N AT I O N A L C E N T E R F O R P O L I C Y A N A LY S I S
Insights on Taxes, Economic Policy, Federal Budget | Bob McTeer | NCPA
BOB MCTEER’S HOMEPAGE
NCPA HOMEPAGE
TAXES AND GROWTH WEBSITE
Bank Stress Tests
RSS FEED
Well, Are the Banks Weak or Strong?
CATEGORIES
By Bob McTeer
04 20th, 2009 1:55:33 PM
digressions &
Search Your News:
(A Tiger by the Tail)*
ARCHIVES
Goodmusings question. Many have received injections of capimarket understood the negative aspects and probably the April 2009 economy tal (purchases of preferred stock) through the Troubled nonrecurring nature of its first quarter performance. I wrote on February 25 that the newly-announced bank stress tests were mostly March 2009 education Assest Relief Program (TARP), yet many large banks anwindow dressing since bank examiners stay inSo, constant touchbanks with theneed to keep their do the TARP February 2009 funds or nouncedenergy large profits this week. If this week’s announcefinancial condition of the banks they regulate, even havinghave their own officesto in give them back? not? Some offered January 2009 ments were all Icrisis knew about the it, largest I’d bebanks. very Iconfused. cautioned that the publicity given to this charade could financial December 2008funds Most of the 400 plusI may banks receiving TARP backfire on the regulators by triggering calls for transparency. I believe getting personal But, my answer is that many of our banks that have enNovember probably need to keep them until this crisis is2008 over. The have stumbled upon something. gaged inInternational significantTrade real estate lending or have mortgageOctober 2008 banks regovernment is worried that if a few high profile backed securities in their portfolios haveabout weak asset andat the endturn limited government September (See my poem transparency of this piece.) them it will put pressure on others to do2008 so and create capital positions because of large reserves for loan losses August mark to market a distinction in peoples’ minds about bank2008 safety. They Read the rest of this entry » and write-downs 2008 media clips of securities. Their capital is very thin, are all safe within the limits of theirJuly deposit insurance. June 2008 which is what TARP is designed to remedy. monetary policy People don’t like the idea of giving the banks monMay 2008 On the other hand, some of their ongoing businesses Obama ey, especially when the banks do things they don’t apApril 2008 administration have generated profits recently while other lines of busiprove of, such as give retention bonuses or raise credit March 2008 Comments (1) poems & songslosses. Sustained net profits would nesses are incurring card interest. Do you agree? February 2008 enable weak banks to rebuild capital in time, but writerecession January 2008 Yes, but we shouldn’t use the term “give” too loosely. downs from past loans and investments continue to erode speeches December 2007 them Block City Let’s not forget that the government didn’t “give” capital and pro-cyclical regulatory responses make a bad taxes 2007 market any money. The have to pay November a higher than 04 18th, 2009 8:00:20 AM By banks Bob McTeer situation worse. October 2007 testimony interest rate for those “borrowed” funds and had to give September 2007 A Week-Endwarrants Specialto the government which are In addition, some of the recent profit announcements convertible into 2007 have benefited from some unusual accounting treatments. RECENT POSTS common stock. For example, BankAugust of America, in its July 2007 Goldman Sachs, for example, changed its fiscal year quarterly report, showed $400 million dollars going to the What do you do when your well runs dry, your muse gets an unlisted telephone Bank Stress Tests April 2007 from one that ended in November one number,to and yourthat hits started fall like ainstone? government as interest last quarter. March 2007 City January,Block which caused a heavy-loss month in December Even so, I think the government should allow February 2007 banks to International Trade to disappear from the radar screen. (ThisNow, is hear-say on I dig up bones. strictly speaking, Digging Up Bones, as defined by pay back the money as soon as they are able to. and Investment country music own legend,bonds Randy had Travis, involves rummaging through the old my part.) A couple of the banks, whose home place tangible a lost andabout long gone Money declinedCreating in market value, marked themandtofinding market, thusmemories of What thelove, ideawhich of the government converting Out of Thin Air!!! activity is not necessarily confined to country. City folks can also get those reducing the value of their liabilities. I’d never thought of the preferred stock to common stock? Is this the gov"Gone, but not Forgotten Blues." Will China Buy our markingTreasuries? your own debt to market. ernment’s way of taking over or “nationalizing” the banking system? In the case of Bank of America, their net earnings of BLOGROLL over $4 billion consisted largely of the trading profits of Merrill Lynch. The fact that BOA’s stock declined sharply on its announcement of a large profit suggested that the http://www.bob-mcteer-blog.com/[4/21/2009 3:45:36 PM]
