 80's was an attempt to sweep a problem of insolvent S&L's under the rug that backfired.

The reason that big banks take over small banks is to get their liabilities back in managable form. The most managable liabilities in banking are deposits, but they also entail maintaining the most capital. Any time there is a paper bubble, the suck of money from places like NYC becomes great. Strangely the depression had few big NY banks go broke, but the smaller banks around the country were sucked dry. Maybe it was the bank of the United States or whatever that big NY back that went broke in 1931 that broke the small banks.

I don't believe the small banks in general would have bought into the derivatives game. I believe that took some concerted effort. I do believe they would have been scammed by the securities of FNMA and FHLMC though. Many would have also been caught up in local real estate plays. I do believe, as John says, that the deregulation was the sign of the times and that what happened had more to do with the place we were in the financial cycle than anything else.

Lastly, I think Obama needs to check his engine light. This mess was in full swing in 2000. The actions that Paulson took were probably the best that could be done at the time using the flawed economic ideas of this time. In fact, the main opposition to that bailout was the Republicans in Congress. These people either know where we are or are so educated against what is happening actually happening that they don't have a clue what is going on. They don't teach Austrian economics to politician or in political science class. The 5 biggest players, if you want to find scape goats are Franklin Raines, Obama economic advisor and past FNMA head and muliimilion dollar bonus drawer, Robert "show me where to put the coin in the fusebox" Rubin, Clinton Treasury cover up man and Citicorp salary drawer, Barney "stop all action against FNM" Frank, Christopher "Fannie pass me the dough" Dodd and Obama himself. Obama was only behind Dodd in receiving money from FNMA, though he had only been in office 4 years. We can go through all the Wall Street stuff, but this mess has it origination in Congress and in the Government Sponsored Enterprises, FNMA, FHLMC and Sallie Mae as well. I have been reading about the Fannie Mae housing bubble since 2001. In fact, in March 2001 I wrote the following, which I believe has been posted here before. http://www.suite101.com/discussion.cfm/ ... 993/390041
These werent all my ideas, but the techinque of what was going to happen was and so much of it turned out to be so accurate that I read it now and am stunned it was even near that close. I mentioned a guy named Noland in this post (this was reposted by someone who read it and I found it in a search) and he was writing about FNM and the actions of Franklin Raines by this time.

Everything out there is going to implode. Obama came in too early, which is where John is right on. See, the banks can't create any real new credit and the only people that want any new credit are those that have to have it and a few daredevlis that haven't a clue what time it is. Being the banks suddenly need a few trillion to patch their holes and the system needs about $4 to $5 trillion extra a year, $700 billion is spitting in the ocean. This isn't something put together over the past 10 years, but over the past 70. John makes the mistake of believing that some of the Post World War II stuff was right on, but most of it was flawed. That was Generation X as well that did that. The system worked well for about 25 years because the mess was pretty much cleaned out by the depression, but it was flawed none the less. Bretton Woods was a monetary disaster and this pile of crap we have now is the result of it.

On the contrary, there a crisis in leadership coming because it is all about passing the buck now. Look at the Republicans who refuse to cast 1 vote for Obama's plan? He don't need their votes. He only needs them to get in the boat with him so that when it sinks they are on the wrong side with him while if it actually worked, he and the Democrats would take credit. This is Terrell Owens politics at its best.

Politicans get too much credit when something goes right and too much credit when it doesn't. In this form I do agree with John. The generational stuff is so interesting and there seems to be a lot to how they interact with each other, though I would have a hard time knowing how the last cycle lined up. I check this site most days because there is always something of high interest to me here and some thoughtful guys writing here all the time. I hope I bring something of interest to the table once in awhile. Thanks to everyone for their efforts here.

[John]

I agree that small banks didn't get involved in residential
mortgage-backed securities, but their employees had the same
debauched attitudes toward credit that the big banks did. They just
exhibited the debauchery in different ways -- second mortgages, auto
loans, education loans, etc.

The point is that the same lethal combination of Gen-Xers and Boomers
existed everywhere, carrying with them the same destructiveness,
arrogance and greed, whether in small banks or large. In each case,
they used whatever tools they had available to get their fat
commissions.

Sincerely,

John

[StilesBC]

It is my understanding that the small regional banks were more involved with construction & development and commercial lending. They couldn't compete with the Countrywide's and Indymac's on residential. And as mentioned, any bank that distanced itself entirely from it all was swallowed up for it's deposit base prior to '07.

