Tag Archives: TARP

Bank Dividends add Insult to Injury

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Bank Dividends add Insult to InjuryBanks have been on a tear lately, helping to lead the overall market higher. Part of the reason they’ve taken off is many of them have recently announced increases in dividends, making their respective shares more valuable.

Therein lies the problem.

Let’s step back in very recent history to the fall of 2008. That’s when the nation was on the brink of a complete and total financial meltdown. It’s when TARP was born and it preceded a fall in the S&P to 666 in March, 2009. It’s when the banks were bailed out, given many billions of dollars lest the world economy come to a screeching halt.

Let’s also take a moment to remember why the banks were brought to their knees. They collectively engaged in lending practices and the creation of toxic financial instruments that ultimately resulted in the collapse of the US housing market, where millions of homeowners ended up in foreclosure.

Now we can fast forward to today.

Earlier this week the Federal Reserve conducted stress tests on major banks. A few of the banks, like Citigroup and SunTrust, came up short of looking like they could withstand another meltdown. The other big banks passed, and some immediately (or in the case of JP Morgan, prematurely) announced an increase in dividends.

One could argue that since the banks survived, paid back all TARP funds and some recently agreed to a multi-billion dollar settlement to deal with foreclosures, they should be free to do what they want with their excess earnings. But, the $25 billion or so that is to be used to deal with the foreclosure situation is a pittance compared to the damage it has caused to the American economy and psyche.

Consider this. At the height of the financial meltdown in 2008.2009, American Express was on its knees. The stock had fallen from $50 in April, 2008, to $9 by March, 2009; that’s an 82% haircut. Like many other big financial entities at the time, it was on the verge of going under. Instead, American Express was granted a bank holding charter, specifically so it could qualify for TARP funds.

Adding insult to injury, the board’s chairman and CEO at the time, Kenneth Chenault, who was at the helm when the stock’s price collapsed, was granted millions of dollars in stock grants in January, 2009, when the stock had fallen sharply, and under his watch. This almost assured Mr. Chenault would put millions of dollars in his pocket if the stock recovered along with the rest of the economy, not because of any extraordinary efforts on his behalf.

So, instead of Mr. Chenault being penalized for the stock plummeting under his watch, he was rewarded by getting low price stock options that were practically guaranteed to rise once the economic calamity ended, with the stock now trading at $57 per share.

During the same period of time, millions of individuals lost their homes to foreclosures, while no one in any executive level capacity was held accountable for the shoddy lending practices. A few may have been shamed, but no one ended up in jail for what is arguably one of the most diabolical chapters in the financial history of our country.

Let’s also not forget that when TARP was established it was backed up by the US taxpayer – yes, you and me. Yet the banks, and the banks alone, were the beneficiaries of billions of dollars in bail out money.

This brings me to ask the question; why would the banks even think about raising dividends at this time, instead of using those precious dollars to help out those who have fallen on hard times? I imagine Jamie Diamond, CEO of JP Morgan, would scoff and laugh at such a suggestion. Remember, he’s the one who pre-empted the Fed’s announcement about stress test results by saying the bank would raise its dividends, almost mocking the process, what I would term an “in your face” moment.

I’ll tell you this. In spite of a number of big banks passing the most recent stress test, if the economy went in the tank again, they would be the most vulnerable. And, as much as I would like to think we learned our lesson from the most recent meltdown, you can bet that we would hear again that the banks would need to be protected, to keep our economy from collapsing. It will be then that you will hear the cries that the banks should have held on to those precious dividend dollars since we will be called on once again as taxpayers to save the day.

Mortgage Settlement – Another Score for the Banks

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Foreclosure_RatesI’ve been reading up on the recently announced mortgage settlement between five major banks and the government. One article that caught my attention was on the front page of Friday’s Washington Post. In this article it refers to the fact that the $25 billion settlement agreed to represents a fraction of the collective amount of underwater mortgages in the country that total in the range of $750 billion. So basically, just over 3% of the homeowners who are underwater might benefit in some way from this settlement.

What struck me the most about the $750 billion dollars of underwater mortgages was this; it’s almost the identical amount that was approved for TARP back in 2008 that helped to keep the major banks afloat. Let’s examine this some more.

When the entire US financial system was close to total collapse back in 2008, the initial thinking was that a large sum of taxpayer backed money needed to be provided to the banks to deal with the massive number of bad loans on their respective balance sheets. Instead, then Treasury Secretary Henry Paulsen called an audible – he switched the game plan and provided the big banks with billions of dollars in funding to help insure they had liquidity to avoid a complete meltdown. Some will argue that this strategy worked, and even I will acknowledge that we are in much better shape than we were back then. However, when I see that the total value of underwater mortgages pretty much matches the TARP funding, it shows me that once again the banks got favorable treatment while the average homeowner got the shaft.

