GLOBAL FUTURE ANALYSIS
HEADWINDS | BANK DEFICITS
The banking industry is on dead row, not some of them, all of them, if they not will knocked down by the US debt exposure, they will go knocked out in the secondary blast caused by economic decline as result of the general economic decline as effect of the Credit Crisis and the Energy Crisis. All loans (mortgages, install base, consumer credit, credit cards, corporate loans and governmental loans) are based on the 'tomorrow is better' concept: the thought that the economy tomorrow is even better than today. Build on the foundation called the concept of endless economic growth. This has gone well till four things happens simultaneous and enforced each other impact: 1) the house price went over its top (the reality that there are limits on what debts people can afford to pay -even low- interest over became clear, something the banking industry was forgotten), 2) mortgage structures with idiotic characteristics (high interest increase, that only could be settled by refinancing) where put in place and came to the surface (and as result of that they could not be fixed anymore by refinance against higher market value, as there was no market value increase any more) 3) energy and resources prices went up in a nation with the highest miles per inhabitant per year and the most square house meter per inhabitant (leaving people with less payment power and purchase power) and 4) the economy slowed down (as there is an end on artificial economic 'growth') and started to decline by less corporate turnovers/profits plus started to bleed jobs. The whole banking industry was based on a never ending dream concept. Never in history has such a stupid crowd of 'professionals' in only 20 years time totally wrecked a system and got bonused by it (the more they wrecked it, the higher their bonus was, than responsibility and alter ego's get anaesthetized very quick/easily). They not only wrecked their own banks (as in: their own jobs), they also wrecked both the financial system (as in: financial stability and future/pension savings) and the state budgets (who must fill the gaps that are caused by lower tax incomes and by the huge figures and the increasing interest rates of it also will come into problems with funding that). The problems are relatively simple: 1) each economy cycles each 7 years (even the ancient Egyptian economy did), people has lend themselves to two economic down cycles (instead of just equals expending with the income steam), prosperity has gone by that to very high levels: prosperity has grown further even during the economic cycle down times, bypassing/erasing the economic cycle down time is also missing economic direction adjustment and is also stretching economic flexibility. The banks that are effected (as in: the US banks and the financials that have $ based assets) are not solvable anymore. They're on the FED/ECB capital drip right now, just to stay solvable for the moment. Everybody is hoping against all odd that the market will go to 'normal' (as in: trees that even will grow beyond heaven). All $ based assets are stressed. The credits are overdone, not in relation with payment powers. This overstretchiness (together with / enforced by the Energy Crisis) first has caused a structural lack of payment power on interests, after that the foreclosures has wrecked (and is still wrecking) the house prices. Interests and loans that not been paid/repaid causes interbanking troubles. Some banks (the technically bankrupted ones) their credit lines by other banks (the healthy ones). The healthy ones threatens continuously no long to fulfill incoming transfers of the bad ones. Both the bad ones and the healthy ones are in stress. Beautiful profit figures and balance sheets doesn't say anything in the financial world. Interbanking (un)balances that are signs of the real banking figures. The bad ones tries to stay alive on the continuous capital injections of the FED/ECB. This situation can not go further much more longer. This as the problems are not solved by it, but just giving clear the air of the dust time. The injections only have showed that markets can not be influenced any more: they (and there attached problems) have become to big. Almost all financials are technical bankrupt, they just stay alive on 1) cooked books and 2) money injections by FED/ECB. Real valuation of the assets of the financials is not a possible solution, than we will see in reality (as in true figures) that the financial system is broke. So all financial value their stressed assets still on 100% (house prices will be 50% of that, no question about it with so many bankowned objects, so they have 50% air in the real estate part of their balance sheets), their CDO assets on 100% (sales of 8% has been done, so they have 92% air in the CDO part of their balance sheets). Claims based on CDO insurances and CDS promises are pushed as much as possible into the future. Defaulting of these central role parties will take the fake AAA insurance roof of the assets of all financials, all banks would have instant TierOne ratio problems, so the whole financial industry has become a house of cards. Everything is empty, but must still stand, otherwise the system collapse. It's total outrages that both the Presidential Candidates are allowed by both the business society, as by the civilians not to speak out on the Credit Crisis. Or they don't get it, or they really get it and therefore has joint the hoping against all odds club of the financial world. The process that's happening right now is that financials bring used and broken cars (worst collaterals the could find) to the central banks and get cash for it as the cars are new, unused, actual expensive models. The ECB has said that they don't will accept dirty collaterals anymore. Everybody brought their CDOs (market value: 8%) to the central banks and get 100% cash for it. Such total unbelievable nonsense only buys time for