- How can this be? Is Citigroup really profitable? Or are they insolvent? John Browne opines :
This week Citigroup shocked Wall Street by announcing that the company would be profitable in the current quarter. At the same time, the Obama Administration indicated that it would be unlikely to nationalize American banks, preferring to provide low cost funding to encourage the private sector to buy distressed assets from the banks. The two developments sparked a vigorous rally in financial stocks, which had been drifting downward for weeks, caught in what appeared to be an unending death spiral. But have the good times really returned?
On the surface at least, there are some promising points. Based on current income, and an upward trending yield curve (that will allow banks to borrow at nearly no cost from the Fed and lend to borrowers at a good profit) the banks should generate strong cash flow. But that is hardly the full story.
Write-downs in the value of toxic assets already held on bank’s balance sheets will continue to explode like ticking time bombs. These debts may be too large to be overcome by a positive cash flow fueled by cheap access to short-term funding. If banks were simultaneously forced to write down assets, they could be rendered insolvent from a capital balance sheet point of view. This is the underlying problem that America and the much of the world face with their banks: banks can be trading with positive cash flow but from a technically insolvent capital position – which is illegal.
Some argue that toxic assets make up only a very small part of the total assets of the banking system. That may be so, but the real issue is the enormous size of the toxic assets in relation to both the capital of the banks and the funding ability of the government.
According to the Bank of International Settlements, the world’s total of derivatives investments, including the poorly understood credit default swap (CDS) market reached some $700 trillion at its height, or more than 20 times the world’s total annual production! The American portion was about $419 trillion, or some 40 times America’s annual production.
The essential problem is that these inherently risky securities were used as collateral for loans. The fall in their value resulted in massive deleveraging. Of course, not all derivatives are yet flawed, or toxic. So, it can be assumed that, in the absence of a total financial collapse, only a limited number will default.
However, if a conservative assumption were made that only some two percent of derivatives fail, it would still amount to some $14 trillion. The American share would be about $8 trillion, or almost one year of GDP once that figure declines to a sustainable level. The estimated total capitalization of all U.S. banks is some $1.6 trillion. But, this amounts to only 20 percent of the potential American liability.
So far, American citizens have been forced to provide financial institutions with nearly $2 trillion in additional bailouts. This brings the total of current U.S. banking capital to some $3.6 trillion, still less than half of the potential problem, leaving a massive $4.4 trillion shortfall. In light of this, even noted bearish economist Nouriel Roubini’s estimate of a $3.6 trillion shortfall appears to be too optimistic.
Of course, not all American banks are in trouble. There are a number of local and regional banks whose managements did not participate in gambling away America’s financial future. Nevertheless, investors should ask themselves some hard questions. What if the government is forced to face the fact that the U.S. banking system, as a whole, is already fundamentally insolvent? What if the Administration is therefore forced, despite its expressed disinclination, to nationalize the problem banks?
Most importantly, while the good banks are being separated from the bad in the FDIC’s ‘coral’, will all American banks be forced to close? Worse still, after the forthcoming G-20 meetings, will all international banks be closed on a temporary basis, on a long bank holiday, as happened in the Great Crash? If so, what would happen to consumer confidence and the price of gold?
Citigroup says that it is profitable. At the same time, most banks are in dire straits. Until Citigroup is able to put its capital where its mouth is, investors in U.S. financials should remain cautious.
- See also:
American & British Banks are Bankrupt!
World Financial System in a State of Insolvency !
Global Financial & Economic Meltdown
America’s Debt – Ticking Nuclear Bomb!
America is at the Edge of Niagara Falls
Guns and Butter – 11 March 2009, “America’s Fiscal Collapse – Obama’s Budget Will Impoverish America”
Download this clip (mp3, 10.28 megabytes)
- This is a radio interview of award winning author and economics Professor Michel Chossudovsky, director of the Centre for Research on Globalization, Montreal, which hosts the critically acclaimed website: www.globalresearch.ca.
From http://kpfa.org/archive/id/49073 :
“America’s Fiscal Collapse – Obama’s Budget Will Impoverish America” with economist and author, Michel Chossudovsky.
The administration’s 2010 budget will entail the most drastic curtailment in public spending in American history, leading to social havoc and the potential impoverishment of millions of people. Defense spending and bank bailouts will consume all government revenue resulting in fiscal collapse that will lead to the privatization of the state.
See also :
Obama’s Wall Street & War Budget !
- So which Big Bank will fail? Just look at the balance sheet of the Big 5 and you know they are insolvent. They have US$40-90T of exposure to derivatives each. This is unimaginable. CitiGroup’s shares went below US$1.00 last week. Despite the recent rally I very much doubt they are solvent. You can hide all the toxic derivatives in off balance sheet items. But I am not so dumb as to believe they are no longer a problem.