Let’s say, for example, that the original TARP money was provided specifically to the banks to deal with the bad loans on their books. The idea was that the Treasury could provide the funding and then “wait it out”; that is, the Fed could have taken custody of the bad loans and then waited for some type of recovery to get made whole. Had that been done, we might have accomplished two objectives; one being providing banks with funds to get the toxic loans off their books and two, nipping what has become a housing epidemic, in the bud. Instead, the homeowner was thrown under the bus, with millions of people losing their homes through foreclosure and resulting in a devastated housing market that’s no where near recovery.

A question to be asked is this; why was Paulsen given such latitude to use the TARP funds as he saw fit? Since he had led Congress initially into believing the funds would be used to clean up toxic loans, why the shift in thinking? My thought is that he saw it as a way to bail out his friends and business peers, while worrying about the dire consequences that would affect the “little guy” down the road. Let’s not forget; before Paulsen became Treasury Secretary he ran Goldman Sachs, and had deep ties to the financial community.

Somehow, all of this is being forgotten as the country’s Attorneys General and Justice department are patting each other on their backs. Lost in the fog is the pain, misery and suffering felt by millions of individuals. Yes, many of them should never had gotten loans in the first place, but the banks knew this and lent them the money anyway, and it was the banks who got the bailout money.

Let’s remember this as well. $25 billion might seem like a lot of money, but split up between 5 major financial institutions, it’s mostly a pittance. And, when its broken down, it’s not likely to have a significant impact on those individuals who are lucky enough to qualify for assistance.

I would like to think that what’s happening now is at least a first step; that the other 97% of individuals underwater will at least have the opportunity to work something out with their lenders. If this is what is ultimately accomplished by this first step, then great. But, as is almost always the case, unless something is shoved down the throats of the lenders, they aren’t likely to go out of their way to do anything more than what is absolutely required.

Another year begins

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Happy New Year 2012Here’s what we know about the market in 2011. The S&P ended at 1257 as of December 31, 2010, and ended at 1257 as of December 31, 2011. So, over a period of 365 days, the S&P was totally flat for the year.

It’s hard to fathom that after 365 calendar days and hundreds of trading days that the S&P would not gain or lose one point, but that’s exactly what happened. It’s hard to imagine that with everything going on during 2011, including a stalemate on balancing the budget, the near implosion of Europe, millions of people losing their homes and unemployment remaining high that the S&P didn’t move. If you had decided to bury your head in the sand for a full year, put your money into the S&P Spiders with hope that your portfolio might jump, you discovered a year later that you hadn’t made a dime; nada. In fact, inflation adjusted, you would have been in the hole.

Of course, the market did move throughout the year, with the S&P getting as high as 1370 on May 2 when it peaked and then falling as low as 1074 on October 4. Thus, the S&P was up as much as 9% at its peak for the year and then fell over 20% from that May 2 high to the October 4 low.

Still, 2011 required a unique set of trading skills and discipline to keep the average trader from losing his/her shirt. Yes, that sounds a bit odd; if the S&P broke even, at least one should be able to preserve 100% of capital. Sorry, doesn’t work that way.

Instead, those individuals who like to call themselves “trend traders” were pretty much forced to approach the market more like “day traders”, or risk losing heavily, when, for example, news from Europe overnight left them vulnerable to heavy losses. You would think this would be a big boon to companies like Charles Schwab who rely on heavy trading to make their money, but this was not the case. In fact, despite the churning throughout the year, Schwab lost 33% of its value over the course of the year, so even the brokers suffered.

Bank’s were hit particularly hard during 2011, with Bank of America itself losing nearly 60% of its value over the course of the year; Goldman Sachs lost 45% of its value; Morgan Stanley lost over 40%. This is compared to a flat S&P, so it gives us some perspective on how poorly the banking sector did perform for the year.

There were also some big names, what I like to refer to as “cult” stocks, ones that traders love to get involved in. Research in Motion (RIMM) was one that got hammered for the year, down over 70%; Netflix (NFLX) was down roughly 60%, and over 75% from its peak to year end.

The combination of a dismal financial sector and such uncertainty abroad made it nearly impossible for the market to advance. 2011 was the year that Europe took center stage, with investors in US stocks being held hostage day in and day out, never knowing what the morning might bring. This was a dramatic shift from the norm, where most investors around the globe had become accustomed to letting the patterns in US stocks dictate the move in world markets.

