naked capitalism

ndk says:

Nice to see such a major firm unafraid to do real analysis and posit financial depth as a synonym for debt to GDP. So much importance has been placed on excess indebtedness that it’s blocking a really important and gruesome separate spectacle.

The longer-dated projections are necessarily a bit sketchy, and I don’t see some of the same trends they anticipate, because rising real interest rates and negative equilibrium real interest rates are very persistent and powerful effects. I don’t see NII recovering persistently any time soon on a risk-adjusted basis, for example. But the rest is well-reasoned.

Is there a link to the full report, Yves, or do we need to be institutional and/or cool for that honor?

john bougearel says:

This is precious in light of the profit/revenue spin from the CEO’s from Citi, BAC and JPM this week.

Thanks Doug and thanks Yves.

And goodnight, just dropping by before going off to bed.

Anonymous says:

here is what I don’t understand about banking profit return.

1. does anybody expect housing price climb to return to 2004-2006 meth day? Interest rate was going down from about 5 to 2 and money was very easy. Even if everything else return to the way it was. interest rate difference and easy money won’t exist anymore. so.. housing price will at best grow at population/income rate.

2. baby boomer will start entering retirement age en masse. Let’s just say, they aren’t social climber changing houses as they get richer. Their priority now is enjoying life. demographically, house buyer will start to shrink.

3. regulation change on CDS, CDO, or all those derivative gambling game. THis was the most profitable money machine ever. even more so than stock market. Any government sane enough to let derivative running lose again?

4. smaller lucrative countries like iceland, eastern europe will now adopt Asian lesson. They will stop consuming and piling up on reserve. No more debt. (there goes another easy money source)

5 and finally, Asia seems to recover first, and money movement will be different. The weakening banks will have to compete against asian banks on high growth economy…

so, … somebody explain to me how those banks will enjoy the 2005/6 crack cocaine days? Expecting US economy to grow 8% using unicorn and rainbow power?

eh says:

…although Bank of America could always be the exception.

Lewis’ claim brings up a number of questions: How about if they had to properly and alone reserve for loan losses? Meaning without TARP and other forms of aid from the Fed (that alphabet soup of programs) and federal government. What are big banks like BAC actually doing with the money they get? How do they formally account for it?

Any company can operate properly if it shrinks costs enough and has its (asset) losses covered.

Anonymous says:

Agree with cap vandal.

E.g. the numbers for industry assets are way, way off.

Not sure what they represent, but it certainly isn’t the US banking industry.

Anonymous says:

Citcorp assets alone are around $ 2 trillion; top four $ 7 trillion; total industry better part of $ 20 trillion.

Anonymous says:

I disagree with the assessment that net interest income is going to decline in 2009. Thanks to the breakdown in the securitization markets, banks are once again in the drivers seat. A look at recent loans will give you a good idea of where interest income is headed.

Eg. The loan provided to Pfizer for the acquisition of Wyeth as also terms of the Verizon/Alltel loan all show spreads of well north of 400 bp for short term loans. It is also important to recognize that the financing costs for banks has not gone up. The spread between the average CD rate and average prime rate is very robust. Also, remember that most bank loan portfolios probably have a duration of 4-5 years. So, between the time they started tightening standards and end of 2009, a full third of their portfolio would be sporting healthier spreads.

Yves – We should revisit this chart a year from now just to see how accurate Mckinsey’s projections are.

Now, provisions for losses – that is a different story :)

Anonymous says:

Mckinsey is part of the problem. A parasite that feeds off of spreading the same virus to multiple hosts.

Let’s see their Fin Svc practice papers from 2006 and 2007 warning of the oncoming collapse.

Anonymous says:

I suspect that it has always been the case that if you ignore writeoffs the banks are profitable.

I think Lewis could have made his comment any time in the last 2 years.

If the government puts enough common equity, which has no obligations on dividends or interest payments, this point might become relevant.

Anonymous says:

I wouldn’t give two cents for a McKinsey report.

I’ve seen their work close up in risk management, and based on proportionate effort, they’re every bit as responsible for the credit crisis as the rating agencies.

JP says:

Mckinsey is part of the problem. A parasite that feeds off of spreading the same virus to multiple hosts.

Let’s see their Fin Svc practice papers from 2006 and 2007 warning of the oncoming collapse.

Couldn’t agree more.
Anybody professing to do analysis in this field who did not predict the trainwreck is wasting our time and breathing too much of our air.

Anonymous says:

Good to see McKinsey’s complicity being brought to light. A very under-reported story, in particular, is the work McKinsey did for Merrill Lynch in the 2001-2005 timeframe (i.e., change in firm’s direction toward a more levered, securitization driven profit focus). A friend in a place to know this at Merrill, referred to Merrill being “McKinseyfied.” By way of disclosure, I’ve never owned MER or BAC stock or have had any affiliations with either firm.