Monday, April 13, 2009

Systemic Risk of Banking Collapse Yields Near Record Earnings

Monday again. I have SO MUCH work to do at my real job before vacation! I am feeling the squeeze. I also had quite the adventure of installing a new toilet this weekend. My legs are all messed up from lifting and setting that base so many times. I was wondering how they can make an airframe for a jet fighter that weighs like 200 pounds total, but they have yet to make 10 pound toilets for ease of installation! There is a new company idea, "Featherlite Toilets Inc.".

Welcome Back
A good friend of Economic Disconnect is the site Capitalist Preservation. The author was on leave doing research, and after a while I feared she may have been kidnapped by pirates or something! Welcome back!

Finally, A Solution That Makes Sense
With a big time hat tip to The Mess That Greenspan Made, Tim Iacono pointed out this article from CNN Money that takes the next logical step in the foreclosure mitigation effort:
Unemployment: Big factor in home defaultsReport indicates unemployment is a major driver of missed mortgage payments, and raises concerns that Presidential plan to modify loans may miss the mark.
NEW YORK (Reuters) -- Unemployment is a bigger reason for missed mortgage payments than high interest rates, according to a study from the Boston Federal Reserve that raises questions about President Obama's plan to stem foreclosures by modifying loans.
Borrowers are more likely to default on their payments because they have lost their jobs or because the price of their homes has plummeted than because of tough terms on their mortgages, the study found.
Loan modifications are not necessarily a better deal for investors either, wrote Boston Fed economists Christopher Foote and Paul Willen, Atlanta Fed economist Kristopher Gerardi and Lorenz Goette, a professor at the University of Geneva.
Their research found that policies that directly help homeowners overcome setbacks such as losing their jobs may be more effective in combating foreclosures.

Now wait for it, wait for it...
The economists suggest that the government could instead replace part of an individual homeowner's lost income from a job loss through loans and grants and help those whose predicament is more permanent become renters.

Oh, the humanity!

One of the major goals of the FED lowering rates to subzero levels and buying longer term paper to further drive down rates was to head off a wave of mortgage defaults which may have come from higher rate resets. While the FED certainly has been able to lower mortgage rates to all time lows, foreclosures are still escalating. It sure is another "conundrum" for the FED!

So if base rates are not enough to help, what is the next step? Of course if job losses or reduced income are factors in people losing their homes, jut REPLACE THE LOST INCOME! The plan is beautiful in its simplicity. It is everything I would expect from years of government training.

That an idea like this is even put into print should give everyone reason to pause. Artificially propping up incomes or outright "wage fixing" is deep in the realm of communism and central economic planning. While the US seems to be rushing headlong in that direction, a direct subsidy to maintain income indefinitely is sure to cause an uproar. Or maybe not.

Systemic Risk of Banking Collapse Yields Near Record Earnings
The major news of the day was of course the Goldman Sachs (GS) earnings release that was about double the expectations. I always wonder why it is that the all knowing stock market, you know the one that correctly prices in the future six months out with its all powerful clairvoyance, can never seem to be anywhere near an earnings estimate. That is a topic for another time.

In an environment where we were hours away from "tanks in the street" and an all out systemic banking collapse, it seems GS was able to function very well. Consider just how special this earnings report was framed by fictitious headlines that would be roughly comparable:

Amid Worst Car Sale Numbers in Twenty Years GM Posts Near Record Profits

6 Months After Cure for Cancer is Released, Pfizer has Record Profits from Cancer Drugs No Longer Used

Toll Brothers Reports Record Profits as Sales of New Homes Collapse

You get the idea.

So how was GS able to pull itself up from the banking crisis and have one of their best quarters ever? Currencies and fixed income perfection:
Goldman 1Q earnings surpass Wall Street estimates
Goldman Sachs earns $1.66B in 1st-quarter, surpassing Wall Street's estimates
NEW YORK (AP) -- Goldman Sachs, in another sign that banks may be turning around, beat Wall Street's earnings expectations as it reported a profit of $1.66 billion for the first three months of this year.
The New York-based bank said it earned $3.39 per share, easily surpassing analysts' forecasts for profit of $1.64 per share. This compares with earnings of $1.47 billion, or $3.23 per share, in the quarter ended Feb. 29 of last year.
Goldman's news, released a day earlier than anticipated, came days after another top-performing bank, Wells Fargo & Co., said it expected to report record first-quarter earnings of $3 billion, well above Wall Street's estimates. That news fed a huge stock market rally Thursday, but with companies including Citigroup Inc. and Bank of America Corp. still to report their first-quarter results, it's too soon to say the banking industry is finally recovering from the devastating losses caused by the credit crisis and the recession.
Morningstar Inc. equity analyst Michael Wong said Goldman benefited from the fact that it has more traditional investment banking and trading operations than more retail-focused banks like Citi and Bank of America.
"What allowed Goldman to outperform is solely tied to their brokerage operations," he said.
Still, Goldman's first-quarter performance put it in a strong enough position to plan the public stock offering of $5 billion which it said would be used, with additional resources, to pay back its government debt. Goldman received $10 billion in government funds during the downturn last fall as part of the U.S. Treasury Department's program to invest directly in hundreds of banks and try and help alleviate the nearly frozen credit markets.
Goldman said its first-quarter profit was bolstered by strong revenue growth in its fixed income and currency businesses. The Treasury market and the dollar were beneficiaries of investor uncertainty during the first two months of the year; in March, the stock market began a five-week rally that lifted the major indexes off 12-year lows.

