Wednesday, February 29, 2012

Mr. Bernanke Stands Pat

Ben Bernanke, Chairman of the Board of Governors of the Federal Reserve System gave his “Semiannual Monetary Policy Report to the Congress” this morning.

Mr. Bernanke basically said nothing. 

The stock market dropped…apparently any hopes for an additional round of quantitative easy were dashed.

What can one say?

The Fed’s forecast for the growth of real GDP: between 2.2 percent and 2.7 percent, slightly higher than the rate of growth experienced in the second half of 2011.

The Fed’s forecast for the inflation in the prices related to consumption expenditures: between 1.4 percent and 1.8 percent, about the same as the annual rate of increase in the second half of 2012.

Unemployment is expected to stay around the level it achieved in January 2012…around 8 percent since economic growth is expected to remain slightly below its long-term trend.

Where does the risk lie in the economy in the future?  It seems that there is still “persistent downside risks to the outlook for real activity.” 

The job market “remains far from normal.”

The fundamentals for household spending “continue to be weak.”

The housing sector is giving off mixed signals, at best.

Manufacturing is improving and real business spending for equipment and software seems to be picking up.

However, the European situation remains a concern.  We are told that the Federal Reserve is “in frequent contact with our counterparts in Europe and will continue to follow the situation closely.”

And, given this environment, the Federal Reserve will continue to keep the target range for the federal funds rate in the 0 to ¼ percent range.  The Federal Open Market Committee “expects economic conditions to warrant exceptionally low levels of the federal funds rate to at least through late 2014.”

There you have it.  Economic growth is expected to continue at a rate that is slightly below its long-term trend of about 3.0 percent through 2013.  Inflation is to stay below the Fed’s target of 2.0 percent for the near future.  And, the risks inherent in the current financial and economic environment continue to be on the downside with the European situation being the main worry.

The banking system will remain flush with excess reserves.  The larger banks will continue to grow larger and take over more and more of the financial system.   Small- and medium-sized commercial banks will continue to fail or be merged out of the banking system. And, regulatory reform will continue to lag behind what is happening in the real world.

That is, there is nothing new to report. 

Thank you, Mr. Bernanke!

Tuesday, February 28, 2012

FDIC Statistics: Larger Banks Doing Better Than Others

The FDIC statistics were released this morning.  The larger banks continue to prosper relative to the rest of the industry.  The larger banks in this case are those that are larger than $1.0 billion in asset size. 

For one, over the past year, the number of larger banks in the United States rose by 5 whereas the rest of the commercial banking system shrunk by 245 banks.  Of the total reduction in commercial banks in the United States of 240 in 2011, only 92 banks were closed by the FDIC. The rest were merged into other organizations. 

A total of 185 banks smaller than $100 million in asset size were closed.

At December 31, 2011, the commercial banking system had 62 fewer banks than on September 30, 2011.  Of this number, 66 were smaller than $100 million in assets.  The FDIC closed only 18 banks in the fourth quarter.

In terms of lending, net loans and leases at the largest 514 banks in the country rose by about $194 billion in 2011, with $137 billion of the increase coming in the fourth quarter of the year. 

This increase is coming in the face of an improving loan portfolio.  Noncurrent loans and leases at these larger banks fell by $44 billion over the past year while the loan loss allowance at these banks dropped by $38 billion.

It appears that the largest commercial banks in the country are feeling better about their loan portfolios and are becoming much more aggressive in actually making new loans. 

This is not the case for the other banks.  For banks that hold assets somewhere between $100 million and $1.0 billion, net loans and leases actually declined by about $31 billion in 2011.  For the fourth quarter of the year net loans and leases held about constant. 

For commercial banks with less than $100 million in assets loans declined by about $8 billion for the whole year and by about $3 billion for the fourth quarter of 2011.

In both of these smaller categories both noncurrent loans and leases fell but by relatively small amounts as did the loan loss allowances held by these organizations. 

The list of problem banks dropped in the fourth quarter by 31 banks to 814 commercial banks on December 31, 2011.  This total was down from 884 banks on the problem list on December 31, 2010. 

