It's a splendid morning here in New York and I hope it as equally splendid wherever you are as well! The lead off story here is that six of our largest nineteen banks have failed the Treasury Department "stress test". Considering that the "adverse case" scenario was not exactly adverse, (If I could lock in an economic scenario that had unemployment peaking at a little over 10% and economic growth positive in 2010 I'd call you done in a New York minute) a 68% "pass rate doesn't sound so good. Secretary of Treasury Tim Geithner continues to say that "a vast" majority of our banks have more than enough capital to survive the storm. All I can say to that is "vast" is a very relative term. If you are running for President, getting 68% of the vote is a "vast" majority. Only 68% of the nation's top banks adequately capitalized? To quote Dillon Panther coach Eric Taylor, "That ain't gonna git 'er done."
Now some may say that the nation's largest banks are not representative of the nation's medium size and small size banks. I know this is true. However, the combination of escalating unemployment and contraction of the economy, kicked off by the largest banks, will, or will soon, issue a vicious wallop on the rest of the banking system. If you notice, just about every Friday afternoon, when thoughts turn to beer, the FDIC announces the closing of another 3-5 banks. The banking system and the economy are sewn together from the top of their heads to the bottom of their feet. Right now, and for the foreseeable future, the economy sucks and is getting suckier. Hence, banks will continue to take it on the chin and capital will bleed. Check out this latest take on commercial mortgages, an area of intense exposure for our banks, big and small Commercial Mortgages at Risk of Default Five Times Higher in a Year. Hi-Ya! Banks need capital, a lot of capital, and I don't know where it is going to come from with the "vast majority" of bank balance sheets as clear as mud. Both the Obama and Bush Administrations have spent that last six months dicking around and with every passing day, companies are failing for lack of credit, employees are laid off, mortgages and credit cards go unpaid, commercial leases are backed out of and it goes on and on. The government has no more "boots on the ground" with regard to skilled examiners and supervisory agents, than it did at this time last year. President Obama wants to create jobs? Come to New York and say to the thousands of unemployed or under employed financial professionals, "Uncle Sam wants YOU!"
Ah, what else struck my eye this morning? Here it is! AIG Acts to Avoid Default Risk
AIGhas moved to stave off the risk of default on $234bn of derivatives by persuading a senior executive at its troubled financial products division to rescind his resignation and remain with the stricken insurer to unwind the complex trades.
AIG insiders said James Shephard, the deputy chief executive of Paris-based Banque AIG, had decided to stay on as the unit’s chief less than a month after resigning in the midst of the political furore over the insurer’s bonuses.