Yields in US treasuries fell off the cliff, with the yield on the 10 year Treasury Note falling over 40% from the end of 2010 to the end of 2011. In that respect, one could argue that US equities did well to break even, as investors around the world fled to safety.

What will it take for US equities to shine during 2012? For starters, banks need to perk up. When you have banks like Bank of America, Goldman Sachs and Morgan Stanley faltering, it’s a sign of uncertainty – i.e., what might be lurking on the collective balance sheets of the banks? Next, the consumer needs to perk up, and that’s going to be tough as long as unemployment remains high. It has been encouraging lately to see weekly jobless claims fall, down under 400,000 for more than just one week at a time, and the unemployment rate is back below 9%. But, rest assured that corporations will do everything they can to increase their respective bottom lines without adding bodies, leading to the continuation of skeptical consumers.

One other thing. When the US implemented its TARP program back in 2008, it took almost 6 months for the market to bottom, when the S&P reached 666 in March, 2009. So though it may appear that Europe has made progress with its banks, we may yet see a delayed affect that will affect markets around the world.

Bottom line for 2012? Honestly, it’s just too hard to tell. It’s a presidential election year, so that could affect the market, depending on the outcome. Banks could continue to struggle as more loans go sour and as the realities of dealing with so much bank owned real estate. And, without the banks participating, it is hard to imagine the market able to make much headway. Expect corporations to squeeze as much as possible out of the work force; no one is going to hire unless absolutely necessary. It’s also quite possible that the effects of recent actions in Europe will continue to be felt in the US, keeping a significant number of investors on the sidelines.

On the other side of the spectrum, if the banks can make headway on their bad loans while minimizing real estate related losses while open up lending in an even bigger way to small businesses, that would be a net positive. It’s also possible that the affect of all of the Fed‘s efforts the past many months will kick in big time, stimulating the economy and the market as well.

A potential huge impediment? Rising oil prices, particularly if it translates to higher prices at the pump. That could be a deal killer. It certainly had a near devastating impact when oil neared $150 a barrel back in 2008; we all saw what happened to the market and the economy in general. The US economy is not yet strong enough to withstand a repeat of 2008.

Which gets me to my 2012 forecast…see me in about 12 months and I’ll give you my number then!

Banks Score Again

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Banks Gorge on ECB Loans

European-Central-BankSo went the headlines this morning as European banks took advantage of a program meant to increase liquidity in Europe’s fragile banking system.

According to Reuters, banks borrowed almost 500 billion euros in 3 year loans carrying an interest rate in the range of 1%.

The market’s initial reaction was positive but then it started dawning on traders that the need for such a huge amount of cash could signal more trouble. And, there’s some question as to how the funds will actually be used; i.e., will the funds be used to loan to third parties or will the banks just sit on the cash, or invest in treasuries while enjoying the spread, much like US banks did when they received TARP assistance back in 2008.

In many ways, what’s going on in Europe is eerily similar to what happened in the US during that tumultuous period back in 2008. Regulators saw trouble brewing, and instead of letting more banks go under decided to throw lots of cash at them, which some think ultimately worked. Now European regulators are hoping for the same outcome, though it is too early to tell if what they are doing will work.

Let’s remember what happened not long after US banks got their TARP funds. It took a few months, but eventually, the market tanked, with the S&P hitting a low of 666 the week of March 2, 2009. In fact, the S&P was close to 1100 at the beginning of October, 2008, when TARP was initiated, so it fell almost 40% in a five month period.

There’s no telling if Europe is on the same path, but those who went through the volatile times at the end of 2008 and the beginning of 2009 know that the initial reaction to TARP was relief. Then reality set in resulting in that big move down in the equity markets. So, we shouldn’t be surprised to see a similar outcome once the initial relief period wanes.

Whatever the ultimate outcome one thing is clear. Banks have once again managed to hold the universe hostage due to their poor decisions. And, once again, the party line will be that banks are the lifeblood of the economic system, that we can’t live without them, that they must all remain strong. Really? Might we not be better off if the we let things run their course, letting the weakest of the weak go under, while weeding out those banks who have made the worst decisions? No one seems to have the answer, but perhaps its worth a try.

Europe takes center stage

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It used to be tough enough to wake up to see what US futures were doing to get prepared for a new trading day, but now it’s more about waking up to find out what happened overnight in the Asian and European markets, because its no longer the case of the tail wagging the dog. Europe has suddenly taken top dog status while the US is left to follow their lead.