814 banks on the problem list is still a very large number representing 13 percent of the number of commercial banks insured by the FDIC.  And, this 814 banks does not included other organizations that are still in very deep trouble but do not yet qualify to be placed on the problem bank list.  The number of banks on the problem list and near being on the problem list could total about one-third of the banking system.

And, in the fourth quarter of 2011 we saw that the number of banks in the industry was still dropping at an annual rate of about 250 banks leaving the system every year.  

Bottom line: the banking system is still not very healthy.  Going further I would argue that the smaller banks are especially not “out-of-the-woods” in terms of problems.  The continuing problems being experienced in the housing market and in commercial real estate will weigh heavily on these smaller banks as we go along.  And, don’t expect much lending from them.

The largest 514 commercial banks continue to grow.  In terms of number, commercial banks with more than $1.0 billion in assets represent only about 8 percent of the organizations in the industry.  However, in terms of assets held, these larger banks hold 91 percent of the assets in the commercial banking industry and 89 percent of the loans.  Their bad assets seem to be decreasing as a problem and their loan growth appears to be getting stronger every quarter. 

Everything we see points to the continued demise of the smaller banks in the industry.  And, there appears to be nothing on the horizon to turn this trend around.      

Monday, February 27, 2012

Mr. Bernanke Speaks to Congress this Week

Ben Bernanke, Chairman of the Board of Governors of the Federal Reserve will give his semiannual monetary policy report to the House Finance Financial Services Committee on February 29.

Mr. Bernanke is in no-mans land…a place that he created for himself. 

There are no precedents for the predicament that Mr. Bernanke finds himself in.  In his wisdom, he led the Federal Reserve down a new path in the fall of 2007 followed by massive financial bailouts, massive financial market bailouts, and two attempts at quantitative easing.

After failing to understand the credit bubbles created by the Fed in the earlier 2000s, Bernanke missed the initial financial market bust in August 2007.  Bear Stearns filed for bankruptcy on July 30, 2007 and on Monday August 6 a market meltdown began.  The Fed reacted slowly, waiting until the next Friday to respond. (

Then, in the week of September 8, 2008, the US government nationalized Fannie Mae and Freddie Mac.  On Monday September 15, Lehman Brothers filed for bankruptcy.  On Wednesday afternoon, September 17, Chairman Bernanke “reached the end of his rope.” (   Bernanke called Treasury Secretary Hank Paulson and that Friday he and Paulson read the riot act to members of Congress. 

Nothing has been the same since.  All the old rules relating to monetary policy were thrown out the window. Since then, the Federal Reserve and the United States government have been feeling their way forward as they go along.  No “new” rules have been written since.

Mr. Bernanke has been trying to invent some rules as he has gone along, many of them being labeled “efforts at transparency.”  Right now we are told that the economy will remain weak for a long time and that the Fed’s target Federal Funds rate will stay close to zero percent until late in 2014.  But, other than this, the Federal Reserve is operating by “feel”.

So, this Wednesday we are going to hear Mr. Bernanke try and make some sense out of the current situation and attempt to give us some confidence that he knows what he is doing.

My guess is that he will accomplish neither. 

What can Mr. Bernanke say about the economy that has not already said: “In January, the Fed lowered its projected range for growth this year to 2.2 percent to 2.7 percent, down from 2.5 percent to 2.9 percent in November. The range for next year now is 2.8 percent to 3.2 percent, down from a previous forecast of 3 percent to 3.5 percent. The U.S. expanded 1.7 percent in 2011.” (

The banking system remains fragile with more than 850 commercial banks on the FDIC’s list of problem banks and with many more that are either insolvent or on the edge of insolvency.  The housing market still remains in the tank along with the commercial real estate market.  Then one out of every four or five individuals of working age are under-employed.  And, the pension system is still grossly underfunded. (

The fiscal apparatus of the United States government is a mess with little or no hope for any leadership to surface this election year.  We should thank the Chinese and the Japanese for buying so much of the US government debt being piled up.  And, we should also thank the Europeans for all their ineffectiveness for this too has caused international monies to come into the United States Treasury bond market providing help for the US government to place its debt and keep interest rates low.

