Europe on the Brink!

How bizarre that the Euro is modestly stronger!

from Britain's Daily Mail:
Fears are growing this weekend that two of Europe’s largest banks may require a bailout, having been hugely damaged by the worsening crisis across the eurozone.
In France, President Nicolas Sarkozy is having to confront the possibility that the country’s second-biggest bank, Societe Generale -commonly known as SocGen - is on the brink of disaster after huge losses over loans made to Greece.
The chilling possibility of the largest bank in Italy, UniCredit Banca, suffering a similar collapse if a bailout is not implemented comes as Silvio Berlusconi already faces an increasingly dangerous national economic situation...
The merest hint a major bank might fall is likely to reignite panic tomorrow in the stock market, which is already feared to react badly to the credit downgrade of the U.S. by rating agency Standard & Poor’s...
Experts fear that if any single bank is seen to be in trouble, all lending could freeze up in the resultant climate of fear, with devastating consequences. 

Chris Wood at CLSA Sees U.S. Monetary Collapse As the End Game

My view is that there is an inevitable endgame as a result of all this massive spending of taxpayer money in the West and Japan to bail out bankrupt banking systems, so in my view unfortunately the end game will be systemic government debt crisis in the western world. It will probably happen in Europe and will climax in the US, and I am expecting on a five year view the collapse of the US Dollar paper standard...The key reason why that is the endgame is that this credit crisis we saw in the west in 2008 and 2009 has simply been deferred, because 95% of the so-called government policy solutions to deal with this crisis have simply been to extend government guarantees. So the problem has been transferred from the private sector to the public sector. It is just a matter of time before investors revolt against these sovereign guarantees...The crisis is going to happen first in Europe, the US will be the endgame. -- Chris Wood from CLSA, Asia's Independent Voice

Bailout Czar: TARP Has Failed

from Fox Business:
The government’s top bailout cop said Sunday that more than a year after the financial crisis hit, many of the goals of Washington’s $700 billion bank rescue program remain unmet and that policymakers still have not addressed fundamental problems that triggered the crisis, leaving the financial system vulnerable to another collapse.
In a 224-page quarterly report to Congress, Neil Barofsky, the Special Inspector General of the Troubled Asset Relief Program (TARP), acknowledged that TARP had stabilized the financial system. But he said that it has so far failed to restore consumer and business lending and to significantly prevent home foreclosure.
And in a slap at Congress and the Obama Administration, Barofsky said that “it is hard to see how any of the fundamental problems in the system have been addressed to date.”
He said the bailout “will have been for naught if we do nothing to correct the fundamental problems in our financial system and end up in a similar or even greater crisis in two, or five, or ten years’ time.”
The top Republican on the Senate Homeland Security and Governmental Affairs Committee, Sen. Susan Collins, (R-MA), said she was “deeply troubled” by the report.
“It appears that ‘too big to fail’ institutions are even larger and possibly more interconnected as a result of TARP assistance,” she said. “The market mentality now seems fixed that the U.S. government will continue to step in and bail out giant financial institutions.”
But Barofsky warned that in his view, little had changed to head off another financial crisis:
• “To the extent that huge, interconnected, ‘too big to fail’ institutions contributed to the crisis, those institutions are now even larger, in part because of the substantial subsidies provided by TARP and other bailout programs.”
•” To the extent that institutions were previously incentivized to take reckless risks through a ‘heads, I win; tails, the Government will bail me out’ mentality, the market is more convinced than ever that the Government will step in as necessary to save systemically significant institutions. This perception was reinforced when TARP was extended until October 3, 2010, thus permitting Treasury to maintain a war chest of potential rescue funding at the same time that banks that have shown questionable ability to return to profitability (and in some cases are posting multi-billion-dollar losses) are exiting TARP programs.”
• “To the extent that large institutions’ risky behavior resulted from the desire to justify ever-greater bonuses — and indeed, the race appears to be on for TARP recipients to exit the program in order to avoid its pay restrictions — the current bonus season demonstrates that although there have been some improvements in the form that bonus compensation takes for some executives, there has been
little fundamental change in the excessive compensation culture on Wall Street.”
• “To the extent that the crisis was fueled by a ‘bubble’ in the housing market, the federal government’s concerted efforts to support home prices…risk re-inflating that bubble in light of the government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.” (Fannie Mae, Freddie Mac, the Federal Housing Administration and other government agencies now insure more than 90% of all mortgages from the risk of nonpayment.)
Barofsky also said that TARP goals to increase bank lending and prevent home foreclosures “have simply not been met” – “lending continues to decrease, month after month” and “foreclosures remain at record levels (and) the TARP foreclosure prevention program has only permanently modified a small fraction of eligible mortgages.
“To the extent that the government had leverage through its status as a significant preferred shareholder to influence the largest TARP recipients to carry out such policy goals, it was lost with their exit from TARP,” he added.

