Wednesday, February 25, 2009

A Letter From A TARP Recipient To The Government

Banks have received billions of dollars from the government as part of the Capital Purchase Program (CPP) of the Troubled Asset Relief Plan (TARP) set up by the Bush Administration. Here is the letter they would love to send to Congress.

Dear Congress,

Thank you very much for the capital last Fall, but there are some things that we need to explain to you.

Most of us didn't need the capital, but took it because you browbeat us into accepting it, or we were so scared that we felt we had no choice.

Please stop calling it a "bailout." It was not a bailout, because you received something of value in return for your investment. The security you received pays you a healthy dividend, and it came with warrants to purchase our stock. Although most of the warrants are out of the money because of the panic in the market, investing is a long term game, and it is possible that five years from now, you will find that in the aggregate you made a great investment in the financial system. Also, remember that every single one of us that took capital from you is current on dividend payments.

We understand you are angry because of the losses we are taking currently, but quite honestly, and with all respect, you have run up a $10.8 trillion dollar loss in the country's finances since the late 1700's, and maybe you should take care of that before you criticize us for our considerably smaller losses.

You are a stakeholder in our bank now, but nothing more, so stop telling us not to play golf with our clients, or to stop sending our most productive employees on weekend trips when they make money for our firm. Normally, we don't put up with this much abuse from our preferred shareholders, but we cut you some slack due to your inexperience with capital markets.

Please stop hauling us in front of various Congressional committees to generate sound bites to display to your constituents back home. I would think you have enough of these already, and we have lots of work to do to get through this credit cycle.

Thank you, and please contact investor relations like all other shareholders if you have any further questions.



Tuesday, February 24, 2009

The Cognitive Distortions Of Chicken Little

I was listening to CNBC, and they just reported that the sky is falling. Oh my God!! Look out below.

The Financial Media is deepening and prolonging the recession by engaging in a series of what a professional would call cognitive distortions. The first of these is called Catastrophizing. This is defined as believing that a situation is much worse than it really is. Here's an example of Catastrophizing. A large bank reports a huge loss due to a unrealized loss in its securities portfolio, and deteriorating loan asset quality leading to higher charge offs and loan loss reserves. Then a talking head, or one of the anchors on CNBC says something like this:

"The entire Banking System is insolvent."

Well actually, no it's not. There are thousands of Banks in this country and just because Citigroup thought they could "ride the worm," if I may be allowed to quote from Dune, doesn't mean that every other banker did.

This Catastrophizing is closely related to Magnification, or the tendency to put a stronger emphasis on negative events and ignoring the the positive events.

So what are the causes of these cognitive distortions? There are many possibilities:

1) The media is so immersed in the flow of information and the negative effect of the markets that all they can see are the problems. This "wall of bad news" leads to the distortions listed above. The media was guilty of this in reverse when the markets were heading up. Can anyone remember an anchor actually challenging the Energy Bulls with tough questions two years ago, or were you as annoyed as I was that they were treated as God like investors incapable of error?

2) They are easily manipulated by large institutional investors who have their own agendas to advocate. Have you considered that the commentators who are pushing Nationalization are short the Banks, and their souls are not as pure as they seem?

Monday, February 23, 2009

Some Good News Lost In All The Doom And Gloom

The sentiment is obviously terrible out there for the market and the economy, so it is important to highlight some data that didn't get that much play because most pundits are too busy predicting when the sky will fall and who it will fall on.

The Conference Board reported that its Index of Leading Economic Indicators rose 0.4% in January. This is the second month in a row that it increased. Five of the ten components in the index were up.

And no...I am not saying everything is great in the economy, but the world is not coming to an end like the blogosphere seems to be saying. This is not Imperial Rome, and there is not a Barbarian army camped outside our walls waiting to sack us.

Capitalism is cyclical. Get used to it.

Saturday, February 21, 2009

The White House Fires Back Against Rick Santelli

The Rick Santelli "Rant of the Year" is now legendary in the investment blog world so I won't waste any time discussing it. The clip is below:

What is less well known is the response from the Obama Administration by Robert Gibbs, the Press Secretary. The clip is below. The Gibbs part starts about 20 seconds in.

"I also think it’s extremely important for people who rant on cable television to be responsible and understand what they’re talking about," he said. "I feel assured that Mr. Santelli doesn’t understand what he’s talking about."

Friday, February 13, 2009

Beating A Dead Horse

This won't come as news to anyone, but here is another depressing chart on the economy from the Dallas Federal Reserve:

"Over the three months ending in December, the Texas Leading Index experienced its sharpest decline since its inception in January 1981 (Chart 1). All eight of the indicators gave negative signals, with the steepest drops coming from the increase in the Texas export-weighted value of the dollar and declines in the stock index of Texas-based companies. In addition, the Texas Business-Cycle Index was revised downward, indicating Texas likely entered a recession sometime in the second half of 2008."

Full report is here.

Tuesday, February 3, 2009

What Is The Real Story With The Senior Loan Officer Opinion Survey

The Senior Loan Officer Opinion Survey on Bank Lending Practices for January 2009 was just released by the Federal Reserve. The universal headline from most media outlets ran something like this - "Banks Continue To Restrict Lending."

While this is technically correct, there is some interesting data in the release. The survey asks 25 questions to domestic lenders, many of which are multi part, and then another series of questions to foreign banks with domestic locations.

1) The fraction of banks that are tightening lending standards overall actually declined from October 2008.

"Relative to the October survey, these net fractions generally edged down slightly or remained unchanged."

The level is still "elevated" however.

2) The fraction of banks that are tightening lending standards for Commercial Real Estate also declined from October 2008.

"80 percent of domestic banks reported that they had tightened their lending standards on commercial real estate (CRE) loans over the past three months, slightly less than the roughly 85 percent that reported doing so in the October survey."

Once again, still elevated.

3) The fraction of banks tightening standards on Home Equity Loans also fell from the last survey.

"About 60 percent of domestic respondents, down from 75 percent in the October survey, noted that they had tightened their lending standards for approving applications for revolving home equity lines of credit (HELOCs) over the past three months."

I'm not saying everything is going great out there. So what's the point of all this? Don't believe everything you read. It wasn't that long ago that we were being told that Oil prices were never going to go down, and that Fannie Mae and Freddie Mac were the greatest companies in the world.

Go to the original source and draw your own conclusions. The sky is not falling and the world is not coming to an end, although that seems to be the general consensus out there.