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Banks Still In Trouble !
More smoke and mirrors, folks. It seems the big banks' profits are one–time affairs, and we would be wise not to expect more profits any time soon.
In fact, it looks to us like "deja vu all over again." Something about all these great profits in the middle of the worst recession in post–World–War–II times reminds us of the stock market bubble in the late 1990s. Remember all those "one–penny–better–than–expected" profits? The purpose was to convince investors to buy more shares and keep the share price going up, up, up. We learned later, during the bust that followed, that the companies' accountants were cooking the books like crazy to squeeze out that penny, not to mention the rest of the profits!
Let the buyer beware!
Since the debt crisis began with the eruption of the subprime mess in 2007, Wall Street pundits have declared "an end to the crisis" at least three times: in mid-2007, in early 2008, and now.
Each time, the government intervened with massive amounts of money to tamp down fear. Each time, investors rushed back to take
risks. And each time, stocks rallied sharply.
But throughout these interludes, the big bets and bad debts that fueled the crisis continued to grow; the nation's savings and capital needed for growth were depleted further; and investors, whose trust is absolutely necessary for a lasting recovery, were duped again.
This has been true throughout the crisis, and it's especially true today.
Banks are a case in point. As I told Larry Kudlow on CNBC Thursday evening1 ...
"Problem number one is the ROT — the toxic assets that just keep piling up behind the scenes at banks like Bank of America and
"Problem number two is the RISK, especially at banks like Goldman Sachs and JPMorgan Chase. These aren't banking businesses; they're gambling operations. JPMorgan has $81 trillion in derivatives. Goldman Sachs has $40 trillion.2
"And in terms of their credit exposure to defaults by their derivatives partners, it's even worse: JP Morgan has over three times it capital at risk. Goldman Sachs has over TEN times its capital tied up in that kind of risk."3
Goldman's own numbers confirm the huge gambles it's taken to achieve its recent profits: The bank's value at risk (VAR) — the
amount it stands to lose in a single trading day — is now $245 million. That's more than double its risk level in the first quarter of 2007, back in the good ol' days before subprime disasters, mortgage meltdowns, and debt collapses.4
Un fortunately, despite all of those episodes, most banks have still not learned the most fundamental lesson from this experience: Yes, large leverage and giant gambles can deliver plump profits — provided the stars are in alignment. But if your stars are crossed, fatal losses can strike down even the biggest and supposedly smartest players: Bear Stearns, Lehman Brothers, AIG, Merrill Lynch.
Nor have they stopped to consider these three irrefutable facts:
Fact #1. The official unemployment rate is going up. Even the most optimistic economists expect it will top 10 percent, and many expect it will go much higher.
Fact #2. The unemployment rate is closely correlated with all consumer debt delinquency rates — on home mortgages, credit cards,
auto loans, student loans, and more.
Delinquency rates must go up almost across the board, piling up even more toxic assets on the books of America's
That's why lending giant CIT is hurling toward bankruptcy.
That's why Citigroup and Bank of America are still hurting.
And that's why, under Saturday's print edition headline "Profits at Two Major Banks Mask Signs of More Trouble Ahead"
(replaced by a less negative headline in the electronic edition), the New York Times reported ...
"While both banks [Citi and BofA] said they were again turning handsome profits, the cheery headline figures masked a sober reality: the results were driven by one-time gains — bonanzas without which both banks would have lost billions.
"At the heart of the banks' troubles are hard-pressed consumers. The question, analysts said, was whether the banks have braced
themselves enough for the next wave of bad debts as people slog through a long, dreary recession.
"Both set aside billions of dollars to cover potential losses on consumer loans and warned that, given the tough economy, the road ahead could be rocky. ... Neither has repaid the nearly $100 billion in government money they received, while rivals like JPMorgan and Goldman have.
"Yet with the economy still shaky — losses on consumer debt like mortgages and credit cards continue to rise — the biggest
concern remains whether either bank has built up enough of a financial cushion to withstand further pain."5
1 Larry Kudlow Show, CNBC, 7/16/2009 7:15 PM ET.
2OCC's Quarterly Report on Bank Trading and Derivatives Activities.
3 Ibid., pdf page 13.
4"Goldman Sachs VaR Reaches Record on Risks Led by Equity Trading," Bloomberg, 7/15/2009.
5"Citigroup and BofA Profits Aided by Asset Sales," New York Times, 7/18/09.
Use It Up ! Wear It Out ! Make It Do ! Or
Do Without !
It's Still Coming! Subduction: One Plate Goes Under Another As The Other Goes Over The Former.Interestingly...Early Church Saints Said: "Mountains Will Roll Over Another." This Sounds Like They Saw Subduction.
The Second Ammendment!
Learn This...Memorize This...Let It Become a Part of You! Bring It Back When The Terrible Chaos Is Over...If There Is Something To Come Back To.
In The MeantimeRun For Your Life
From now on, Folks, it's gonna get pretty rough! In fact, downright cussed. Mr. Ugly Is Showing Now!
But For Now...Keep RunningKeep Your Purse and Scrip With You—Luke 22:36And NowGet Two Guns—Luke 22:36–38Before The New Dude Won't Let You Have Them
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