America's megabanks
Goodbye, or see you again?
Dec 17th 2009 NEW YORK
From The Economist print edition
America’s big banks are repaying the state. Can they really walk alone?
IT WAS less of a goodbye kiss and more of a farewell hand-off in the face. Thirteen months after getting government cash from the Troubled Asset Relief Programme, America’s megabanks have stampeded to repay it before the new year, desperate to escape the stigma and meddling it has brought. On December 9th Bank of America (BofA) said it had repaid the $45 billion of preferred stock owned by the state and sold $19 billion of new ordinary shares. Citigroup and Wells Fargo announced similar plans on December 14th. (JPMorgan Chase, the other megabank, repaid the state in June.)
In total this month the government should get $90 billion of preferred stock (really a form of debt) repaid, while the banks will raise some $50 billion of common equity to boost their capital. The state will tear up its loss-sharing agreement with Citi. It also intends to sell its $25 billion of ordinary shares in the bank within a year, although immediate plans to flog $5 billion-worth were put on ice after Citi’s shares dipped too low for the Treasury’s taste. That blip aside, the banks are feeling perkier. BofA, which has struggled mightily to hire a new chief executive, managed to appoint Brian Moynihan, a company insider, to the role on December 16th.
For taxpayers relief at being repaid should be tempered by the fact that they are still on the hook for these too-big-to-fail firms. Regulation could help. The House of Representatives approved a bill on December 11th that avoids immediate surgery but would allow supervisors to beat up banks that pose a “grave threat” by, for example, blocking mergers and even forcing disposals. The bill also says creditors must take a “haircut” of up to 10% if a bank fails. But this is pretty tepid stuff: as soon as creditors sense a failure is imminent, they will refuse to roll their loans over, starting a run. The Senate is still ruminating on its own bill. It may take until the middle of next year for a final law to be passed. One Wall Street hedge-fund manager speaks for many when he says “the banks aren’t afraid” of the government any more.
Goodbye, or see you again?
Dec 17th 2009 NEW YORK
From The Economist print edition
America’s big banks are repaying the state. Can they really walk alone?
IT WAS less of a goodbye kiss and more of a farewell hand-off in the face. Thirteen months after getting government cash from the Troubled Asset Relief Programme, America’s megabanks have stampeded to repay it before the new year, desperate to escape the stigma and meddling it has brought. On December 9th Bank of America (BofA) said it had repaid the $45 billion of preferred stock owned by the state and sold $19 billion of new ordinary shares. Citigroup and Wells Fargo announced similar plans on December 14th. (JPMorgan Chase, the other megabank, repaid the state in June.)
In total this month the government should get $90 billion of preferred stock (really a form of debt) repaid, while the banks will raise some $50 billion of common equity to boost their capital. The state will tear up its loss-sharing agreement with Citi. It also intends to sell its $25 billion of ordinary shares in the bank within a year, although immediate plans to flog $5 billion-worth were put on ice after Citi’s shares dipped too low for the Treasury’s taste. That blip aside, the banks are feeling perkier. BofA, which has struggled mightily to hire a new chief executive, managed to appoint Brian Moynihan, a company insider, to the role on December 16th.
For taxpayers relief at being repaid should be tempered by the fact that they are still on the hook for these too-big-to-fail firms. Regulation could help. The House of Representatives approved a bill on December 11th that avoids immediate surgery but would allow supervisors to beat up banks that pose a “grave threat” by, for example, blocking mergers and even forcing disposals. The bill also says creditors must take a “haircut” of up to 10% if a bank fails. But this is pretty tepid stuff: as soon as creditors sense a failure is imminent, they will refuse to roll their loans over, starting a run. The Senate is still ruminating on its own bill. It may take until the middle of next year for a final law to be passed. One Wall Street hedge-fund manager speaks for many when he says “the banks aren’t afraid” of the government any more.
Can the public at least be sure the banks are healthy? Huge progress has been made. Combined bad-debt reserves for the four megabanks stand at 4.3% of loans, or $130 billion, compared with 2.6% a year ago. The next line of defence, core capital, has reached $400 billion. That meets the target set by the Federal Reserve’s stress tests in May and is almost double the amount at the end of 2008. Citi’s ratios in particular have improved dramatically (see chart). Three-quarters of the megabanks’ assets are now financed by sticky deposits, equity or long-term debt.Yet as students of Japan’s zombie banks know, nasties may lurk in the megabanks’ $7.4 trillion of assets (equivalent to about half of America’s GDP). The banks’“level 3” assets, which are illiquid and hard to value, are still $346 billion—almost as much as their core capital. The fair value of loans, the price a third party would pay for them, is $76 billion below the value they are held at on the banks’ balance-sheets, suggesting bad-debt recognition is too optimistic. The biggest worry is that the banks are making profits largely because their funding costs are at rock bottom. In the third quarter the four paid an average annual rate of 1.4% on their debt and deposits. America’s banks are nearly free of state ownership, but may still be addicted to near-free funding.
Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved.
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