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S&P: The Bank Crisis May Last Until 2013

Standard & Poor’s (S&P), the credit rating agency that played a big negative role in this crisis, released a report yesterday that concluded that the U.S. banking crisis may last until 2013.  Only time will tell if they are right - who knows if they are trying to make up for the mistakes they made with mortgage crisis.  If they are right it maybe more evidence that the financial conglomerates may be a drag on our economy.  It is well past time to break-up the “too big to fail” conglomerates.

The less than glowing report by S&P is like cold water in the face and a deep contrast to the euphoria after the release of the not too stressful ‘stress tests’.

Despite the cautious optimism creeping into the financial markets, in light of what some believe are better-than-expected results from the
government stress testing of 19 large banks, Standard & Poor’s Ratings Services believes that banks are far from a recovery, and the banking crisis has merely
entered a new phase.

S&P’s report states that banks may need more capital cushion then even required under the not too stressful ‘stress tests’.  In some respects this report actually discredits the ‘stress tests’ because of its conclusion that more capital may be needed but of course the report would not explicitly discredit the ‘stress tests’. 

While efforts to spur lending, take bad assets off banks’ balance sheets, and restart the market for packaging and selling securities may help the sector, S&P said banks will have a tough time surviving absent a bigger capital cushion than regulators require.

According to the report, the following are some of the challenges that the financial sector will continue to face:

(emphasis added)
—Industry risk is generally creeping higher rather than stabilizing;

—Losses during this downturn will likely be greater than the industry thought when it began;

—Franchise stability and market confidence are increasingly critical components of credit;

—There’s a greater focus on capital adequacy;

—Government support is now explicit in our ratings for highly systemically important U.S. banks;

—Hybrid securities appear to be riskier than we thought;

—The industry structure is changing;—Volatility appears to be here to stay;

—The originate-to-distribute model is being rethought; and

—Regulation is generally increasing.

S&P is actually considering lowering the credit rating on 23 U.S. banks including 10 banks that underwent the not too stressful ‘stress tests’. 

“There’s nothing to say that this banking crisis can’t go on for another three or four years,” S&P Managing Director Tanya Azarchs said.

Treasury Department and Federal Reserve are hoping that the financial conglomerates can ‘earn’ their way out of this crisis with higher earnings and will not require anymore taxpayer money.  This report implies that the government’s hopes can be easily dashed.  There are several economic factors not working in their favor - the biggest one being unemployment (currently at 8.9% and possibly increasing).

The financial conglomerates really screwed up by underestimating the riskiness of subprime lending and negligently (or intentionally) disregarding any warnings of the risk in their pursuit for higher profits and bigger bonuses.  But it was not enough just to underestimate the risk they then spread the risk through out the financial system with their exploitation of securitization.  The consequences of their actions has been felt by millions of Americans through the trillions of dollars lost in retirement savings and home equity.

Many of these financial conglomerates, especially Bank of America and Citigroup, existence depends on and may continue to depend on taxpayer assistance.  Their existence or survival will be a drag on our economy especially if they will require more taxpayer money in the future.  But the bigger drag will be from financial conglomerates performing the tasks that banks are suppose to do - accept deposits and provide loans to credit worthy individuals and businesses.

Financial conglomerates have been reluctant to perform these basic banking functions because they still have a lot of “toxic” assets and liabilities on their books.  The not too stressful ‘stress tests’ and the trillions of dollars that the Fed and Treasury Department have pumped into the financial system have not changed that.  These financial conglomerates are in survival mode but their survival and our interests in an economic recovery are in direct conflict.

It is well past time to break-up these financial conglomerates.