from Yahoo Finance:
WASHINGTON (AP) -- The government's response to the financial meltdown has made it more likely the United States will face a deeper crisis in the future, an independent watchdog at the Treasury Department warned.
The problems that led to the last crisis have not yet been addressed, and in some cases have grown worse, says Neil Barofsky, the special inspector general for the trouble asset relief program, or TARP. The quarterly report to Congress was released Sunday.
"Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car," Barofsky wrote.
Since Congress passed $700 billion financial bailout, the remaining institutions considered "too big to fail" have grown larger and failed to restrain the lavish pay for their executives, Barofsky wrote. He said the banks still have an incentive to take on risk because they know the government will save them rather than bring down the financial system.

Turmoil in Markets

tweet from Arlan:

Euro equity mkts see biggest 1-day losses in 7 months; Japans mkts following tonight; $$ nearly erased Wed. big losses on Dubai fears.

Bank Losses Still Getting Worse

Is this becoming too big to bail out?

from WSJ:
Wall Street is growing concerned that financial firms including Citigroup Inc. are at risk of facing stiff losses from some complicated tax-related assets that could soon fall in value and hurt the firms' capital.
When lenders and financial firms book quarterly losses, as many have repeatedly during financial crisis, they are allowed to book credits against future tax bills they will face in the future once they return to profitability. Portions of those complex assets, known as deferred tax assets, or DTA, can be added to firms' capital, which serves as an assurance against losses for depositors, and against dilution

Plunging Global FInancial Markets Panicked Over Swine Flu

Just about everything is plunging tonight over fears of a potential swine flu pandemic. Only the US Dollar and gold are higher. Commodities have continued to plunge minute by minute. Soybeans is down more than 45 cents at this writing, having eliminated the past 15 trading days of gains. Even currencies are in turmoil!

from Arlan Suderman's (Farm Futures) Twitters:
Swine flu fears have triggered another round of risk aversion in the world financial markets, spreading into the commodities.

More Bank Losses -- and Bailouts -- Coming

from Zero Hedge:
A report by JP Morgan analyst Matthew Jozoff is putting the spotlight back on the banks, where lately everything has been seen as rosy to quite rosy. Jozoff disagrees and in fact sees another $400 billion in losses as a result of the continuing credit deterioration, and very likely major new capital infusions needed.Says Jozoff:

We find that TALF 2.0 is likely to benefit securities with the least amount of writedowns and lowest haircuts —fixed rate bonds and long-reset hybrids should have the most upside. We estimate that banks will experience about $400bn more in losses, and stress tests will reveal the need for more capital for certain institutions.

Among other things Jozoff points out is that banks will need to set aside an additional $215 billion in reserves against holdings of $2.1 trillion in residential loans not packaged into securities. As banks have taken only $85 billion in loss allowances as of Q4 2008, and Jozoff estimates the total expected residential losses at $300 billion (based on 12-16% losses on the total number mentioned above), banks will be hard pressed to fund this capital deficiency, especially now that each and every bank is rushing to repay the TARP that "it never needed in the first place." Continues Jozoff:

We expect that total losses could reach $1.3 trillion. Banks so far have taken writedowns and losses of $920bn, so they are roughly 70% through with total losses. Capital raised to date ($900bn, much of which came from governments worldwide) has been close to the amount of losses realized to date. Given the amount of losses still to come, we believe the system will need more government capital (although healthier institutions may not need more and may try to raise capital from the private sector). Bank earnings will also be a source of capital and some estimate that over the next two years, the largest institutions can see around $200bn of earnings (pre-tax, pre-provisions).