So in the absence of wild derivative bets, mortgage backed securities sales, and lending gone wild GS can make numbers such as this by playing the fixed income markets and the dollar? I mean, why ever take a risk on exotic debt instruments when you can make all this money in vanilla trading? Beats me!

Now it is not clear as of this minute how much the AIG counterparty payouts helped GS, and we may never know that in detail. For now that is a work in progress. Some observations on what GS report means going forward:
- The pressure will be on for the other banks to have great reports
- The stress tests are now less than meaningless unless they want to call "baloney" on said bank earnings reports
- The banks just kissed away any ability to get any more help from a vote in Congress; public opinion, while fickle, will be against helping banks making boat loads of cash
- Backdoor bypass of Congress for additional funding for banks now looks like the best example of any forward looking ability of the FED/Treasury
- Feeling of being scammed is beyond salvage now
- GS may have overplayed their hand with this report, effectively uniting opinion against further bailouts

I will have to more thoroughly digest the news and I am sure more information will be coming out regarding the numbers.

Something just does not seem right here. Sound off in the comments.

Have a good night.

8 comments:

Anonymous said...

Goldman Sachs set aside $4.7 billion for salaries and bonuses last quarter, after taking in a profit of $1.7 billion. That means that Goldman’s employees stand to profit far more than it’s shareholders from this quarter’s outperformance.

The $4.7 billion in compensation is 50% of Goldman’s total revenues for the quarter. The first quarter of last year, compensation ate up just 48% of Goldman’s revenues. As Heidi Moore at the Wall Street Journal reports, Goldman’s rising compensation comes despite the fact that the firms has cuts its headcount by 7% since the end of last year. That means that the remaining employees are each taking an even bigger slice of the pie.
http://www.businessinsider.com/goldman-bonuses-are-way-up-too-2009-4

These bastards need to be drug out in the street and given the beat down, this has gone on long enough.

Kevin

GawainsGhost said...

This is all bovine feces, or taurus excrementum, or in the vernacular bullshit, GYC.

They're cooking the books! Zero Hedge had a post about this earlier, in which banks through accounting sheenanigans made themselves look healthy but sickly enough to receive funds from TARP, if that makes any sense.

It's fraud plain and simple. And don't think the people don't know it.

These TEA (Taxed Enough Already) parties are growing into a real movement. 2200+ protests planned all across the country on April 15. The media and the politicians ignore them at their peril.

getyourselfconnected said...

Gawains,
That revolt sentiment should only grow when faced with scams like this. All the bailout cash to give GS record earnings? Ugly, just ugly. Kevin's highlights just add to the outrage.

getyourselfconnected said...

Also a must read;
Kevin left this at Capitalist Preservation and it rules, 10 ways you know you are in a banana republic:
http://tinyurl.com/dx7car

GawainsGhost said...

The Big Picture is all over this story.

http://www.ritholtz.com/blog/2009/04/how-to-puff-up-earnings-goldman-sachs-style/

GS just ignored the month of December so as not to have to account for their losses! That takes a lot of gall, to pay yourself bonuses while ignoring losses.

None of this is going to end well.

Anonymous said...

David Viniar, Goldman Sachs Group Inc.’s chief financial officer, said he’s “mystified” by the interest investors and government officials have shown in the bank’s trading relationship with American Insurance Group Inc.
http://www.bloomberg.com/apps/news?pid=20601110&sid=aY.ISqynmYLg

The biggest theft in the history of the world and this clowns mystified why anyone would be interested. Yeah right.

Kevin

David Ferreira said...
This comment has been removed by the author.
thebullishbear said...

Does anyone have a clearer idea of the missing december part of the GS result?

I found something here:
http://www.topgunfp.com/shenanigans-at-goldman-sachs/