And, in terms of the Europeans, the European recession is present and accounted for while European officials still fail to bring any sense of resolution to the economic and financial crisis now taking place in that area of the world. 

Furthermore, the only thing that is keeping the United States dollar from falling further in the world is the weakness that has come about in the euro.  Otherwise, the value of the United States dollar would continue its forty-year decline against the other major currencies of the world.

So, Mr. Bernanke must make some sense out of this environment and provide us with enough information on what the Federal Reserve has in store for us to give us more confidence about the future. 

Good luck, Ben!    

Friday, February 24, 2012

"Little" Problems Here and There: Pension Plans

As I have written many times over the past three years, the societies and economies of the western world are going through a period of transition from an age where we thought we could buy prosperity for almost everyone, to an age…well, we don’t know the answer to that yet.

Coming out of the World War II period, the United States government decided that it could achieve greater equality of wealth and opportunity in the country if it (1) underwrote high levels of employment by constantly inflating the credit of the economy, (2) subsidized home ownership so that more and more Americans could own their own homes, and (3) by providing generous pensions to people though direct governmental programs or subsidized private sector initiatives.

Today we have the largest degree of income/wealth inequality in the United States since the early part of the last century; we have experienced the worst period of severe price deflation that the housing sector ever experienced where even now 22 percent of the homeowners with mortgages find that their home prices are below what they owe on their mortgages; and many pension funds, both private and public, are underfunded to such a degree that grave concerns exist about their viability.

The pension funds of private corporations have been hurt by the very low interest rates that have existed in the financial markets for the past several years.  Given such low investment returns these companies have found it difficult to make the returns they need to fund their obligations.

One solution to this problem has been to leverage up the pension funds with low cost debt so as “to reduce financing costs, extend our maturity profile and manage our liabilities” said Dave Vajda, vice-president, chief risk officer and treasurer of NiSource, an energy company that issued bonds in 2011. (

Companies are not “earning” their way out of their pension problems.  Currently, they seem to be using “borrowing” to fill the gap.  CSX, Kroger, Raytheon, and NiSource are just a few companies that have recently followed this path.  Still JPMorgan estimates that corporate pension plans are only about 77 percent funded.

But, the problem appears to be even worse in the public sector.  I have written about the situation of state and local governments numerous times over the past two years or so.  Research has placed the shortfall in the $3-to-$4 trillion range with others saying that $4 trillion is only a lower bound.  Whatever the number is, most agree it is substantial. 

There seems to be several reasons for this situation.  First, state and local governments don’t like to use mark-to-market accounting to realistically price their obligations.  Second, many state and local governments are still using assumptions about investment returns that are delusional, at best. Most state pension plans use the assumption that their investment portfolios will earn an 8 percent annual return, this at a time when 10-year US Treasury securities are returning about 2 percent per year. 

Additionally, state and local governments have been notorious for using methods to cover-up the position of their pension plans in the face of budgetary requirements to balance budgets and so forth.  The Government Accounting Standards Board, which oversees government accounts, has been sleepy, at best, in the past.  There is some indication that this group is beginning to show some life. (   

The point is, that there are still pockets of problems lodged within the United States economy that need to be worked out going forward.  And, the working out of these problems is not going to be simple and easy. 

Another factor contributing to this problem is that the “social model” that has served as the foundation for these programs (pensions, unemployment, housing, and so forth) is changing.  Mario Draghi, President of the European Central Bank, stated yesterday that the “Social Model is Gone”.  He was referring specifically to the European Continent, but it applies to the United States as well. 

One further problem faced by the pension programs in the United States is that many people are taking early retirement and this fact was not built into the pension schemes.  The reason why many are taking early retirement is that organizations, both in the private sector as well as in the public sector, have been downsizing to meet budgetary needs and this downsizing has resulted in the fact that many who have left these companies are people eligible for their full pension benefits.