Going forward, the bulk of bank losses will come from loan books and less from securities portfolios, which have already gone through large writedowns. Most bank loans are not required to be marked-to-market, but, rather, reserves are set aside for expected loan losses to be realized in the next year or so. That is why reserve coverage ratios (reserves vs non-current loans) have plunged. In other words non-current loans are growing at a faster pace than reserves have built-up.

Even though banks don’t have to reserve for total cumulative losses today, the question is how much more reserves will they need over the next few years to cover loan losses. In the case of residential loans, if total expected losses are $300bn and banks have set aside $85bn in reserves for these loans, we estimate that there could be over $200bn left to go, or about half
of total projected losses across all assets.

Regardless of the validity of earlier "leaked" stress tests, this is likely a major sticking point for the administration which is currently beating its head on how to sweep these potential large future losses under the rug.

Delayed: Bank Stress Test Could Stress Financial System

from Reuters:
The U.S. Treasury Department is planning to delay the release of any completed bank stress test results until after the first-quarter earnings season to avoid complicating stock market reaction, a source familiar with Treasury's discussions said on Tuesday.

The Treasury is still talking about how results of the regulatory stress tests on the 19 largest U.S. banks will be released, and may disclose them as summary results that are not institution-specific, the source said.

The government is testing how the largest banks would fare under more adverse economic conditions than are expected in an attempt to assess the firms' capital needs. The tests are due to be completed by the end of April, but Treasury has said they may be finished before then.

The source, speaking anonymously because the Treasury has not made a final decision on what to disclose, said officials do not want any test results released before the earnings season wraps up for most U.S. banks on April 24.

Treasury did not immediately respond to a request for comment.

The Ominous Lesson We Learn from the FDIC's Largest Bidder

from Zero Hedge:
For all those who feel like punching their monitor or TV every time the administration says that the legacy loan program is fair and equitable at a transaction price in the 80-90 cent ballpark, we have some news for you (that will likely make the half life of said monitor or TV even shorter).

But first, there has been a lot of speculation about where banks have marked their commercial loan portfolios. Zero Hedge had previously discovered and disclosed interpretative data from Goldman, which concluded that the major banks were still stuck in a fairytale world where these loans were marked in the 90+ ballpark, a far, far cry from where comparable loans would clear in the market. Of course, FDIC's head Sheila Bair (who many WaMu shareholders lately do not feel too hot about) had some interpretative voodoo of her own, claiming the bid offer disconnect is purely due to a lack of liquidity and access to financing:

"It has been clear for some time that troubled loans and securities have depressed market perceptions of banks and impeded new lending. Difficult market conditions have complicated efforts to sell these troubled assets because potential buyers have not had access to financing. The Legacy Loans Program aligns the interests of the government with private investors to provide financing and market-based pricing, and is a critical step forward in the process of restoring clarity to the markets. While there are inherent challenges to implementing a program of this magnitude quickly, the framework announced today provides the foundation upon which the FDIC will begin to build immediately."

So it came as a big surprise that none other than the FDIC keeps a track of where commercial loans clear in its own internal auctions. In a relatively obscure part of the FDIC's website, there lies a little gem of disclosure, which exposes all the rhetoric by Sheila Bair and by other members of the administration as hypocrisy on steroids. We bring you: FDIC's closed loan sales database. Zero Hedge took the liberty of compiling some of the data for the benefit of our readers: we picked a data sort of all closed commercial loan auctions from January 1, 2009 to February 28, 2009, to see just at what level these would close. Of course, we highly recommend our readers recreate these results.
|The results: 43 commercial loan auctions, of which 39 were for exclusively performing (so not non-performing, or lower quality auctions, and by implication free cash generating), consisting of 331 total loans, representing $206 million in face value, ended up clearing for a $103 million price, a 49.3% discount, or a 50.7% clearing price! That's right, the FDIC itself clears performing commercial loans at 50 cents on the dollar on average in its own regulated, orderly auctions. One would assume the chairman of the very agency that conducts these loan auctions would be aware of them and would at least reference or mention these results in her numerous public appearances.