It wasn’t always like this. In fact, it was quite the opposite, where European markets had to adjust to what happened in the US the prior day. So, if the US market was hit hard on a Wednesday, then Europe would start off on a rugged note on Thursday. In fact, what we’re seeing now with the European markets is similar to what the US went through back in 2008 and early 2009.

Recall what happened in the fall of 2008 when TARP was created to bail out US banks. The near economic meltdown in the US took center stage, with Lehman‘s collapse and AIG‘s near collapse affecting markets world wide. The initial market meltdown began the week of September 29, when the S&P was just above 1200. One week later, the S&P got as low as 839, so a 30% haircut in just a few days time. However, the S&P didn’t hit its low until March, 2009, when it got to 666, which marked the beginning of a bull run that lasted for over two years.

Now fast forward to where we are today. While the S&P is off of its high of 1370 reached on May 2, it’s held up reasonably well, given existing circumstances. And, Europe is pretty much at the stage the US was at during that dark 2008/2009 period, and setting the world wide market tone, just like we did back then.

Even though many US investors have no direct holdings in European based stocks, they are subject to the turmoil being experienced across the pond, and like it or not, need to adjust to this new reality when trading.

History offers many clues, and what we do know is that it took about 6 months from when the TARP was established for the US to hit its market lows. Thus, we should assume that the fallout from Europe’s own bailout efforts will continue for some time. The good news is once investors figured out that the worst was over, the US market went on a tear, with the S&P almost doubling in just over a year’s time.

So, like it or not, US investors need to understand that Europe is likely to maintain center stage for some period of time. Thus, savvy traders will need to accept the present realities, or continue to operate as if Europe doesn’t matter, and ultimately suffer the consequences.

A lesson for the US?

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There’s a lesson to be learned from Europe’s handling of their economic problems; actually take steps that have teeth to them.

Step back to 2008 when then Treasury Secretary Henry Paulson summoned all of the top executives of US banks together to discuss what would become the TARP. Originally, when Paulson had spoken to Congress, the funds were going to be used to clear out bad mortgage loans. Instead, the funds were loaned to the banks as a means of providing liquidity and keeping them all from going under.

Europe’s approach is different. In effect, bondholders who were owed money by Greece were told to take a 50% haircut; no questions asked. The reasoning was simple; if you don’t agree then everyone’s going under, and this won’t be allowed to happen; end of discussion.

Banks in the US were simply given too much leeway, and there was no way they were going to, or intend to, take the types of haircuts they need to in order to help get the economy back on track. Instead, a full three years after TARP, our economy remains stuck in the mud, millions of people have lost their houses and many more face the same fate.

Clearly, Europe’s actions aren’t the answer to everything; but, they did what needed to be done to keep Greece from going under. Now they will need to look at Italy, Spain and others that face similar economic problems, and that will be a daunting task. But, a blueprint has now been laid out where each situation can be dealt with one step at a time.

Much like Europe was able to benefit from seeing how the US handled its own internal problems a few years back, we now have an opportunity to do the work necessary to get our economy back on track. I only hope that the banks can somehow see that if they get proactive by dealing more appropriately with the millions of under water loans on their books that it will not only help them in the long run but the entire country as well.

True mixed messages

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Just last week, the S&P fell by 6.5%, a tough 5 day period no matter how you look at it. Now, just a weekend later, the market has rebounded sharply, leading traders to ask, have we bottomed?

Now, in just a day and a half, the S&P has regained over 4.5% on excitement that Europe has come up with a plan to deal with the load of sovereign debt that has led to market volatility and concern.

At the same time, economic report after economic report continues to come out weak. Just this morning, for example, the monthly Consumer Confidence report came out with at 45.0, a terrible reading, no matter what spin you might hear.

In looking at Europe’s potential program that some are describing as TARP like, the one criticism that seems to keep popping up is that there is a leverage component of 8-1 – that is, the ability to borrow funds on the margin, In my opinion, that doesn’t really do anything to resolve Europe’s long term problems. In fact, if anything, the thought of introducing additional leverage into an already over leveraged equation doesn’t make any sense at all.

The bulls will argue that the recent selling has been overdone, but in fact, the market will be the final arbitrar in deciding when enough is enough. And, with housing still in shambles, unemployment rising and banks not lending, Europe’s stop gap plans aren’t likely going to be enough to put a floor on the US market.

If things weren’t so serious Bove would be a joke

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Here’s the latest take on things by banking analyst and “guru” Dick Bove of Rochdale Securities. To paraphrase, if the government continues on a path of holding banks accountable for their deplorable actions, the US will go into recession. In other words, give the banks a break.

