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Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Monday, December 14, 2009

The Banks & Their Fat Cats

System capital has improved over the past year, although most
of the increase reflects the net addition of TARP funds to the
system. On a "quick" basis, banking system liquidity is also
improving, as commercial loans roll-off rapidly against Treasury
holdings. This is a normal development after a deep recession
and primarily reflects weaker business loan demand. It is no
exaggeration to say that US based businesses have lost up to
$2 trillion in gross sales globally during the recession, and that
means a large reduction in working capital financing needs.

The banks' loan / lease book expanded in November after months
of decline. There was an uptick in the residential mortgage
portfolio to reflect higher home sales in the US. Still, loan / lease
footings are down 6.5% yr/yr, as C&I loans to business have
dropped by nearly 17.5% yr/yr. Bank loan loss reserving is still
growing, albeit at a more modest pace. The system loss reserve
account has topped $200 bil., or 16.5% of gross capital.

The system is repairing slowly. Bankers are no longer friendly
and it is understandable that credit standards have tightened
further when you consider that loan losses are still rising. With
business sales only beginning to recover, and with excess housing
inventories still being worked off, the economy does not yet
need robust development lending by the banks.

Relative to a sensible long term trend to include 3% inflation,
the loan / lease book of the banks was $1.5 tril. on the high
side in 2008. It is now half that amount.

The Fat Cats
Attacking commercial and investment bank compensation
programs has been a fine, populist sport for nearly two years
now. The programs that were volume or production based were
exquisitely dumb as they gave bankers the green light to put
their firms capital at risk in pursuit of higher comp. Plans will be
subject to regulatory review going forward.

Their are a lot fewer bankers around these days upon which to
lavish bonus money. If you are into attack mode on the comp.
issues, you might keep that in mind.

Even so, when one gazes at the shrinkage of the asset base of the
system, the still rising loan and securities losses books, and the
fact that TARP money has underwritten cash flows for many
banks and IBs, you have to admire the insouciance of a number
of the guys who are still standing. This issue is not going away
soon, and it will be interesting to see just how the Fed and other
regulators will treat bonus plans going forward.

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