Tag Archives: banks and banking

Banks lied, markets died

Or something. It’s that time of year again where banks have to come clean, a little, about what’s on their books. It’s not pretty. If I understand it, and I don’t, banks are allowed to keep bad loans on their books at an inflated value so long as they don’t actively try to sell them. Hence, zombie banks. So that mortgage on a spec house can still be carried at $6 million, unless the bank offers to unload it at present value – say, $2.5 million. What happens when this gauze is ripped off and the true value of the putrid, rotting mess is revealed? Nothing good, that’s for sure.

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Zombie banks

The Fed TARP program has created “Zombie Banks” – financial institutions that have too much toxic debt to live yet are still walking around. The zombies,according to this Wall Street Journal article, are afraid to sell these toxic assets at their current price because doing so would force them to recognize their losses and would kill them. Strong banks, on the other hand, don’t want to buy because they think prices are going to fall even further. At the risk of further infuriating my ever-growing body of colleagues who hate me, this situation reminds me of the real estate market in an area near us here in Fairfield County.

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Gretchen Morgenson: The end of banking as we’ve (recently) known it

Her prediction – financial services will return to the dull old boring days when the good ones traded at 1 to 1.5 X earnings  book value.  No more leveraging 30X, no more out-sized salaries and, by the way,higher interest rates. My manager tells me that our office saw a large number of house viewing appointments today so maybe buyers are ahead of those pundits who think mortgage rates are going to fall lower and stay lower.

But sellers might want to consider what will happen if the financial services jobs and multi-million dollar bonuses disappear, especially if accompanied by higher mortgage costs. Nothing good.

And hedge funds? They’re not doing so well either. These guys charged 20% of the profits they earned: no profits, no 20% and no 20% until they earn back their losses, if they ever do. Citadel’s  Kenneth Griffin, whose fund lost 55% this year, says he’s trying to stay open. “But he acknowledges that for several years, he will be working mostly for ‘psychic income.’ ”

Griffin will survive, but a lot of junior hedge funders will not be buying $4 million homes in Greenwich in the near future. Looks like the only ones who will will be Greenwich town employees.

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