Posts Tagged ‘U.S. banks’
Prior to the financial crisis, the Federal Reserve bought minuscule amounts of U.S. government debt. In 2011, the Federal Reserve bought 61% of all net U.S. Treasuries issued (source: Wall Street Journal, Mar. 27, 2012).
Reread that again, dear reader, to absorb its full meaning—61% of all issued U.S. Treasuries were bought by the Federal Reserve last year.
Before the financial crisis, it was foreign countries that were the major purchasers of U.S. government debt. Since then, many countries have reduced their purchases of U.S. government debt, especially China.
In December of 2011, all foreign countries were net sellers of U.S. government debt to the tune of $21.0 billion (source: Forbes). South Korea reduced its holdings of U.S. government debt and its holdings of U.S. dollars from 63.7% of foreign currencies to 60.5% of foreign currencies.
Over the last five years, China purchased an average of 63% of all newly issued U.S. government debt. In 2010, it dropped to 45% of all newly issued U.S. government debt and now China is purchasing only 15% (source: Wall Street Journal, Mar. 27, 2012).
With the Federal Reserve being the largest buyer of U.S. Treasuries, it creates the false impression that the U.S. government debt market is functioning normally and that there is ample demand worldwide for it. However, if the Federal Reserve stops buying, who will be there to purchase U.S. government debt?
In the U.S. government debt market, like in all other debt markets, the higher the demand, the lower the interest rate one needs to pay on their debt. The Federal Reserve is creating its own demand, … Read More
The big banks have steadily recovered since the Lehman Brothers collapse in late 2008 that sent bank stocks in a punishing downward spiral, which inevitably required hundreds of billions of dollars in bailout funds from Uncle Sam to save the U.S. banks from collapse.
In my view, this chaotic event was an opportunity that may surface only a few times and times of chaos are when you could make big money.
What was clear was that the newly minted President Obama couldn’t allow the big banks to fail even though they were responsible for the subprime mortgage and credit crisis around the world. If the big banks collapsed, this would have likely triggered a mass selloff in the U.S. and thrown the U.S. economy into a depression instead of a recession. The housing market is showing signs of improvement in spite of continued price pressures, which you can read about in U.S. Housing Market: Anatomy of a Recovery.
There was absolutely no way the government would allow the big banks such as Bank of America Corporation (NYSE/BAC) and Citigroup Inc. (NYSE/C) to fail, as it would drive down banking competition nationwide, which would not be good for competition and confidence in the U.S. banking system.
The concept of chaos generally provides a great opportunity to make some easy money. On March 5, 2009, Citigroup could have been bought for $1.02 a share. The stock is currently trading at a post-consolidation price of $36.78 after a 10-for-1 stock adjustment. A block of 100,000 shares could have made you a cool $266,000 in two years. Citigroup was trading at over $52.00 … Read More
As if the big U.S. banks didn’t have enough trouble.
Besides the large U.S. banks’ exposure to Europe and to the derivatives on their balance sheet (off-balance sheet items, which is why no one can evaluate what they’re really worth), there is another issue—a lawsuit—that could cost the big banks billions of dollars and negatively impact their corporate earnings in a significant way.
There is a private antitrust lawsuit that has a staggering five million retailers against Visa Inc. (NYSE/V), MasterCard Incorporated (NYSE/MA), and 13 of the big banks, including Citigroup, Inc. (NYSE/C) and JPMorgan Chase & Co. (NYSE/JPM)—15 major financial institutions in total that could see corporate earnings plummet if this antitrust suit gains traction.
The plaintiffs—the retailers—are accusing the 13 big banks and the credit card companies of colluding to charge fees for credit card transactions that are much higher than a competitive market would command.
Not only are the retailers demanding compensation for overpaying for these fees—dating back to 2004—but they are also probably seeking a permanent fee reduction going forward. The defendants argue that MasterCard and Visa are public firms, which immediately implies they compete with each other for business, outside of the oversight of the big banks. There go the corporate earnings of MasterCard and Visa (if this suit progresses).
The plaintiffs believe they have a very strong case to show that this is one club—the credit card companies and the big banks are intertwined into one. As such, there really is no competition, forcing retailers to pay whatever the fees demanded are.
It is estimated that, in 2009, industry-wide, the fees amounted to some … Read More
Back in October of 2009, I wrote a scathing editorial in the pages of PROFIT CONFIDENTIAL on my dislike for Bank of America Corporation (NYSE/BAC) stock (Why I Don’t Like the Bank Stocks). Back then, Bank of America stock was trading at $17.00; today it trades at $5.37. I still don’t like the stock.
I was in Miami last weekend and realtor after realtor was telling me that the biggest condo building bust in history has bottomed out and is rebounding with the U.S. housing market. Buyers are snapping up properties, one-third of them paying cash, and the best deals are gone.
Not sure I believe them. Or should I rephrase that as, “Not sure they understand.”
We all remember when banks pulled way back on home foreclosures in 2010, as they were accused of not having their paperwork in order when the foreclosed. This put a temporary halt to U.S. home foreclosures. Now they’ve cleaned up their act and big U.S. banks are actually starting to accelerate their foreclosures.
