STAFF NEWS & ANALYSIS
Bank of America Reports Sharp Rise in Bad Loans While European Banks Step Up Disposals
By Staff News & Analysis - April 21, 2009

Bank of America showed the sector's troubles were far from over by reporting a big rise in bad loans, while two European banks stepped up efforts to reduce their reliance on state funding. Bank of America shares plunged 24 percent after the No. 1 U.S. bank by assets reported on Monday a 41 percent leap in nonperforming assets. BofA was also helped by $4.1 billion in one-time gains, adding to a sense that better-than-expected results last week from Goldman Sachs (GS.N), JPMorgan Chase (JPM.N) and Citigroup (C.N) could be tough to replicate. Bank of America has received $45 billion of taxpayer money, and some analysts believe it needs more. Bank of America Chief Executive Kenneth Lewis said on a conference call that "we absolutely don't think we need additional capital," but admitted conditions were tough. "Make no doubt about it, credit is bad, and we believe credit is going to get worse," he said. The Bank of America news quashed hopes raised earlier after Switzerland's UBS AG (UBSN.VX) agreed to sell its Brazilian business for $2.5 billion and Allied Irish Banks (ALBK.I) pledged to raise $2 billion, possibly through disposals. Analysts remain wary that an improved first quarter will be sustained, although optimism has built that the global economy has turned a corner, sending world stocks on a six-week climb. J.P. Morgan estimated U.S. banks could incur $400 billion more in losses from the credit crisis and said it expected certain institutions would need more capital. – Reuters

Dominant Social Theme: From good to bad.

Free-Market Analysis: The rise of markets around the world and the six-week upward trend of American equity markets certainly excited the media financial presenters who were convinced that the V-shaped recovery was on. But of course it's not that simple. Top bankers in the United States and elsewhere continue to caution that the larger economy is not on track, that "credit is bad but it's going to get worse." The idea that US banks could sustain another half trillion in dollar losses does not give rise to an innate sense of confidence, nor to a certainty that America, much less the world, has turned a corner.

It is not so simple, as the Bell has repeated on numerous occasions. Why don't they listen to us? The paradigm still in use holds that important leaders meet, the central banks pull their levers and the economy gradually responds. Our point of view continues to utilize free-market business-cycle analysis to come up with a different prediction. We believe that the central bank money stimulation produced a gigantic mal-investment of money over time that distorted real-estate and a variety of other industries including, most prominently, banks themselves.

If this were a normal glitch in the business cycle, the world economy would be responding by now and the bankers would not sound so gloomy. Instead they are predicting further credit dislocation, which means sour loans, especially in real estate, have not yet resolved themselves.

For those that believe mark-to-market regulation will reduce the kinds of credit dislocations that bankers are predicting, we have a question. If mark-to-market was a panacea, would the bankers sound so gloomy? In fact, it is not regulation that drives markets into such a black place but money stimulation. So many billions, and probably trillions, were invested in various endeavors, many development oriented – that are now foundering and ruined. These various developments around the world will never be used, or used sparingly in different ways than envisioned. The waste of money is phenomenal — and that is what continues to weigh on the market, not some regulation or another.

There is the question of derivatives exposure. One wonders about the value of some US$400 trillion in derivatives. Perhaps we shall know soon enough. Surely, given all this it is not going to be an easy or quick turnaround. OK, we're grouches. The recent equity upturn never struck us as the real thing.

Europe is really no better off than America. In Britain, headlines blare, "Markets braced for historic £200bn deficit." Like America, Britain is facing huge public deficits as the government there, copying the Obama administration has put into place a gigantic public funding program. The result is an estimate "£200bn deficit … Britain's total national debt [should climb to] to over 100% of gross domestic product for the first time since the early 1960s," according to the UK Telegraph.

After Thoughts

Fiat money stimulation really doesn't work! Eventually there is hell to pay. It slows down economic adjustment while hiking monetary inflation and eventually ushers in price inflation. The additional money pouring into the international economy, combined with eventual inflation, many new rules and regulations and general determination to combat "deflation" will all keep the economic crisis going for a very long time. That's why the bankers sound gloomy in our opinion.

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