It could be, but I doubt it. Government officials don’t want to run banks, especially since they know they don’t know how and would only earn their government pay(document continues on next page)
www.ncpa.org Dallas Headquarters: 12770 Coit Road, Suite 800, Dallas, TX 75251 Washington Office: 601 Pennsylvania Avenue NW, Suite 900, South Building, Washington, D.C. 20004
N AT I O N A L C E N T E R F O R P O L I C Y A N A LY S I S
Insights on Taxes, Economic Policy, Federal Budget | Bob McTeer | NCPA
BOB MCTEER’S HOMEPAGE
NCPA HOMEPAGE
(continued from previous page)
TAXES AND GROWTH WEBSITE
Bank Stress Tests
Search Your News:
By Bob McTeer
04 20th, 2009 1:55:33 PM
CATEGORIES
RSS FEED
check anyway. I think the idea is simply a way of giving In 1980 or 1981, I testified before the Maryland Legdigressions & Tiger by the Tail)* urging them not to impose usury limits on bank the banks more support (to the extent that common(Astock islature ARCHIVES musings is superior to preferred) without having to go to Congress credit cards in Maryland. The Maryland banks said they April 2009 for moreeconomy money. If the government did such a thing, I would have to move their credit card operations out of I wrote on February 25 that the newly-announced bank stress tests were mostly March 2009 educationbe voluntary on the part of the banks since think it should state if limits were imposed. window dressing since bank examiners stay in constant touch with the February 2009 that wasn’t part of the original deal. energy financial condition of the banks they regulate, The even having their own offices inthe limits, and the Maryland legislature imposed January 2009 largest banks. I cautioned that the publicity given to this charade could Whatfinancial aboutcrisis these “stressthetests” that the regulators banks moved their credit card operations and2008 many, many December backfire on the regulators by triggering calls for transparency. I believe I may getting personal are performing on the 19 largest banks? jobs to Delaware where they remainNovember today. 2008 have stumbled upon something. International Trade
October 2008
I think announcing such a thing was a huge mistake. What about TARP II, the private-public partnerlimited government September 2008 (See my poem about transparency at the end of this piece.) Bank regulators routinely perform stress tests and require ship designed to buy illiquid assets from banks? Will August 2008 mark to market the banks to do so; so they won’t learn anything new. But it work? Read the rest of this entry » July 2008 media now they haveclips put themselves in a position of having to 2008it hasn’t even I don’t know. Most people don’tJune realize monetary policy about the results of the stress tests, announce something May 2008 started yet. They have incentives for private sector capital which isObama a no-win situation. I think it was a gimmick to April 2008 to come in as buyers. I’m not sure there is an equal incenbuy timeadministration that wasn’t thought through. Anything they anMarch 2008 Comments (1) tive for the banks to sell, if selling causes them to take a & songs nounce poems will have a downside with no upside that I can February 2008 big loss on their capital. think of.recession January 2008 speeches
December 2007 complaining Block CityAlso, Congress and others are already What about banks raising interest rates on credit taxes November 2007 that the terms aren’t 2009 8:00:20 AM espeBy Bob tough McTeer enough on banks. This is just cards? Isn’t this a bad time 04 to18th, do such a thing, testimony one more instance where CongressOctober sets out2007 to help the cially banks that have accepted TARP money? September 2007governA Week-Endbanks Special and ends up trying to penalize them. The 2007 with it. Yes,RECENT it’s veryPOSTS bad PR. However, the financial crisis has ment has the private sector afraid toAugust do business July 2007 created a severe recession which has raised credit card They keep changing the rules. What do you do when your well runs dry, your muse gets an unlisted telephone Bank Stress April 2007 delinquencies. TheTests banks need to recover their costs. number, and your hits fall like a stone? Do you blame the private sector for 2007 feeling distrustMarch Block City The consumer response should be to pay off their cards ful of the government? February 2007 International Trade I dig up bones. Now, strictly speaking, Digging Up Bones, as defined by as soon and as possible againmusic carrylegend, a balance on Investmentand nevercountry Randy Travis, involves rummaging through the old No, not at all. them. They are Money a terrible dealhome for place consumers. and finding tangible memories of a lost and long gone love, which Creating Out of Thin Air!!!
activity is not necessarily confined to country. City folks can also get those
Should Congress put a limit—a usury limit—on "Gone, but not Forgotten Blues." Will China Buy our what banks can charge? Treasuries?
The last time Congress did that was in 1980 and it caused,BLOGROLL or helped cause, a severe recession. Any kind of price fixing is bad.