- Fortune magazine reports :
The government is bracing for a big bank failure.
A bill introduced in Congress would give the FDIC, the agency that stands behind Americans’ bank deposits, temporary authority to borrow as much as $500 billion from the government to shore up the deposit insurance fund.
The bill — the Depositor Protection Act of 2009, backed by Senate Banking Committee Chairman Chris Dodd, D-Conn. and Sen. Mike Crapo, R-Idaho — wouldn’t change the status of individual bank accounts, which through the end of this year are insured up to $250,000.
But the Dodd-Crapo bill acknowledges what the financial markets have been signaling for the past month — that the government must take the lead in a costly cleanup of the mess in the financial sector.
“I think it’s a commendable start,” said Simon Johnson, a former International Monetary Fund chief economist who tracks the crisis on his BaselineScenario.com blog.
Dodd said he introduced the legislation at the behest of other regulators, notably Federal Deposit Insurance Corp. chief Sheila Bair, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner. All three recently wrote Dodd to support an emergency expansion of the FDIC’s capacity to borrow from the Treasury.
“This mechanism would allow the FDIC to respond expeditiously to emergency situations that may involve substantial risk to the financial system,” Bernanke wrote in a Feb. 2 letter to Dodd.
The Senate bill is being introduced at a time of rising market stress about the health of the banking industry. Seventeen relatively small banks have already failed this year and 25 went under in 2008. Last year’s failures included the July demise of mortgage lender IndyMac and the September collapse of Washington Mutual, which was the sixth-biggest depository institution in the nation at the time it failed.
Fear of a big collapse continues to rise
The Credit Derivatives Research counterparty risk index — a measure of the annual cost of insuring the bonds of 14 global financial companies against default — surged nearly 30% this week as investors rushed to protect themselves against possible defaults at giant institutions.It now costs an average of $289,000 per year to buy insurance on $10 million’s worth of bank debt, according to the CDR index. That’s just shy of the $300,000 average premium in force the day the index hit its all time high — Sept. 17, 2008.That was the day after the government’s $85 billion first bailout of AIG (AIG, Fortune 500), two days after the failure of broker-dealer Lehman Brothers and a week before WaMu was seized by regulators.
The current degree of stress in the financial sector is “totally shocking,” said Johnson, given the massive resources governments around the globe have devoted to reducing fears of a major collapse.
The financial fears point to the need for the Obama administration to produce a detailed plan of how it will deal with troubled too-big-to-fail institutions and bad assets in the banking sector, said Johnson, who teaches in the business school at MIT.
“If you don’t do a systemic plan fast, you set up a target for speculators,” said Johnson. The market’s reaction to Geithner’s failure to produce an adequately articulated proposal as promised on Feb. 10 stands as a cautionary tale. The Dow Jones Industrial Average has dropped 20% since then.
FDIC may need to hit Congressional ATM
The insurance that the FDIC provides to bank depositors is funded by annual assessments on banks. But the fund has been depleted by a sharp rise in bank failures over the past year, and efforts to raise the fees that support the deposit fund have been complicated by the poor health of the banking industry.
The deposit fund’s balance fell 64% in 2008 to $19 billion, putting deposit fund assets at just 0.4% of banking industry assets. That’s barely a third of the 1.15% statutory minimum.
Despite the welcome signs that policymakers are coming to grips with the extent of the U.S. banking crisis, observers say officials have yet to make clear that they fully grasp the scope of the financial industry’s problems.
A $500 billion loan to the FDIC “begins to approximate the maximum loss from resolving the top four banks,” said Chris Whalen, a managing director at Institutional Risk Analytics, a financial research and hedge fund advice firm.
- George Noory, Coast To Coast, interviews Alex Jones on the possibility of pandemic avian flu. See also:
Live Avian Flu Virus Placed in Baxter Vaccine Materials Sent to 18 Countries
US Air Force Study Suggests 2009 Influenza Pandemic in 1996
Is the World Heading Towards Pandemic Avian Flu ?
Bayer Exposed (HIV Contaminated Vaccine)!
- Why are so many prominent scientists in the fields of medicine, biology, virology, chemistry … killed or suicided ? See list here. Steve Quayle comments :
The reason all these bio weapons scientists and microbiologists are being systematically murdered is to block any work by any of them to find the cure or vaccine to the genetically altered super-plague that will be unleashed on the world to cull the population of useless eaters!
- Are the Satanist Illuminati trying to set off a pandemic avian flu? They have a global depopulation plan to bring the population down by as much as 80%.