Hold on now. Let’s take a little stroll down memory lane here.

First, banks have always had favored institution status, given that the money they take in from depositors (you and me) are backed up by the government (you and me).

Next, no one put a gun to the heads of bank executives when they happily raked in fees from bogus mortgages and collateralized mortgages sold to unsuspecting investors.

Next, the banks didn’t turn down the $700 billion in TARP funds that kept the bulk of them from going under while the average person on the street was left to fend for him/herself.

So, Bove saying that the government will be responsible for putting the US back into recession because they are forcing them to pay up for their mistakes, well, that sounds more like an analyst that made a bad bet on banks.

In fact, as I’ve stated before, Bove has been all over the map. In many ways, he represents the market, trying to find some footing, reaching for solutions that simply aren’t there, and hoping that one of his calls actually comes true.

Yes, if a few more banks go under, it’s going to likely cause a ripple effect, but at least we’ll end up weeding up the ones who shouldn’t be around anymore. Hell, the banks didn’t seem to have any problem at all foreclosing on millions of homeowners – many who should never have received loans in the first place – and upending their lives. So, perhaps it is fitting that these same banks suffer similar consequences. I promise, it won’t take long for most of us to forget about them.

Banks get the upper hand… Again

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I just read a story that was written by Daniel Gross of the Contrary Indicator. It’s a bit complicated, but the bottom line is that a number of banks have paid back TARP funds that they had previously borrowed by using funds from the Small Business Lending fund that was created as part of the Small Business Jobs Act.

In a nutshell, some smaller banks that had borrowed TARP funds qualified for lower interest rates from the government by loaning money to small businesses. In some cases, this allowed the banks to knock down their interest rate obligation to the government from 5% to 1%. So, while the banks were basically doing what banks are supposed to do – loaning money to small businesses – they were able to take funds from this new program and pay down their TARP obligations, saving a nice chunk of interest that you and I as taxpayers would otherwise be entitled to for backing up the TARP program. How sweet it that…for the banks?

Let me try to come up with an example here that you can relate to. Let’s say you had borrowed funds to finance a house at a rate of 5% that was guaranteed by the government. The government then came to you and said whatever line of work you are in, we want you to allocate a small portion of your products or services to a specific segment of the population. You don’t have to worry about being at risk because if for some reason your product is defective or your service is lousy we’ll simply step in and assume the liability. And, for doing all of this, we will reduce the mortgage interest on your home to 1%.

Sweet!

Unfortunately, there are millions of borrowers out there who could have used a program just like this one as an incentive to stay in their homes to avoid foreclosure. Imagine, for example, if you were able to replace a 5% mortgage with a 1% mortgage. What would that do for your cash flow, and in turn, how might that stimulate the economy? Instead, the government has continued to subsidize the banks, thinking that by doing so, that the banks are going to go out of their way to help borrowers in need. As usual, that is flawed thinking, as the only small businesses getting loans from the banks are the ones with stellar credit and pose almost no lending risk. So, the bottom line of the banks participating in this gift of a program will increase, benefiting shareholders, while reducing the amount of interest we should be earning as the ones who took the risk by backing up TARP as taxpayers. Nice.

China takes a stab at US

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Throw China into the mix now, piling on the US after the S&P issued its economic warning on Monday.

According to an article on CNBC

China’s Foreign Ministry said on Tuesday that the United States must take “responsible” measures to protect investors in its debt after Standard & Poor’s threatened to lower its credit rating on the United States due to a bulging budget deficit.

The headline reads: “China Urges US to Protect Creditors After S&P Warning”. In other words, up yours!

To be honest, I had to chuckle when I saw the headline; after all, it’s almost always the US that is offering such sage advice to countries of “lesser” status. So, China and the rest of the world must be gleeful after China’s public scolding.

But, could they be on to something? Is it really worse than we might think? They do hold a ton of our debt, and its reported they have upwards of $2 trillion in dollars, so aren’t they at least entitled to vent their thoughts?

Of course, Treasury Secretary Timothy Geithner dismisses it as no big deal. What else is he going to say? Remember that this is the same guy who turned his head when he was head of the Federal Reserve Bank of New York, certainly playing a role in the near financial meltdown or our country, favoring to bail out the banks through TARP.

Interestingly, the market action today is pretty calm, considering that warning of Monday. Seems like US investors aren’t taking it all too seriously. China, on the other hand, has made it clear that we best get our act together, or else…