Author Topic: Are big banks value traps ?  (Read 38053 times)

Spekulatius

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Re: Are big banks value traps ?
« Reply #150 on: May 15, 2020, 08:37:36 PM »
Despite Trump’s tweet asking for negative rates, it seems that the Fed itself is against them. both Powell and the head of the St Louis Fes strongly suggested such. In this case, I would go with what the Fed stated not Trump‘s tweet and that would actually take some tail risk for the banks off the table.
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Spekulatius

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Re: Are big banks value traps ?
« Reply #152 on: May 16, 2020, 04:58:20 AM »
Financial stability report from the Fed. It’s seems like the banks are Ok for now. Issues to worry about is commercial real estate and life insurers. I haven’t seen any report before indicating increased leverage and crappy assets with life insurers. interesting.

https://www.federalreserve.gov/publications/files/financial-stability-report-20200515.pdf
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meiroy

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Re: Are big banks value traps ?
« Reply #153 on: May 16, 2020, 05:09:43 AM »
"Leverage in the financial sector. Before the pandemic, the largest U.S. banks were strongly
capitalized, and leverage at broker-dealers was low; by contrast, measures of leverage at
life insurance companies and hedge funds were at the higher ends of their ranges over the
past decade. To date, banks have been able to meet surging demand for draws on credit
lines while also building loan loss reserves to absorb higher expected defaults. Brokerdealers struggled to provide intermediation services during the acute period of financial
stress. At least some hedge funds appear to have been severely affected by the large asset
price declines and increased volatility in February and March, reportedly contributing
to market dislocations. All told, the prospect for losses at financial institutions to create
pressures over the medium term appears elevated."

"The vulnerability stemming from elevated CRE valuation pressures, coupled with a dim
outlook for the sector as indicated by recent declines in equity real estate investment trust
(REIT) prices, suggests that CRE may undergo a substantial repricing in response to disruptions generated by the COVID-19 pandemic. For instance, since late February, the hospitality and retail sectors have experienced precipitous declines in demand because of social
distancing, putting the ability of these sectors to make timely mortgage and rental payments
into question. The non-agency commercial mortgage-backed securities (CMBS) market,
which had previously been funding about one-fifth of CRE mortgage debt, stopped new
securitizations toward the end of March. CRE loans that would normally be securitized have
been accumulating on bank balance sheets. In addition, data from the April 2020 Senior
Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) indicated that a major
fraction of banks reported weaker demand for CRE loans and tighter lending standards, on
net, in the first quarter of 2020 (figure 1-15)."


At the end of 2019, loss-absorbing capacity in the banking sector was at historically high
levels.
This strength permitted banks to absorb the increased credit provisions and draws on
credit lines associated with the onset of the pandemic. Tangible capital at large banks—a
measure of bank equity that excludes items such as goodwill—changed little in 2019,
and regulatory capital ratios stayed well above their required minimum levels (figures 3-1
and 3-2). The Federal Reserve is currently conducting its 2020 stress test and conducting
additional assessments of banks’ resilience to the unprecedented economic shock caused
by COVID-19.

(2019 4Q) Leverage measured at life insurance companies using generally accepted accounting principles rose to post-2008 highs (figure 3-6). Moreover, the capitalization of the life insurance  sector is likely to deteriorate in coming quarters
because of lower-than-expected asset valuations and lower long-term interest rates. Insurance companies are also important investors in CRE, corporate bonds, and CLOs, exposing
them to risks stemming from sharp drops in asset prices, elevated issuer leverage, potentially rising defaults in the corporate sector, and funding illiquidity risks.

That was a good read. Thanks Spekulatius.
« Last Edit: May 16, 2020, 05:26:08 AM by meiroy »

rb

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Re: Are big banks value traps ?
« Reply #154 on: May 16, 2020, 06:15:26 AM »
(2019 4Q) Leverage measured at life insurance companies using generally accepted accounting principles rose to post-2008 highs (figure 3-6). Moreover, the capitalization of the life insurance  sector is likely to deteriorate in coming quarters
because of lower-than-expected asset valuations and lower long-term interest rates. Insurance companies are also important investors in CRE, corporate bonds, and CLOs, exposing
them to risks stemming from sharp drops in asset prices, elevated issuer leverage, potentially rising defaults in the corporate sector, and funding illiquidity risks.
So it looks like the LifeCos are holding the bag of shit this time around.

thepupil

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Re: Are big banks value traps ?
« Reply #155 on: May 16, 2020, 07:01:22 AM »
http://baunefinancial.nm.com/files/78464/power_of_portfolio.pdf

Not sure how representative of the industry they are but Northwestern Mutual has nice and pretty brochure’s about their portfolio to get a feel for what life insurance co’s own and what their ultimate problem is (falling yields, which pushes them out the risk curve). Ultimately the majority of assets are IG bonds (but there’s lots of CRE mortgage exposure, though I would guess most probably attaches at 40-50% LTV). I am not sure how say losing 50% on a PE vintage or two that might be 1% of the general account or a similar percent on HY/CLO’s/levered RE would impact their position. For example, IG spreads have blown out, preserving all-in yields, which might help them preserve overall portfolio yield while taking some hits elsewhere (though I would expect some IG defaults too, so it’s very uncertain.

