Monthly Archives: March 2008

Rant of Week: 3/9/08-3/15/08

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We were trying to avoid selecting another Sippican Cottage blog post for rant of week. We did not want to make it seem like every rant of the week was going to come from him. But this one was just too good to pass up.

For those that don’t already know it, we should point out that Sippican Cottage lives in the great state Massachusetts. Recently, that state passed a law requiring people to purchase health insurances. That means that if the state deems that you can pay for it, you have to pay for it. Otherwise you have to pay a large fine.

To say that Sippican Cottage was unhappy about this new law would be an understatement. When it was first past he just about blew his top. Now that it has been in place for a while, his rant is not as explosively angry as his first one was. But his rant still has the air a barely suppressed rage as he warns America what to expect from universal health care.

Bank Ratings

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Do you know the financial health of your bank? This site will give you a good idea of your bank’s financial health if you are willing to put a bit of work into it (Edit: For some reason the web site always reverts to the insures tab no matter what link I put in. Make sure you click on the banks and thrifts tab or none of this is going to make sense).

The first challenge when using this site is finding the bank that you want because the search function does not work.

For example, I tried searching for M&T Bank (which is the name the company advertises under) and did not get anything. I tried searching for Manufacturers and Traders Trust Company (the name the company is listed under) and did not get anything. So I gave up in disgust thinking that they did not have this bank in their database. Then when I was scrolling through their list of banks for New York, I found the bank listed under Manufacturers & Traders TC, Buffalo, NY. But even typing that into the search function will not bring up the bank.

In other words, the only way to find a bank is to narrow it down to the type (savings & loan or regular bank), state, and rating and scroll through the resulting lists.

The ratings are based off regulatory filings that the banks have to make with various government agencies and they range from A+ to E-. But by themselves these ratings don’t tell you much because you have no idea why a bank is rated the way it is.

But if a particular bank catches your eye, you can click on it and you will be taken to a slightly more detailed chart. Here is the chart for M&T for example.

Now if you look at the chart for M&T you will see that it still leaves a lot to be desired as far as the information offered is concerned. How do you define asset quality for example?

But if you want to do an in depth study of the bank, you should look up the banks regulatory filings for your self. The real value of the charts is that it gives you an idea of why the banks are rated the way that they are. You should use these charts to adjust the bank rating in your head based on your own particularly views. For example, M&T is ranked as a “B-” but I think that it should be a “C” at most.

If you look at the chart you will see that M&T is rated highly in only in profitability and stability. Now profitability is next to worthless as measure of a bank’s soundness. Granted, a bank that is losing money year after year will not stay in business for long. But high profits in a bank make me nervous. It could mean they are exceptionally well manged. But it probably just means they are taking on a lot of risk.

Stability is almost as worthless as profitability. This is because stability is a measure of a bunch of things, some of them relevant and some of them not. For example, the length of time a bank has been in business is factored into the stability ranking. That is an irrelevant data point. A bank that has been in business for 100 years can go bankrupt tomorrow just as easily as bank that has been in business for 10 years if all other things are equal. On the other hand, diversification is also factored into the stability ranking. This is relevant since a bank that has all its eggs in one basket are more likely to go under.

So the fact that M&T has a high stability ranking is slightly more encouraging then its high profitability ranking, it still does not reassure me much.

To make matters worse, M&T does not do very well on Capitalization, Liquidity, and Asset quality. To my mind, these are the most important indicators of a bank’s soundness. The fact that they are all on the low side makes me think that M&T should be rated a “C-” not a “B-“.

By contrast, check out the profile for ALDEN ST BK. It is rated “B-” just like M&T. But unlike M&T, Alden State Bank deserves its “B-“. If anything it should be rated higher.

You will notice that Alden Street Bank is less profitable then M&T. But you will also notice that Alden State Bank is way better capitalized then M&T. In fact, Alden State can’t get a better rating on capitalization then it has. Looking at the two charts, I suspect that this is the only reason that Alden State Bank is less profitable is that it has less leverage. That is a good thing.

You will also note that Alden State has a lower stabilization rating then M&T. But Alden State stabilization rating is still quite good. Given that M&T has 700+ branches and Alden State has 2 branches I suspect that Alden State’s lower stabilization rating is entirely due to its size. In fact, given how small Alden State is, it is pretty impressive that it manges to come so close to the stabilization rating of M&T.

