COINING IT

As predicted, it has been a great earnings season for banks. Along with Goldman and Morgan, B of A and the much maligned Citibank posted remarkable numbers in the quarter just completed and were promptly rewarded by having the stock prices hammered---as also predicted. Poor guys are the Rodney Dangerfields of the business...they just get no respect. Perhaps with reason as most of the geniuses about are convinced that the earnings were a one-time thing all coming from trading operations which of course as everyone know can never be repeated...unless you're Goldman and every man, woman and child has a "buy" rating on the stock. The reality is that the numbers can be repeated for at the present cost of money and with the Treasury creating more and more product resulting in one-way traffic in currency markets even I could make money and I was one lousy trader. Hell, you have a 3.5% spread on no risk paper...DUH! But of course the geniuses will tell you that bad loans are about to come along and bite them; but they are also predicting a rise in the S& P of 13% by the end of the year. So what is it guys, Is the economy at the end of the recession or are we in for a real mess in the credit markets? Just asking.

The bank results have caused another dust storm to kick up concerning what the banks have been doing with the financial support they received. I was under the impression that the primary purpose of the TARP money was to stabilize the system in order to get credit flowing again. Not so, say a new round of critics; that money was to be the money that was to be used for the extension of credit. The successful stabilization of the system seems to have highlighted the span of attention of various politicians involved in this process; it's about as long as that of my dog although I hasten to add that she is a very bright dog indeed. The system was in extremis a few months back. Credit does not emit from a failed system, a point that seems to have been forgotten. In addition, was appears to be that which is being asked is for banks to repeat the credit failures of recent memory which will certainly result in a new crisis in a short period of time. And yet, the role which the Fed adopted of essentially being the lender of last resort to the entire commercial system seems to have been greatly reduced in the past few months so credit is flowing again, just not enough for this new band of critics. Far better in my opinion for the banks to use this excellent point in time to build reserves, increase capital and stabilize themselves internally than to begin pumping out money into a still shaky corporate sector or worse yet, into consumer or real estate exposure. A reduction of debt at this stage is a far better aspiration for all concerned.

Remarkably, another issue has emerged concerning official support. There are loud cries that the daily funding the banks are receiving from official sources is being used not for credit support but for proprietary trading, that is the banks' own funding position in various markets. This is being heard from people who should know better and is directed at the use of the Fed discount window with veiled references to Goldman Sachs who as one might remember turned themselves into a Bank Holding Company last year during the height of the crisis. Goldman, I suspect, has availed itself of the Window in no greater proportion than any other institution (while in theory that is limited only by the amount of its collateral, in practice except for real emergencies the Fed makes it VERY CLEAR when it is that they are unhappy) and the fact is that the total amount that has been drawn--only an aggregate amount is known not individual drawings--is tiny as opposed to the funding requirement of the major players in the system. The charge is simply dopy.

Putting aside what are quite frankly silly and minor concerns should be done as there are still major issues with which the regulatory system must come to grips. I'd like to go back to a few of those tomorrow with a few more thoughts on the subject of systemic risk and the regulation thereof. By the by, does anyone know if something happened to Al Gore? I hope not but this is the coldest stretch in this part of the midwest in 100 years. Global cooling anyone?

GOLDIE

As expected, Goldman Sachs blew the doors off with their earnings announcement of today. Despite what one might think of these guys they can turn on a dime and make a hell of a lot of money in any environment. Of curse when you are about the only guy left in the business life does get a bit easier and remember, GS is now a bank just like Citibank and is therefore eligible to borrow from the Fed and practically zero interest. With this kind of cost of funds, even I could make money but probably not as much as Goldie.

What is interesting is to note the absolute confidence they have in themselves as even with their low cost of funds you don't make $3.4 bil without taking risk, and obviously this is what they did. This strategy stands in marked contrast to their only real competitor left on the Street, Morgan Stanley, who had previously announced a meaningful reduction in their risk-taking well over a few weeks ago. I still believe that the earnings of financial institutions this quarter will be modest as little can be expected in stock appreciation at this stage whereas risk management and the building of reserves will take front stage. Again, I think earnings will be deliberately understated without comment from regulatory authorities. As to which approach is the wiser? Time will tell.

Meanwhile, the scuffling still continues over the proposed new world of regulators albeit at a more subdued pace, as official Washington is caught up in Supreme Hearings, Obamacare and Energy. It is encouraging to see, however, that the Brits are facing the very same politics now that there appears to be somewhat of a general agreement that the FSA didn't work worth a damn and that maybee the Old Lady should get another shot at it this time around. I've been thinking about my view that at least in regard to systemic risk (whatever the hell that is) The Fed should clearly be the entity that is in the forefront. The contrary view points to the fact that to mix the traditional role of the Fed as the setter of monetary policy with this new and perhaps conflicting role of systemic regulator might not be a good idea. There is merit in this, but as a practical matter, the nitty gritty of risk management, oversight or whatever one wishes to call it, was never the purview of the Federal Reserve in Washington but rather, of the Federal Reserve Bank of New York. So I said to myself, "Self, why don't they make de jurie what was always de facto?" The answer came back, "Beats the hell out of me." I'm going to think about this some more. I could continue to run on, but there aint that much happening. Later.