[mannfm11]

JOhn, your post today raises some interesting points. For one, the printing of unsecured money makes it all unsecured and I think the Fed has taken a real gamble taking the less than treasury collateral they have already taken. But, from what I understand the US government is less in debt relative to GDP than the Japanese government. Due to the fact the dollar is the reserve currency, it gives the US government more latitude and because the US needs its credit rating to go to war, we are probably farther away from default than most. The Japanese supposedly ran their debt to 200% of GDP during the 1990's, which would indicate the US has a long way to go. The problem with being the reserve currency is that the big time capacity to finance destroys the trade balance. I got a book off the mises.org site by a guy named Jacques Rueff called the monetary sins of the west, which talks about the fact the US was running the risk in the 1950's and 1960's of causing another depression due to the fact there wasn't enough gold to convert the excess dollars floating around the world, which he contended was the end cause of the depression of the 1930's. This book ties in with the book "The bubble that broke the world", in that both draw a real picture of world monetary tug of wars going on that worsened the depression. I suspect both were really the cause of the mess rather than Smoot Hawley, thus the Congress of the US was blamed for what really was an international banking mess. It is pretty clear that the origination of the Federal Reserve had a lot to do with the 1920's credit bubble and the Bubble that broke the world drew a nice picture of how easy it was suddenly to float billions of credit in a world that probably had less than $20 billion of gold in it.

There are a few defenses against US default. One is the defense of very low interest rates. One is the reserve currency defense. Another is the need for US cash flow by other countries to expand their credit and last, but not least is the American consumer is out of credit, which is rapidly slowing the flow of dollars worldwide. Rueff said the problem with the reserve currency status was that the money really never left the country that held the status, but was instead returned through some financing circle and thus the country never had the normal discipline of a country without reserve status because the effect of money leaving the country didn't happen. We are at a new juncture, one where despite the reserve currency being the US dollar, the engine of credit, the US consumer has broken down. So the new game is the money going out is slowing tremendously. The great secret about government money is that it goes into the banking system and if the banks don't have a place to lend it, they buy bonds from the government. Unlike indivduals, the banks don't have to worry much about inflation and they make the interest rate rules anyhow. If interest is a problem, they will merely pass new rules that prohibit money market accounts and payment of interest on checking type deposits. What are people going to do? Are they going to take their $100,000 and put it in their matress in currency? If they do, the banks will merely make it a crime to do so, just as FDR did by executive order under 12USC95a.

The surest way the US would default would be to print money. It is too easy to finance at some rate than to put the game on toilet paper. Very few people make the connection that a Federal Reserve note is a lien on their home,on their place of employment and maybe even on the city they live in. It is the ultimate bondage and most likely it has a lien on the entire world, enforcable by the banking system. Few understand the entire game is a series of bank notes and the money, whether it is American, British or Japanese, has only a little to do with the governments.

[MarshAviator]

A recession of biblical proportions
Consumers usually build savings in booms, then raid their troves during busts - but not this time.

This from http://money.cnn.com/2009/02/02/news/ec ... /index.htm

Looks like these "Journalist" are reaching a Generational Dynamics view by circumnavigating the subject.

One thing to take from this article that's pretty funny;
The savings cycle was backwards, which they try to rationalize by so called wealth effects, but while they mention
the GD1 and 75 years, never really broach the subject of permanent changes to behaviors due to people's
birth date.

They even recognize the current predicament as some sort of journey.

The close is hysterical suggesting a lottery solution to investing, which we sort of had.

Looks like in a year or two the mainstream news may have it.

[JLak]

I'd lke to hear what the Millies have to say about this one too if they are out there because I feel they might have some fascinating insights. We don't hear from enough Millies on these kinds of subjects.

Many of us early millenials have nearly given up hope on this question. It's been clear to me that most of our economy is obsolete, finance and media in particular, since I learned to program a computer in grade school. The early part of the 90s was middle school for me and we ('hackers?') really believed that our revolution was upon us. Check out he Hacker's Manifesto to get a feel for the zeitgeist, 'cheesy' as it is. More importantly, however, that angst was directed in real terms against those ivory-tower structures in education, media and finance that our parents wanted us to submit to and have faith in the way they did their entire lives. I think we collectively gave in some time in 1999 when we realized that the technology revolution was only making the three aforementioned superpowers more powerful, and more protectionist. Our parents kicked us out of the house unless we went to school and incurred debt, so we had to get jobs. Now look at me: government job, boomer boss, 401k, starting another MS degree and paying Stanford tuition for it ... again! There's no substance to it, just playing a game to get ahead. In the end, I just make a lot of people rich from the bottom of this ponzi scheme and there's not a single one of the massively complex institutions that I submit to that could not be replaced in superior form by a simple computer program; school, bank, media, and government.