Friday, February 27, 2009
Ideology over numbers
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I posted this below, so apologies.
The question is, what would deposit rates be in the absence of FDIC guarantees and TAF funding?
I think its reasonable to choose the last one. I'd like to hear your counterargument.
In the comments section below I argue that reacting to deposit rate spiked by raising lending rates only results in a reduced amount of credit and higher provisioning. Examples of this are the banking systems of Argentina and Brazil (in the 90's). Were lending rates to further spike today, in the U.S., the outcome would be highly predictable.
In the absence of FDIC guarantees - lower. Sharply.
Proof. The foreign branch deposits of Bank of America - which are not FDIC guaranteed yield 270bps in 2008 versus 463 in 2007.
No guarantee. Rates are falling.
Margins are rising without guarantee.
More to the point - there is 100 billion in non FDIC guaranteed foreign deposits.
The rate on those dropped almost 2%.
The yield on loans only dropped basis points.
There is almost 2 billion more revenue there too. No guarantee - just another 2 billion in revenue.
I don't understand your example. There is a massive Bernancke-Geithner "put" in place for BofA and Citi - if that put was removed I have to believe uninsured deposits would seek a safer haven.
Bernancke and Geithner have all but announced that they will do whatever it takes to save Citi and BofA. That is a form of insurance. Your example may say more about the perceived (lack of) quality of banks outside the US than anything about the earning power of the US mega-banks.
Personally, I'm starting to warm up to the idea of removing the put and seeing how long BofA and Citi survive. A science experiment as it were. That's bailout fatigue talking - a visceral hatred of bankers and the fear that saving these clowns will drag the US economy down for 10 years or more in massive public sector debt.
I'll have a glass of wine and try to get over it.
There was no new Geithner put in June. None at all.
Nobody in June thought Bank of America would fail. People did talk about Citigroup.
But in those days Bank of America had not purchased Merrills and had it not purchased Merrills it was fine.
Interest margins were going up in June too.
Sure they went up further and faster after the government guaranteed money came through.
But margins have been rising ever since the boom ended.
You don't address why banks are able to get zero rate deposits. It's because the government is flooding the financial system with free money. Even if a bank didn't get bailout money, they are profiting from the overall bailout deluge, which keeps borrowing rates low. Then their own unwillingness to lend drives the spread way up. It reminds me of the girl from Peru.
There once was a girl from Peru
Who filled up privates with glue
She said with a grin
They pay to get in
Now, they'll pay to get out again, too!
No - rates would go to zero without the liquidity flood too.
We would get deflation driven by delveraging. Zero rates are a very good post tax return in a deflation period.
If you assume prices fall 5% annually you are dead keen to hold money.
Dead keen. Zero is the number.
Your data demonstrates that it's almost certainly government guarantees that's created the bank windfall.
(i) Fed support of asset backed commercial paper by allowing banks to discount their own issues at the Fed. End of August 2007.
(ii) TAF December 2007. Allowed banks to issue ABCP and discount it with the Fed behind closed doors -- precluding investor reaction. This constituted an unlimited back door credit line -- at least until the Fed decided to pull it. Instead we got FDIC guarantees a year later.
Net interest margin has actually been dropping, so while you see a larger total interest income each year, this means a lower return on equity for banks. As the following Bloomberg article via Asia Times implies, many of those past profits came from now-reduced credit lines to now-troubled companies. In other words, these incomes streams won't last much longer. A bit offtopic, but I just don't trust what banks say about their balance sheets/income statements. Its too easy for them to fudge their numbers.
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