everybody to come with a good solution. But as the value of the assets (as in: the payment power) has gone down there is no 'happy days are back again' solution to expect. So there must be 1) a collapse or 2) a bailout. It not will be the collapse, as we don't like the hard/cleaning facet of capitalism. This weakness had caused the problems: we've tried to bridge the 7 years less growth part after the 7 years growth part in the economic cycle by credit overstretchiness. This lack of stabilizing growth and not extention focused winter growth is now the reason our economic tree can break in this severe storm (extra heavy due pushing problems to the future, till that is not more possible, like we experience now). It will be a bailout. All banks will be able to bring any asset they don't like to bailout fund (Super SIV), exchanging them for nominal/initial value. We all are gone pay the effects caused by credit overstretchiness caused by the bonuses of the bankers. Any other solution will lead to economic/governmental collapse. The value of the dollar will just be watered with all these huge 'assets'. The super SIV will get more than $ 100 trillion (6 times the GDP of the US in 2007) in liabilities (the current US governmental debt is $ 9.5 trillion and the current US governmental liabilities are $ 46.5 trillion according the calculations of the GAO. Any currency with a huge dollar exposure (Euro, Yen and Renminbi) will be soaked down with the dollar. The recent value rise of the $ is only caused by large Euro/Yen sales and $ purchases of Europe and Japan (as the 3 nations has agreed March 13, 2008 to do when the $ would slide to $ 1.60). Banks only can be saved by a bailout, the other option is 100% sure chaos, a bank bailout has at least a lower chaos chance percentage forecast. And there is more bad weather in sight. The Energy Crisis will reshuffle the economy once again, going van international/national to local/regional (due to energy prices) with all the capital write down attached to it. This second reshuffling wave will be the end for the bank industry as we now it. The new bank brand are joint structures of the new local players. Global banking was based on an economic model that was has it foundations in cheap oil. As cheap oil has gone the foundations crack and the building based on it will collapse. The bailout questions are: Will we bailout all banks (deposits? bondowners? shareholders?) due the Credit Crisis, or will we draw lines? Will we bailout other industries (airlines? carmakers? powerplants?) due the Energy Crisis, or will we draw lines? Where is the momentum that foreign investments stops in this bailout schedule? Where is the momentum that foreign investments stop if we don't perform bailouts? Has the US administration give additional guarantees to the Chinese investments in Fannie and Freddie (are the liabilities of the US administration much more higher than we know due to such type of guarantees (Paulson should know)? Can we survive without foreign investments? What will the inflation rate than become (as governments spend more than they earn)? Is there one way or the other a crisis due anyway? Bailouts must be accompanied with a debt to products plan (foreign debts can be exchanged for products/services/export) than the US has a change to restore/recover from its debt. This is also better for the world, as a collapse of the US also will mean a collapse of Europe, Japan and Federal China. Lehman Brother (mega player in CDOs, with a current value of 8 cent on the dollar, so only 8% of the nominal value) has filled Chapter 11 on September 14, 2008, as nobody, even with an open discount window of the FED for financing the take over was interested. Fannie and Freddie are seized by the government on September 7, 2008 and place under an other GSE called the Federal Housing Finance Agency (FHFA). House prices = payment power = real economy. As the real economy gas gone worse, the payment power is gone and house prices will tumble down to real economy attached prices. There a lot more deficit bank trouble on the way, just because payment power only get worse instead of better. The Credit Crisis started in the weak areas, but has lifted from subprime, to near prime and reaches prime (as more and more jobs are lost). The Credit Crisis is a direct effect of the Boskin Committee effects on economic statistics putting in place during the Clinton Administration. The result of this pimped statistics is ever government since than can report 'paper reality' economic improvement, as first the US citizens dive into debt and when this hit the bottom (payment power no longer could be provided by renewing loans to higher levels based on the artificial high house price), US citizens start to default on their payment, just because the payment power wasn't really there. The government now has put Fannie en Freddie on 'budget'. If the house price decline will be stopped by that. The lying statistics has really effected our acceptance of reality. Paulson still thinks that this a fire he can control with some buckets of water. Lying statistics will be seen in the history books as the main cause of the Credit Crisis. The fact that these low inflation figures of the BLS (Bureau of Labor Statistics) are convenient for lowering governmental expenses on Social Security and Retirement Plans is an other issue, that's a (certainly huge) social issue this report doesn't address which has saved the government a lot of money, and brought the people concerning into problem as they has to deal with the real inflation. The fact that the worst performing banks gets more loans of the FED (moral hazard) is not true. But that the banks that are owned by the shareholders of the FED gets always/unlimited what they want, the other banks don't, is certainly truth. This is the most severe downsized of the cartel facet of the FED.
Author: Gijs Graafland
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