Wow,
http://online.wsj.com/article/SB124343337462058677.html#mod=article-outset-box">this sounds pretty good!
WASHINGTON -- U.S. banks reported a first-quarter profit of $7.6 billion, buoyed by revenue at a few larger companies, but overall the credit picture remained grim as the number of banks in trouble continued to rise and borrowers increasingly fell behind on their loans.Or is it?
Let's think. During that quarter AIG passed through some $100 billion plus from the taxpayer to the largest of these very same banks.
So the banks "made" $7.6 billion, but they had an "unearned gain" of over $100 billion. Let's call it an even $100 billion as some of it didn't stay here in the United States.
Now The WSJ claims:
Still, the latest results were an improvement from the industry's net loss of $36.9 billion in last year's fourth quarter.They were? I guess if you can count robbery as an "improvement", ok. But let's look at this from a different angle - back out that "unearned" and illicit gain from the passthrough and they would have lost $92.4 billion dollars, or well more than twice last year's fourth quarter.
Heh, if I can steal making my numbers is easy! All you have to do is leave the bank vault open and promise me that there are no guards, no cameras and no guns! I will then march in and steal whatever I want, and of course will turn in respectable quarterly results.
The problem with the banks lies here:
Despite those actions, banks were increasingly unable to build their reserves fast enough to keep up with noncurrent loans. The ratio of reserves to noncurrent loans fell to 66.5% in the first quarter from 74.8% in the fourth quarter. It was the lowest level in 17 years.To put this in a bit more simple form, this means that while the banks are claiming to be increasing loss provisions, loans are going bad faster than their provisioning is increasing - which means they're reporting "profits" that are false, as provisions for bad loans hit earnings. So we can take some more off those "reported earnings", as much as another $6-10 billion dollars.
Do those reported numbers still look ok?
What's worse is that the banks are charging off (that is, disposing as worthless) a huge amount and yet even that is not slowing down the bad loan count - they're going delinquent faster than the banks are charging them off.
That's not bullish folks.
http://online.wsj.com/article/SB124346787723260427.html#mod=testMod">Then there's this:
WASHINGTON -- A government program designed to rid banks of bad loans, part of a broader effort once viewed as central to tackling the financial crisis, is stalling and may soon be put on hold, according to people familiar with the matter.
The Legacy Loans Program, being crafted by the Federal Deposit Insurance Corp., is part of the $1 trillion Public Private Investment Program the Obama administration announced in March as a way to encourage banks to sell securities and loans weighing on their balance sheets to willing investors.http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a7d6mMDGG3nc">And this...
May 26 (Bloomberg) -- The highest-graded bonds backed by commercial mortgages may be cut by Standard & Poor’s, potentially rendering the securities ineligible for a $1 trillion U.S. program to jumpstart lending.
As much as 90 percent of so-called super senior commercial- mortgage backed bonds sold in 2007 may be affected as the ratings firm changes how it assesses the debt, New York-based S&P said today in a report. About 25 percent of the bonds sold in 2005, and 60 percent of those sold in 2006 may be cut. The "CMBS", or Commercial Mortgage Backed Securities marketplace has seen an amazing contraction in spreads - that is, perceived risk - over the last month or so. Most of this has been due to the belief that The Fed would effectively monetize them (yeah, I know, they're claiming they aren't - riiiight!)
This change will drive a stake through the heart of that program - expect to see those spreads start to blow out again, and soon, as commercial real estate is in much more trouble than is being discussed openly.
Simply put there is far too much supply and far too many retailers that are or will go under to support it. There's no realistic possibility of fixing this problem and as a consequence the expectation has to be that we will see an all-on collapse at some point in the not-so-distant future in this marketplace as rent collections and therefore valuations collapse.
Now add a dose of panic in the Treasury market, and oh boy, things could get interesting fast, no?
Buckle up folks - this ride is likely to be a bit rough.
Disclosure: Lightly short the broad markets (SPX) at the present time.
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