Bob McTeer is a distinguished fellow at the National Center for Policy Analysis and former president of the Federal Reserve Bank of Dallas. Visit Dr. McTeer’s blog at www.bob-mcteer-blog.com. (document continues on next page)
http://www.bob-mcteer-blog.com/[4/21/2009 3:45:36 PM]
www.ncpa.org Dallas Headquarters: 12770 Coit Road, Suite 800, Dallas, TX 75251 Washington Office: 601 Pennsylvania Avenue NW, Suite 900, South Building, Washington, D.C. 20004
N AT I O N A L C E N T E R F O R P O L I C Y A N A LY S I S
Insights on Taxes, Economic Policy, Federal Budget | Bob McTeer | NCPA
BOB MCTEER’S HOMEPAGE
NCPA HOMEPAGE
TAXES AND GROWTH WEBSITE
Bank Stress Tests Bank Stress Tests
04 20th, 2009 1:55:33 PM
CATEGORIES
(A Tiger by the Tail)*
digressions & musings
RSS FEED
Search Your News:
By Bob McTeer
(A Tiger by the Tail)*
ARCHIVES
April 2009
economy
This is all very disconcerting toMarch bank2009 regulators I wrote on February 25I that newly-announced wrotethe on February 25 that the newly-announced bank stress tests were mostly education who are accustomed to keeping bank financials conbank stress tests were mostly window since stay in constant touch with the window dressing dressing since bank examiners February 2009 energy fidential, andtheir rightly so. After all,January deposit insurance financial condition of thethe banks even having own offices in bank examiners stay in constant touch with fi-they regulate, 2009 the largest banks. I cautioned that the publicity given to this charade could financial crisis is a great equalizer. Retail depositors can rest asnancial condition of the banks they regulate, even December 2008 backfire on the regulators by triggering calls for transparency. I believe I may sured that their individual deposits (even more havinggetting theirpersonal own offices in the largest banks. I cauNovember 2008 than have stumbled upon something. one) are safe below the $100,000 level, temporarily tionedInternational that the publicity given to this charade could Trade October 2008 raised to $250,000. Safe is safe. No fine distinctions backfire on the regulators(See by my triggering calls for limited government September 2008 poem about transparency at the end of this piece.) need to be made. transparency. I believe I may have stumbled upon August 2008 mark to market Read the rest of this entry » something. July 2008 media clips Any implicit ranking of the “Big 19” will cause June 2008 (Seemonetary my poem about transparency at the end of policy problems for the equal banks thatMay are2008 not quite as this piece.) equal as others. My guess is that April the regulators are Obama 2008 administration frantically meeting trying to get themselves out of After much waffling back Comments and forth,(1)officials have March 2008 poems that & songs amount2008 of damannounced somebody (probably the various bank the foolish promise with the leastFebruary recession on the notion that regulators) will announce something about the results age. Maybe this will put a damperJanuary 2008 transparency is the answer to everything-that on May 4. They are not sure what, but something.Block City speeches December 2007 more information is always better thanNovember less. Here’s taxes 2007 a little There are really no good04options. 18th, 2009 Chairman 8:00:20 AM BerBy Bob McTeer poem I wrote about transparency years ago. October 2007 nanke testimony has already said that this is not a pass or fail September 2007 A adeWeek-End Special test-that all 19 would pass and be certified as August 2007 quately or fully capitalized, even if some additional RECENT POSTS Transparency is currently a central banker cause July 2007 capital must be added to make it so. (My words; not reminds metelephone too much ofApril sausages and laws What do you do when your well runs dry, your But muse it gets an unlisted Bank Stress Tests 2007 his.) Such a Lake Wobegon solution is hits notfall likely number, and your like a to stone? I think translucence, like my shower March 2007 door, City satisfy.Block Inquisitive minds will want to know which February Tradeand which is abygood compromise 2007 I dig upwere bones. aNow, strictlyIf speaking, banks International passed easily stretch. all Digging Up Bones, as defined and Investment country music Randywords, Travis, involves rummaging through the old were good, which were most best . . legend, . in other It lets in the light, but keeps out the flies. home place and finding tangible memories of a lost and long gone love, which Creating Money least worst? Out of Thin Air!!!
*
Will China Buy our Treasuries?
activity is not necessarily confined to country. City folks can also get those "Gone, but not Forgotten Blues."
In an effort to curry your favor, I’ll spare you the YouTube version of Buck Owens’ “Tiger by the Tail.” BLOGROLL
Bob McTeer is a distinguished fellow at the National Center for Policy Analysis and former president of the Federal http://www.bob-mcteer-blog.com/[4/21/2009 3:45:36 PM] Reserve Bank of Dallas. Visit Dr. McTeer’s blog at www.bob-mcteer-blog.com.
www.ncpa.org Dallas Headquarters: 12770 Coit Road, Suite 800, Dallas, TX 75251 Washington Office: 601 Pennsylvania Avenue NW, Suite 900, South Building, Washington, D.C. 20004
