Friday, September 11, 2009

As Subsidies Subside

So here we are on another September 11th.

Today I’m pondering next week’s expected beginning of the removal of government subsidies from the U.S. banking system. The stock market has been showing off its’ new found love for driving up equities regardless of the fact that computed stockholder’s equity numbers are now driven not by top line revenue improvements but by the modeled mathematics of cutting back on expenses. According to the Wall Street Journal, economists buoy about the world getting better. Exactly for whom I’m not quite sure because unemployment benefits are soon to permanently run out on people (and their families) for whom these same economists say no jobs are forthcoming for at least another year. I'm not sure I would advise the President to stand between the pitchfork wielding public and the “Black Swan” academicians with Christmas approaching.

And so into this "theoretically improving" world President Obama is expected to inform Wall Street next week that the one of the government's bank subsidy programs ends in October. The Troubled Loan Guarantee Program (TLGP) is a less well known subsidy vehicle than the Troubled Asset Relief Program (TARP) but it is nevertheless one of the pillars of the rescue plan that was put into place by the combined efforts of the Bush/Obama administrations.

TLGP is another one of those things that never really took off in the way people imagined it would. Like TARP it was meant to encourage banks to continue to lend under extraordinarily stressful conditions. However, we’ve all seen that credit availability dried up anyway because ultimately banks backed away from subprime lending as they collectively de-leveraged and shut down the exposure manufacturing aspects of their business models. So because there was no new lending the opportunities to make use of TLGP by the industry were relatively sparse.

So now here’s where it gets a little interesting.

Over the past year we’ve been tracking the system wide trends in defaults, non-accruals and finally other assets owned by banks and we’ve been seeing continued degradations in net lending assets quality. That means that the business need to eventually take advantage of trouble loan guarantees has been growing not receding. The TLGP concept may have been instituted before it’s time and that time may be still be in the future, probably not that far. One might ask, “are we pondering confiscating subsidy tools just as banks might be on the verge of using them?” And of course the even more fun questions "Why?" and “Is this a good idea?”

Of the 8,800 or so active bank units reporting to the FDIC around 3,500 or so have formally opted-out of the TLGP. Yes there’s a list floating around out there that has double that number but if you look real closely people that list has many banks listed twice, once under its’ FDIC Certificate ID and again under its’ Federal Bank Holding Company identifier. So that means 5,300’ish of the brethren have stayed silent on their intentions. This includes most of the bigger banks by the way. It they all activated under the program the Unites States government could quickly find itself running out of another kind of clunker money pool. TLGP extension by exception means a lot of case-by-case evaluation workload for the FDIC’s staff.

Could you put that in English please Mr. Santiago, "I think it means someone is setting up a high hurdle filter."

To be honest one can argue that banks have had ample time these past months to ponder their business positions and make their plans on how they will steer their way into the second decade of the 21st century. Apparently it’s time to test their mettle and let the forces of competition winnow the winners from the losers. If this is so, making TLGP extensions available only to those with true survivor potential as opposed to keeping the program open for zombies actually has national policy merit … as long as it’s applied objectively that is.

To me this means that the administration may be preparing to send a potentially uncomfortable message to Wall Street that it wants to begin to divert capital away from obsessing on artificially floating up the DJIA and redirect it back into economy building uses of private capital. By making it so that banks will soon need such private capital to survive the anticipated loss scenarios of 2010 it means that only collective and focused investment as a cadent nation of citizens can stave off the further withering of a weakened broader economy. It’s a glitch that changes the where and how the nation’s wealth reserves are to be employed. Pretty gutsy move. Wake up and smell that coffee!

“A déjà vu means they’ve made a change in the matrix.”

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