Posts Tagged ‘insolvency’

Zombie Bankhouse?

7 July 2009

I admit, I really don’t know if any major U.S. banks are insolvent or if the banking system as a whole is insolvent. A few months ago, it seemed to be conventional wisdom, with few dissenters outside of Tim Geithner’s Treasury Department. But around the time of the Treasury’s “stress tests” of the largest banks on May 7, which incredibly nearly all of those banks passed, the stock market was once again smitten with the banks.  As John Authers of the Financial Times notes, the S&P 500 Financials Index rose 8.3% the next day, to 175.8, a level more than twice as high as their March low. Financial stock prices have since tumbled by about 14% to 151.5 (as of July 6), but they’re still 85% above their low. A healthier sign still is that credit default swap contracts for bank loans and bonds indicate that the market thinks bank credit is slightly less risky than it was two months ago. Are we out of the woods yet?

Doubtful. The banks still aren’t lending (business and consumer loans are down slightly, real estate loans are about the same), and they’re still sitting on vast piles of reserves ($688 billion, up from $2 billion a year ago). Possibly this is just a rational response to a recession and a general worsening of consumers and firms as credit risks, but it looks like a continuing credit crunch, in which even good credit risks can’t get loans, and it does not look like the behavior you’d expect from healthy banks.

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Big zombies

12 February 2009

Must . . . eat . . . money

(hat tip: Julia)

Many economists have been warning that the net-worth problems of the banks are a lot bigger than the $700 billion that’s been allocated to deal with them.  Some have said a TARP II, TARP III, etc., to the tune of $2 trillion or so may be necessary to fix the banks once and for all.  Now Dr. Doom himself, Nouriel Roubini, says the banking system is just plain insolvent, and by about $3.6 trillion.  The specter of 1990s-Japan-style zombie banks in the U.S. is no longer a specter but a reality, it seems.

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