Curiously, the FDIC also discloses the winning bidders. The surprising recurring result: a little known (but deserving much greater attention) company known as Beal Bank (and its LNV Corporation subsidiary). In the first two months of the year alone, Beal Bank, and more specifically its owner Andy Beal, has won $73 million face value of auctions, for a price of $43 million- a clearing price of 59%. Another way of looking at it is that Beal accounts for 35% of all FDIC auctions.

Just who is Andy Beal, aside from a prolific and profitable poker-playing, college-dropout of course? A great question, which Forbes goes into great detail answering this weekend. We paraphrase the key points from Forbes:

Standing outside the glass-domed headquarters of his Plano, Texas, bank in March, D. Andrew Beal presses a cellphone to his ear. He's discussing a deal to buy mortgage securities. In just a few minutes, the deal's done: His Beal Bank will buy $15 million of face value for $5 million. A few hours earlier he reviewed details on a $500 million loan his bank is making to a company heading into bankruptcy--the biggest he's ever done. A few floors above, workers are bent over computer screens preparing bids for chunks of $600 million in assets dumped by two imploded financial firms. In the last 15 months, Beal has purchased $800 million of loans from failed banks, probably more than anyone else.

It is amusing that Beal Bank, which is not large enough to qualify for the FDIC's zombie bank life-support program known as TLGP, is beating the FDIC at its own game, gobbling up assets (at fair market prices, which is what auction outcomes are by definition). Beal is such a non-mainstream individual that Project Zero will hold a honorary bunk in his favor, (he will have to decide who gets top with Chuck Bowsher) until such time as he decides to stand outside ZH headquarters for 24 hours to gain admission:

It's hard to imagine Beal fitting in at a bankers' convention. He walked into the Las Vegas Bellagio in 2001 and challenged the world's best poker players to games with $2 million pots--the highest stakes ever. Donning large sunglasses and earphones, Beal held his own against the poker stars, once winning $11 million in a single day, although he shrugs that he lost more than he won. At the track he'll drive one of his nine race cars (costing as much as $100,000 each) at 150 mph. On city streets he cruises in a huge Ford Excursion, the vehicle that has made him feel safe since a drunk driver punctured his lungs in 2000.

However, the main reason why Beal is prophetic beyond his years is the following:

He thinks the government is going to be "disappointed" by its various programs to revive lending. He says Treasury Secretary Timothy Geithner's new plan to guarantee loans to buyers of toxic assets won't lead to many sales because the problem isn't liquidity but price. They are not low enough. Half the country's banks--4,000 in all--would be bust, he says, if they marked their loans to what the loans would fetch in an auction. He says banks are fooling themselves by refusing to mark busted assets down.

"Banks are on a prayer mission that somehow prices will come back and they won't have to face reality," Beal says. And that reality, according to Beal, is going to get a lot worse. "Unemployment is going over 10%, commercial real estate hasn't even begun collapsing and corporate credit defaults are just getting started," he says. His prediction: depression, without bread lines this time, thanks to the government safety net, but with equal cost to society.

It is a fitting conclusion that Beal himself is the winning bidder in FDIC's commercial loan auctions (which no other major bank with a $ trillion+ balance sheet has any interest in participating in - why is this if the loans are worth 90 cents as Citi et al have them market internally?), and thus the true market test of what all these toxic legacy loans are really worth. Zero Hedge wholeheartedly agrees with Beal that the CRE situation is headed for a cliff at 120 mph, and that no matter how much hypocritical posturing and rhetoric the administration spouts, or how many more trillions in debt the U.S. incurs to revive the financial zombie on the morgue dissection table, there is nothing at this point that can be done to change the final outcome.