A generalised sense of cautious optimism seems to be on the table for this week. In the US, Goldman is refunding the taxpayer and Wells Fargo is making money. Over here, notwithstanding March’s FSA stress-test madrigal, there’s no actual new proximate reason to be cheerful, but the sun is shining, and tomorrow should be rather warm. All of which adds up to perfect conditions for a little Spring rally.
The bigger question, naturally, is whether this is tantamount to the beginning of the end of the financial crisis (note, not the economic one). Are the banks beginning to work again?
Anecdotally, yes. HSBC, for example, last week announced it was making available £1bn of 90 per cent mortgages for UK homeowners.
To put that into perspective though, look at this from Tyler at Zero Hedge, put together last week. It’s an aggregated ‘balance sheet’ for the entire US banking system. As Felix Salmon at Reuters notes, it’s a seemingly simple piece of information that “repays a lot of looking at”. Consider:
The US government is committed to supporting 72.3% of all bank liabilities.
The US government directly owns 20% of the entire banking system’s equity.
None of which, naturally, says anything about the actual assets the banks own.
To turn this into an apt metaphor: imagine the entire banking system is just one family, with a mortgage and a home. The government’s liability support, outlined above, is tantamount to that banking family simply being told by their local building society (Obama Mortgage Co) that their mortgage loan won’t necessarily be recalled at a moment’s notice. Some security. And kinda what you need in a mortgage loan anyway.
The point being that governments’ bank liability support, the “bailouts” we have so far seen, say nothing as to the underlying problem: the value of our banking family’s home. The value of the banking systems assets.
Here’s Zero Hedge’s rather more numerically literate explanation (emphasis ours):
In a normal world, the Assets, by definition, should equal the Liabilities plus Shareholder Equity. As nobody knows what the true value of the assets really is, the Bail Out support programs are designed to provide the backing to make it seem like the almost $8 trillion in deposits, the core of bank and thrift liabilities, are not “supported” by toxic assets, or “hot air” to use popular jargon. As presented, the various Bail Out programs now support over 72% of the total liabilities on the balance sheet. The implications of this are staggering: Roubini anticipates the total amount of write downs (in the US) will reach $3.6 trillion, or another $2.4 trillion to go. The revised IMF estimate (which is not the final one by a long shot) estimates $3.1 trillion in total US losses, or another roughly $2 trillion to go.
A further $2 trillion decline in asset values would leave the world’s banks with quite a negative equity problem. What’s £1bn of new 90 per cent mortgages in the UK to counter that? Or for that matter, a rather piddling $10bn TARP repayment from a Wall Street brokerage?
For now, though, enjoy the Spring sunshine.