Wells Fargo (WFC) said that the low cost of money from the government combined with a surging demand for mortgages was all the medicine that it required.
No mention, of course, that the “surging demand for mortgages” is mostly refinances and not home sales and therefor is somewhat self-limiting. Nor anything about “the medicine they require” including stable employment of the market they are lending to, in order to prevent mounting loan losses as unemployment increases and the unemployed default not only on mortgages but on credit card debt as well. So forgive me if I don’t hold your hand and sing songs of happiness with you.
Oddly absent from the discussion of how well Wells Fargo did is why the government was in the midst of testing bank balance sheets at all. The experts at the Treasury had been thrown off the scent and consequently had missed the fact that there was not need to test what is already working well. The same holds true for the Geithner plan to take toxic assets off bank balance sheets. It is academic now. What banks are earning from the difference between the cost of capital and the income from lending is now great enough for the banking system to be self-sustaining again.
This is an incredibly odd statement, but I have been expecting ever since the FASB announced that it was changing the long-standing and heretofore effective “Mark to Market” accounting rule.
The banking crisis originated because of the collapse in value of the “securitized mortgage assets,” the so called toxic assets, held by those banks; a collapse in value that left their balance sheets in such disastrous condition that they could not lend money. For many months the whole crisis of the collapse revolved around the method of ridding them of those toxic assets or injecting capital into them, but now it is a simple matter of getting cheap money from the Fed which allows them to lend at a profit.
The banks are “self-sustaining again” based on the difference between the cost of the money they borrow from the Fed and the profit they make from lending it. The state of their balance sheets is no longer an issue.
There “was not need to test what is already working well.” Nobody, I repeat nobody, thought it was working well at the time. Including Time Magazine. The discussion was not about lack of income from lending, it was about the disaster of their balance sheets due to the devaluation of the toxic assets. Now the balance sheets are no longer an issue, lending is profitable even though the Fed rate has not gone down and lending rates have decreased, and the banking crisis is over
You thought we didn’t notice that, didn’t you Doug? The Fed rate has been effectively zero since the crisis began, mortgage rates have been declining steadily and are now at a thirty-five-year low, and suddenly lending has become more profitable? How, precisely, did that happen?
The answer, of course, is that the government has created a “bubble” of government-backed refinancing of existing mortgages; low margin, but profitable because it is government backed. The contribution to the economy of this refinancing is precisely zero, and its contribution to the banks is self-limiting because the amount of money allocated by the government is fixed. The refinancing will quit happening when that pool of money runs out.
And so, of course our enthusiasm for “bubbles” continues.
The balance sheets of the banks are no longer an issue because the FASB rule change means that the banks no longer have to report the toxic assets at the value placed on them by the market, that is what the market thinks they are worth. The banks may now show them on their balance sheets at whatever value they want to show them at, regardless of what they are actually worth. Of course bank balance sheets are suddenly improved.
The government “stress test” results are coming out only after, and immediately after, that rule change was implemented, and the preliminary result of the stress test is that all of the banks are just fine. A skeptic, such as me, has to wonder what the result would have been had it come out earlier. A cynic, such as me, has to wonder why the stress test took as long as it did.
Douglas A. McIntyre is neither skeptic nor cynic, obviously.
An economy of bubbles and sanctioned tricky accounting. Enjoy.
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