A more damming comparison is to compare the two banks liquidly ratings. In a crisis, little Alden State will have more cash on hand (relative to its size) to deal with the problem then M&T.

Why is this important? Well look at the Asset quality of both banks and you will see that they both have poor asset quality. This means that both companies are likely to have big problems with people not paying back their loans. This is no surprise since both banks are based in upstate New York (although M&T has branches in other states). You are not going to find a lot of people with good credit up there.

But it looks like Alden State is prepared to face its problems where as M&T is not.

Thus, I think B- is an accurate rating for Alden State. It is the rating that you would expect a small but well run bank in a economically depressed area to have. But it does not seem to me that M&T should have the same rating.

The Triumph of Karl Marx

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In theory, America is nation that believes in a free market. In reality, we just have our own version of socialism. If you make money, Americans believe you be be able to keep it. If you lose money, Americans believe your losses should be shared by everyone.

So we bail out banks. From the Naked Capitalist…..

We had warned a couple of months ago that a colleague with serious connections into the Treasury and Fed told us they were working on plans for a quasi-nationalization of the banking system. Their view was that while banks would technically be solvent, they’d have enough bad credits that they would be unable to extend new loans.

Steve Waldman, in a terrific post at Interfluidity, concludes that nationalization is underway, via the expansion of the Term Auction Facility and Fed’s new 28 day repo program.

Readers may know that there has been a lot of disquiet regarding the negative non-borrowed banking reserves that resulted form the TAF. Bond market mavens, such as commentator Caroline Baum at Bloomberg, dismissed those worries as reflecting a lack of understanding of Fed operations.

I remained troubled, not by the negative non-borrowed reserves figures per se, but by the fact that the Fed was downplaying an operation which was extraordinary. The TAF is a discount window of sorts, but with somewhat longer-term loans and no stigma. Note the TAF accepts the same types of collateral at the same haircuts as the discount windows.

But the discount window is a “break glass in case of emergency” facility. It’s when liquidity is so scarce that banks can’t borrow on normal terms, so they go to the Fed, post collateral, and get dough. The fact that a supposedly temporary operation has become semi-permanent and was increased (it was initially $40 billion, then it was quietly increased to $60 billion) was a troubling sign, yet the Fed acted as if this was business as normal.

We are looking for ways to bail out those who borrowed more money than they could afford to buy a house
From Market Movers…..

Martin Feldstein has a bright idea: allow homeowners to refinance 20% of their mortgage balances with the government, where the new loans amortize over 15 years and reset every two years at the interest rate on 2-year Treasury bonds (currently 1.6%).

Mark Thoma worries that participation won’t be high; I worry rather that participation will be too high

And how do we pay for everyones losses while enabling everyone to keep their gains? We depend on our favorite communist nation to lend us money at cheap rates. From Brad Setser…..

Reuters reports that China’s reserves increased by $61.6b in January alone.

That is a stunning sum. $60b is roughly the size of the US monthly trade deficit. Annualized, the implied increase in China’s reserves tops $700b.

And the real increase in China’s foreign exchange holdings could be even bigger. We don’t know what happened with the banks’ (large) fx position. It could have fallen, increasing the reserves of the central bank. Or it could have increased. My friend Logan Wright told Michael Pettis that China hiked its reserve requirement in January and the banks were required (oops, encouraged) to meet that requirement by holding even more dollars. If Logan is right, the total accumulation of foreign exchange by China’s state then could have topped $80b.

To be precise, the $61.6 increase includes some valuation gains. Strip out the effect of the euro’s January rise, and the “real” increase in China’s reserves was “only” $55b — or about $20b more than can be explained by FDI inflows and China’s January trade surplus. Some of the difference — maybe $6 to $7b — is explained by interest income on China’s existing reserves. Some likely reflects ongoing “hot money” inflow.

A $55b monthly increase works out to an annual increase of around $660b. That is big — but not implausible. In my January paper on China’s foreign asset accumulation I estimated that China’s state added at least $500b and perhaps as much as $600b to its foreign assets in 2007, with much of the increase “hidden” in the state banks. $660b is only a modest acceleration.

The sums involved are so staggering that I suspect that they have lost their ability to shock.

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