Seems Everyone is Speculating on the Banks

Hey, the economy is not only recovering…it’s becoming better than ever before!

“Banks recover to their levels before the fall of Lehman,” is a headline in this Monday’s El Pais from Madrid.

“Public assistance enables the world’s largest 15 financial firms to return to the capitalization they had in September 2008,” the article continues. The largest of the largest, HSBC, is now judged to be worth $186 billion, according to the stock market. China’s ICBC is on its heels, with a market cap of $178 billion. BNP Paribas is 7th at $87 billion.

We will overlook the compromising detail that banks actually lost money in the last quarter – more than $3 billion. And let’s forget that China’s major banks are sitting on mega-losses from more than eight years ago (to say nothing of the more recent losses). Western banks, too, still have billions in assets whose real worth is an open question…and subject to quick reconsideration…

El Pais goes on to report something intriguing: “The two big Spanish banks leave the crisis stronger.”

Ah. What doesn’t kill you makes you stronger. The world economy is recovering, or so people believe. Stocks are going up – led by the banks. But are the undead of the banking world really stronger?

Ha ha…don’t make us laugh.

But the world seems to believe it. The Wall Street Journal reports that just five big financial stocks are behind the stock market’s rally. Fannie Mae, Citigroup, Freddie Mac, Bank of America and AIG account for nearly a third of market’s daily turnover. Seems everyone is speculating on the banks…and moving them higher.

You will recall, dear reader, the banks made a fortune during the bubble years. You may also recall that they made so much money that when the bubble years came to a close, that they were almost all broke. Without hasty action from the feds, it would have been the end of the road for every major bank on Wall Street. As it was, even with government help, none of them survived intact. They all either went bankrupt, were sold off, or got bailouts with strings attached.

What busted the banks was too much of a bad thing. They made their money by peddling debt. In order to move the stuff, they convinced clients that their products were good safe investments – even leveraged derivatives backed by subprime mortgages! Such good salesmen were they that they even convinced themselves. When the crisis came, they realized that they had been buyers of the debt…as well as sellers of it. What could they do with it…except sell it to the feds?

But the whole financial industry is coming back to life. According to El Pais, it’s back…and it’s better than ever.

But wait? How could that be? Hasn’t the world entered the worst recession since the great depression? How could lending money be such a good business? People don’t borrow in a recession.

Strategic Short Report’s Dan Amoss is just as skeptical. “The banking system has no experience managing through the current ‘negative home equity’ environment,” he tells us. “This is an environment in which mortgage rates are already about as low as they can get and consumer balance sheets are as stressed as ever. Due to the nonrecourse nature of mortgages, most borrowers have no financial incentive to keep paying. Many are choosing to mail the keys back to the lender.

“This problem will cap the upside of bank stocks for years to come, so the sector will offer lots of short selling opportunities.”

Borrowing by households has fallen off a cliff. Instead of borrowing, they’re paying back debt at the fastest rate since the ’50s. No money to be made there.

How about commercial and business loans? Are you kidding? Businesses are cutting back too. Businesses borrow to expand…and there is no expansion going on. This is a contraction. Credit is contracting along with everything else.

Then, how could the banks make money? Let’s refer to that news item again. Oh…there are the magic words: “Public assistance enables…”

The banks are making money the same way Detroit is making money…dishonestly and temporarily. Instead of doing honest deals with willing and able counterparties, the banks are pulling a fast one. Their money comes, ultimately, from the poor taxpayer…the poor sap who funds all the government’s giveaways. The private sector lived far beyond its means during the bubble years. People wasted their money they didn’t have on things they didn’t need. Now, they try to save their money. But now the government wastes their money for them.

Speaking of which…a quick note on the Cash for Clunkers program. Numbers to be released today are expected to show a peak in sales in August caused by the feds’ incentives. President Obama calls the program a showcase, proving how effective government can be at getting the economy back on the road.

But let’s go back to basics. It’s a sham when people waste their own money. It’s a crime when they waste other peoples’ money. Prosperity comes from accumulating (saving) capital…and using it to increase productive capacity. The formula is pretty simple: Save your money. Invest it in productive business. The Clunkers program encouraged people to do the opposite – consume capital, other peoples’ capital.

‘Nuff said.

Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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Admirable honesty in today’s world of corrupt crap news. Two thumbs up.

Here is the excuse for you to quit your US assets Bill : extract from by Anonymous on Wed, 09/02/2009 – 12:53 The Wegelin piece goes on to say that, if the non-US residing, non-US citizen refuses to pay these taxes on non-US assets, then the American IRS can sequester a foreign bank’s US assets—even if they are merely acting as custodians—in order to enforce their decision (which is not necessarily made with judicial review). That would mean, for instance, that if a foreigner, Johann Suisse, living in Zurich with a net worth of ChFr 10 million and a… Read more »
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