In the third quarter of 2011, U.S. banks started foreclosures on more homes than at any other time in the past 12 months. Banks have a backlog of foreclosures in the U.S. housing market to start work on as a result of the banks cooling foreclosures during the period they were being accused of faulty foreclosures practices.
According to the National Association of Realtors, U.S. home prices fell in three-quarters of all metropolitan areas in the third quarter of 2011. The median price of homes in the U.S. was down 4.7% in the third quarter of 2011, compared to the same period of 2010. Foreclosure sales still make up 30% of all U.S. housing market activity at the resale level.
Hence, we have a situation where more foreclosed homes are coming onto the U.S. housing market and U.S. home prices are still dropping. But this is not the real problem.
If the Federal Reserve … Read More
The big news yesterday: Fitch Ratings service comes out and issues a warning for U.S. banks. Fitch may lower its credit ratings of the large U.S. banks if the eurozone debt crisis is not resolved. U.S. bank stocks got hit hard on the news. Bank of America Corporation (NYSE/BAC) stock now trades at $5.90 (I wrote months ago that I wouldn’t touch this stock).
The big U.S. banks must be ecstatic.
After 100 people at the Federal Reserve ended their review of major U.S. banks, the Fed concluded that some of the largest banks in this country could increase their dividends, buy back shares and repay government loans.
Wednesday, I wrote how I was immediate-term bullish on the stock market. My three main reasons for being bullish: corporate earnings for the third quarter would surprise on the upside; a cloud of investor pessimism still prevails over the market; and stocks are simply attractive compared to U.S. Treasuries that offer little to no return and that may be our next bubble to burst.
But, in the short term, for 2011, I’m negative: bearish on the stock market and economy.
I have great concern towards the U.S. dollar, am concerned about its possible collapse (which would push domestic interest rates up, sending the stock market down), and see the weight of the U.S. housing market putting additional pressure on the economy.
The National Bureau of Economic Research said earlier this week that the worst U.S. recession since the Great Depression ended in June of 2009. I agree with this. But the U.S. economy is still so fragile, so very delicate; we could lapse back into recession if the cards are not played right.
We need to understand that home construction and the residential real estate market are the backbone of our economy. As I have mentioned before, the price of homes in the U.S. fell 15% during the Great Depression. From its peak in 2005, the price of homes have fallen in America a devastating 28% — almost double the decline rate experienced during the Great Depression.
U.S. rates for 30-year mortgages have sunk like a stone to 4.32% this week, the lowest rate since 1971, according to Freddie Mac. Yet, housing prices continue to fall, because there is no … Read More
Some old-time market watchers are still calling for Great Depression II. One research report I read earlier this week by a well-known economist says we are in a depression.
I’m in the enviable position of being one of the few analysts who called the severity of this recession back in the beginning of 2007, before the word “recession” was even on the lips of the majority of economists.
U.S. banks posted their biggest profit in three years for the quarter ended June 30, 2010. According to the FDIC, U.S. banks earned $21.6 billion in the second quarter of 2010.
So, the improving economy is bringing bank profits back up again. When you add in the $18.0 billion in profits these banks had in their first quarter, we are looking at a profit for U.S. banks of about $40.0 billion in the first half of this year.
But, despite the banks starting to lay on the profits again, they continue to tighten the lending standards. In the second quarter, net loan and lease balances for U.S. banks declined $95.7 billion.
Hence, instead of the banks lending out money to get the economy going, they are lending less. Sure, I’ve heard bank presidents say that consumers and businesses are not borrowing. But I also know of many businesses that cannot get loans, because they cannot meet the stricter requirements. You cannot compare the lax lending rules of 2005-2007 to the rules of today — there is a huge difference.
Banks have an obligation to their shareholders to make money. After all, it is the shareholders’ money that is at risk. Thus, to ask banks to make lending easier, with the risk of loan losses increasing, is not fair. That’s like asking my business to lower the cost of our publications to make them more affordable to all, but that would risk the viability of the business and the people who work in it.
In this economy, on one side, you have the consumers/businesses that need money, but can’t get it, … Read More
Economic issues have a concrete impact on any country’s domestic policy. The problem is that world economies are so intertwined that their relationships and any issues arising from these relationships sometimes have an adverse impact on how governments formulate and implement policy. The U.S. policy has had its share of such adverse consequences, the most prominent being the country’s dependence on foreign oil and, more recently — and more importantly — its dependence on foreign debt financing.
Money was flowing on Wall Street last week. Add up the second-quarter profits of Intel (NASDAQ/INTC), Google Inc. (NASDAQ/GOOG), Bank of America Corporation (NYSE/BAC), JPMorgan Chase & Co (NYSE/JPM), Citigroup, Inc. (NYSE/C) and General Electric Company (NYSE/C) — which all reported their second-quarter profits last week — and you have $18.4 billion in earnings hitting the Street.
I watched a good Sunday movie, “The City of Ember.” Sci-fi movies are not usually my cup of tea, but I liked it for a number of reasons, one among them for giving me an angle for this article. The movie plot is relatively simple. The aboveground world is self-destructing and, in an underground palace, the “Builders” of the City of Ember have just finished building, in essence, an elaborate bomb shelter. Having placed instructions in a sealed, time-locked metal box on how to get out of it, the Builders set the timer to precisely 200 years, believing that would be enough time for whatever calamity is happening aboveground to be over.
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