This situation is particularly acute in the public sector as employment in government in the United States dramatically increased over the past fifty years while labor unions became very active in the state and local government bodies.  Now, over fifty percent of the members of labor unions in the United States reside in the public sector.

This is all changing.  We have no idea right now where this change will take us.  The difficult part of this, however, is that there are obligations outstanding right now that need to honored in one way or another.  All we can say, at this time, is that the transition is not going to be easy.

There are many of these “little” problems, here and there, that we have built into the United States economy that must be worked off.  How they are worked off can affect the economy and financial markets in many ways.  But, these little problems don’t always get the headlines because the emphasis of the press…and the politicians… is constantly to find the “green shoots” that indicate that the real economy is picking up steam.          

Thursday, February 23, 2012

Bank Regulation is Going from the Ridiculous to the More Ridiculous

Bankers should be concerned about profits and making good loans and being good community citizens.

But, there is a new game in town.

Don’t grow your bank beyond $10 billion in assets.  But, if you do exceed $10 billion in assets grow your bank as fast as you can!

CEO Mitchell Feiger of MB Financial, Inc., a Chicago bank, is quoted as follows: “We are watching (deposit) accounts carefully.  We work to stay under $10 billion (in assets) until we can’t do it anymore and we’ll blow past it.  When you go past it, it doesn’t make sense to go over by $100 million.” (

“For regional banks, expanding beyond $10 billion in assets now comes with regulatory demands that are aimed at making the financial system safer but that add complexity and costs.

As such, some banks have made the unusual decision of expanding more slowly and even turning away money to stay under the regulatory benchmark.  Some banks have lowered the interest rates they pay for customer deposits in an effort to attract less cash.  And the timing of growth initiatives also is now a factor, as some banks think it makes little sense to trip the $10 billion trigger unless they are to grow much bigger.”

Is this what we want American commercial bankers to focus on.

Almost every day the banking scene seems to get sillier…if the situation weren’t so serious.

Bankers in the United States…and all over the world as a matter of fact…are spending too much time not doing banking but doing regulatory compliance and avoidance.  Bank managements are focusing on how to stay out of regulatory trouble or regulatory attention.

This attitude is not going to change.  The changes in the regulatory environment Congress has created is going to have to play out.  Too much has been started, too many institutional changes have been initiated and organizations created, and too many people have been hired for this tidal wave to stop in the near term.  

And, regulators are still fearful of bank failures as the number of problem banks remains large and bankruptcies and foreclosures stay near record levels.  We still hear about the fact that 22 percent of the homeowners with mortgages on their houses in the United States have mortgages that are greater than the market value of their home.  We also hear that the commercial real estate market is still sufficiently in trouble that many of the loans on these properties are below loan values.  There are a lot of banks that are not out of the woods yet.      

Unfortunately, the folly will continue.  I see no way out of this swamp at the present time.

