bank run blog

originally published September 28, 2008

With Congressional leaders and senior administration officials working to craft a palatable sequel to the emergency economic rescue package defeated in the House on Monday, it was clear that Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben Bernanke had encountered their first significant setback since they embarked last year on a series of increasingly aggressive market interventions in an attempt to sustain the failing US banking and financial system. At the same time, the protracted two-week “crisis”, a flurry of meetings, press conferences, market updates, and cable news chatter, has inadvertently revealed the enormous power of these two unelected stewards of the nation’s economy, as President Bush and his would- be successors loiter on the periphery of federal efforts to bail out what’s left of the sector.

It has been reported that one provision of the original draft of Paulson’s plan asserted that, under the authority of the Act, Treasury’s actions “are non-reviewable” and “may not be reviewed by any court of law or any administrative agency.” The extraordinary claim of broad powers reminded many in Washington of Bush administration concepts about the “unitary” executive. But even under the revised terms agreed with Congressional leaders, Paulson and Bernanke will assume unprecedented authority and discretion.

Paulson, a lifelong member of the Wall Street investment banking demimonde, has ironically been called upon to oversee the receivership of the entire collapsed sector, including once-revered Goldman Sachs, where he was CEO. Bernanke, an academic who in recent Congressional testimony stressed his lack of ties to Wall Street, seems determined to deny the deflationary fundamentals of the current “disorderly unwinding.” Their actions, taken coincidentally during the election campaign, will delineate many aspects of the next presidential administration.

cross posted at

redstateupdate.net

originally published April 27, 2008

One month into the second quarter, earnings statements and economic activity continue to confirm that fallout from the implosion of international securities markets is being felt all the way down the food chain, in revolving credit, auto loans, commercial real estate, and retail sales. Market analysts will be focused on this week’s GDP number, the Fed’s action on interest rates and the wording of its statement, and earnings reports from companies heavily dependent on consumer discretionary spending. But disastrous first quarter results in the banking sector mean that the crisis is far from over, and no amount of consumer spending or Fed intervention can prevent the banks and financials in general from acting as a drag on the US economy for many quarters into the future.

First quarter earnings for large commercial banks and major Wall Street investment houses were abysmal, with most institutions reporting huge writedowns and continued exposure in a baffling array of securities markets trading structured investment vehicles (SIVs), collateralized debt obligations (CDOs), mortgage backed securities (MBSs), and asset backed commercial paper (ABCP). As overvalued housing markets “correct” and overheated credit markets “unwind,” it has become apparent to investors that these securities, nominally valued at many trillions of dollars, are essentially worthless. Now, with the tacit backing of the Fed, these institutions are scrambling for fresh capital to replenish their depleted cash reserves, each quarter revealing another fraction of their losses.

The three largest US banks all suffered significant declines from the first quarter of 2007. CitiGroup posted first quarter earnings down 11 percent, Bank of America earnings were down 77 percent, and JPMorgan Chase reported earnings 49 percent lower than the previous year. Wachovia surprised the market with a loss of $393 million, and saw its share price lose more than 10 percent in one morning. The nation’s largest thrift, Washington Mutual, posted a $1.1 billion first quarter loss and announced it was closing all 186 of its mortgage offices and eliminating 3000 jobs.

The fact that these numbers didn’t lead to a major market downturn reveals the extent to which traders suspect that the banks, and the investment banks, are technically insolvent.

cross posted at

redstateupdate.net

The number of Americans who are now depending on government assistance to feed themselves rose to an astounding one tenth of the population. CBS News reports;

“In September, more than 31.5 million Americans received food stamps — up more than 2 million from the month before. That’s one out of every 10 U.S. citizens. A family of four must take home less than $1,767 net per month to qualify for food stamps.”

The New York Times reports;

“The nation’s poorest citizens are already suffering some of the harshest effects of the economic decline, most notoriously with a 60 percent increase in children forced into “food insecurity.” That’s bureaucratese for families driven to skipping meals. There were more than 690,000 youngsters who didn’t have enough to eat last year. There were 783,000 meal-skipping seniors among the 36 million Americans found to be chronically lacking adequate food, according to government data.”

CBS News said that food stamp usage in Louisiana rose by 234 percent in September compared to a year ago, and reliance on food stamps is up “24 percent in Idaho, nearly 24 percent in Florida, and more than 20 percent in Nevada and Texas.”

see stories-
CBS News : Sign Of The Times: Food Stamp Use Soars
New York Times : Welfare as We Knew It

Although final figures have not yet been posted by the nation’s retailers, media reports suggest that worried consumers were as stingy as a TARP protected bank when they hit the stores this holiday shopping season.

The Wall Street Journal writes that Christmas sales dropped overall this season, with even luxury goods, “once considered immune from economic turmoil” dropping a dramatic “21.2%, compared with a jump of 7.5% a year ago, when the economy had just begun to sputter. If jewelry sales are included in this category, “the luxury sector plunged by a whopping 34.5%.” The Journal reports;

“Despite a flurry of last-minute shoppers lured by the deep discounts, total retail sales, excluding automobiles, fell over the year-earlier period by 5.5% in November and 8% in December through Christmas Eve, according to MasterCard Inc.’s SpendingPulse unit.”

ShopperTrak RCT reports that shopper traffic fell during the last week of Christmas shopping by 27 percent over last year and sales declined by 5.3 percent over last year’s figures. Sales were down across the board this year, with sales of electronics and appliances falling by 26.7 percent and women’s apparel sales down by 22.7 percent.

The Journal quotes an analyst from Deloitte who said;

“This will go down as the one of the worst holiday sales seasons on record. Retailers went from ‘Ho-ho’ to ‘Uh-oh’ to ‘Oh-no.’”

In these segments, the Associated Press looks at the dramatic holiday sales slow down.




“Other figures on this holiday’s shopping predict this will be the worst season in 40 years.” –Brain Thomas, Associates Press



“There’s a lot at stake for retailers. Holiday shopping season accounts for as much as 40 percent of annual profits.” –Mike Franzia, Associated Press

see story-
Wall Street Journal : Retail Sales Plummet

Investor and finance blogger Paul Kedrosky has been warning of a wave of failures affecting poorly capitalized small and regional banks, and in this video from Yahoo Finance Tech Ticker he calls on regulators to step in and take preemptive action to cushion the impact of a crisis he likens to the Savings and Loan failures of the early 80’s :



Yahoo Finance Tech Ticker : Beware of Zombie Banks!