Key to Future Bank Performance: How to Get Around the Regulations

Interested in investing in a commercial bank these days?
What should be the key factor in determining whether or not to invest in a specific bank?
How about the ability of the management of the bank to get around the rules and regulations now being written up or proposed by the bank regulatory agencies?
A New York Times article this morning, “Consumer Inquiry Focuses on Bank Overdraft Fees” contains the following subtitle: “Wondering whether banks are working around new rules.” (
My answer?
Yes!  The banks are working around new rules!
I began my banking career in the 1960s, a period when commercial banks began the process of financial innovation that just grew and grew through the latter part of the century.  In that decade we saw the introduction of the negotiable certificate of deposit (negotiable CDs), the formation of bank holding companies, the issuance of bank liabilities through the bank holding companies, and the creation of the Eurodollar.  Then we saw banks attempting to get around state branching laws and interstate branching laws and so on and so forth.  The rest is history!
When I was working in the Federal Reserve System in the late 1960s and early 1970s the “rule of thumb” was that the Fed was about six months behind what the commercial banks were doing.  New rules or regulations would go into effect on the banking system…the commercial banks would move to “get around” the new rules or regulations…and, it would take about six months for the Fed to catch on to what the commercial banks were doing.
Times haven’t changed…and won’t change.
Given the rapidly changing environment created by information technology, the financial institutions will just have more ways to quickly and effectively avoid any banking rules or regulations they believe it is worthwhile to avoid.
To me, what Congress and the regulators are trying to do is silly!
For one, the “powers that be” are trying to avoid 2007-2008 from happening again.
Guess what?
2007-2008 will not happen again.  We have already moved way beyond that.
Furthermore, the technology has changed to the point where it is almost impossible for regulators and legislators to understand what is going on, let alone write rules and regulations that will control what is going on. 
Look at the Dodd-Frank financial reform act.  Most of the rules and regulations included in this bill HAVE NOT BEEN WRITTEN YET!
And, President Obama signed the act into law in July 2010.  We are ready to celebrate the 2nd anniversary of the signing of the bill and the most of the rules and regulations incorporated into the bill have not been written.
And where is this “writing” taking place?  Primarily in back rooms, with no intrusion from the public, and no review.  See the enlightening piece in the Wall Street Journal this week, “Fed Writes Sweeping Rules From Behind Closed Doors.” (
Here are some of the goodies: “the Fed has held 47 separate votes on financial regulations, and scores more are coming.  In the process it is reshaping the U. S. financial industry by directing banks on how much capital they must hold, what kind of trading they can engage in and what kind of fees they can charge retailers on debit-card transactions.”
I understand that one rule relating to when Governors of the Federal Reserve System could go to the bathroom has been removed.  The writers of the rules did not want to get into gender differences they felt were necessary and instead of raising this issue…they just dropped the whole provision.
 These rules and regulations do have effects.  The problem is that they may not always have the effects that are desired. 
In some cases they do.  For example, in the New York Times we read the headlines: “Under Volcker, the Old Dividing Line in Banks May Return.” (  That is, financial institutions may divide back into the distinction between commercial banks and investment banks.
This is just what Paul Volcker would like to have happen.
However, in many other cases, the rules and regulations will result in outcomes that are far from what was intended by Congress or by the regulators that wrote the regulations.  What those outcomes might be are, of course, unknown because they haven’t happened yet.
And, some of the outcomes may be totally unexpected because the outcomes will be related to the new things that information technology will allow institutions to do.  In five years, finance may be done in an entirely different way than it is now.  (See my forthcoming review of the new book “The End of Money,”)
What bank…or financial institution…should one invest in? 
Congress and the regulators have created so much uncertainty in the world of banking that it is almost impossible to say anything about bank performance in the future.  All bets on banks are nothing more than gambling, at this stage. 
I do not expect this environment to change much in the near future.  Investing in banks is not where I would want to put my money at this time because there is nothing really to base an investment decision on when it comes to the banking industry.     

Tuesday, February 21, 2012

Greece: Initial Response to the Latest "Kick of the Can Down the Road"

The eurozone has acted.

Greece is going to postpone bankruptcy for a while longer as it was given 130 billion euros to help it cover, among other things, debt coming due in March. 

Problems still remain.

First, Greece is still insolvent.

Second, Greece still has major structural problems in its economy and society.

Third, Greece is in a severe recession.

Fourth, the eurozone is in the midst of a recession.

Fifth, 90 percent of the holders of Greek debt must sign up for the bond swap.  If they don’t there may be severe legal problems.

Sixth, the Greek government must still implement the policies and programs required by the bailout plan.

Seventh, Greek society must hold together.  The question still remains about how the Greek people will “suffer” the policies and programs required by the bailout plan.

Eighth, elections for a new Greek government will be held in April.  There is uncertainty about what will result from this election. (

Ninth, there is concern over what is going to happen in the Middle East.  The focus is on Iran, Israel, Europe, and the United States.

Tenth, enough said, given all the other problems and uncertainties in the world today.

Bottom line: the major issues outstanding have not been dealt with; there is little or no confidence in the officials in charge; and the world needs to move on but still has the Greek problem to deal with.