Anecdotally, my friend works for them and is doing increased business; people are seeking the stability /illiquidity of life insurance as they watch the stock rollercoaster.

I also think the Fed report does a good job of highlighting the size of the CRE market. With all this talk of “everyone’s moving out of apartments, not going to the office or mall ever again”, the fact that CRE is a $20 trillion asset class and far bigger than leveraged loans or HY should really make one think about the ramifications of all that. Working remotely forever and not going into the office will destroy banks, insurers, municipal governments that are highly  dependent on property taxes (all of them), etc.

Just because it is a terrible outcome, does not mean that it can’t happen; but a commercial real estate collapse is not REIT bag holders problem; it is society’s problem. The REIT market is like 2-5% of the large cap indices, but the CRE market is $20 trillion and comprises large portions of bank/insurance balance sheets. For perspective, crappy credit (leveraged loans and junk) is $2.4 trillion and the stock market is $38 trillion. This may seem a leap, but the stress in CRE is one of the reasons I can’t understand growth tech valuations; if you think that we’re going to see a bunch of banks/insurers/pensions/municipalities fail because of declining CRE and property taxes, and the populace is going to sit there and watch tech pay between 0% and 20% tax rates and enjoy several (beneficial and perfectly legal in my view) monopolies, I think that’s mistaken. The destruction that comes with what’s conteplated will be pervasive and all encompassing. Corporate earnings power will be assaulted, as will that of the wealthy: increased regulation, increased labor friendliness, increased corporate and individual taxes.

In some ways, we are all long offices and retail and apartments, even if you don’t own my shitty REITs or big banks
« Last Edit: May 16, 2020, 08:04:14 AM by thepupil »

thepupil

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Re: Are big banks value traps ?
« Reply #156 on: May 16, 2020, 07:30:11 AM »
In other news, in an example of the fake vol suppression that accompanies illiquid investments; the TIAA real estate account, which owns low leverage “core” real estate, some cash, and REITs, including 37% office and 20% retail IS FLAT year to date. TIAA’s general account guarantees liquidity to people who own QREARX.

This happened in ‘08 too, allowing saavy non profit workers to punch out and buy risk assets (or go to cash) at fake marks.

If anyone knows a teacher or professor or cop or whatever that might be long this, I suggest you get in touch with them and explain that a fund that is 57% office and retail should not be flat year to date and strongly recommend they sell (either to replace with REITs or hide out in something else that isn't so mismarked).

https://fluenttech.tiaa.org/pdf/factsheet/878094200.pdf

Check out the two largest investments, malls held alongside BPY and SPG.

Flat year to date, hah!

Fashion Show Mall: Fashion Show is held in a joint venture with Brookfield Property Partners LP, in which the Account holds 50% interest, and is presented gross of debt. As of March 31, 2020, this debt had a fair value of $417.9 million

Florida Mall: The Florida Mall is held in a joint venture with Simon Property Group, L.P., in which the Account holds a 50% interest, and is presented gross of debt. As of March 31, 2020, this debt had a fair value of $155.8 million.
« Last Edit: May 16, 2020, 07:56:11 AM by thepupil »

Spekulatius

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Re: Are big banks value traps ?
« Reply #157 on: May 16, 2020, 06:13:36 PM »
CRE seems to be an Achilles heel of the financial system. The report mentioned  low cap rates to start and now with COVID-19 the fundamentals have weakened substantially too. With a $20 trillion, the Fed May find It difficult to nail out the entire sector. We have seen the reaction of Public equity Reit already and it was swift and significant. If now the private market follows to the same extend, we will see a lot of naked bodies on the beach.
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meiroy

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Re: Are big banks value traps ?
« Reply #158 on: May 17, 2020, 09:09:15 PM »
https://www.cbsnews.com/news/full-transcript-fed-chair-jerome-powell-60-minutes-interview-economic-recovery-from-coronavirus-pandemic/

PELLEY: Are the banks sound?

POWELL: So after the last financial crisis, the banks more than doubled their capital and liquidity and they're far more aware and better at managing the risks they're taking. They're so much stronger than they were before the financial crisis, the last financial crisis. In fact, they were right at the heart of that. They were a key mechanism for amplifying bad things that happened. That's not the case at all now. They've been strong. They've done all the things you would hope they would do. Companies have pulled down their lines of credit. They've funded those. There's -- much more cash has flooded into the banking system as people have sold risky assets. And the banks have absorbed all of that. So the banks have been strong so far.

PELLEY: And for people who wonder whether they should take their money out of the bank and put it in a mattress, you tell them what?

POWELL: There's no need to do that. No need at all. The banks have been strong, they've been fine. There's absolutely no need to do that.




« Last Edit: May 18, 2020, 04:28:51 AM by meiroy »

LC

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Re: Are big banks value traps ?
« Reply #159 on: May 17, 2020, 09:23:59 PM »
From a financial systems point of view - this crisis has been managed very well. Powell is correct about that. People that dismiss all regulation should wonder where we would be now without 10 years of strict federal oversight and regulatory requirements on the large banks. And as another poster mentioned - capital returns to shareholders over that period have been very generous.

My guess going forward: All banks probably do fine on the April stress tests. Further tests will be done with revised stress forecasts above the SA and BHC stress scenarios, and increased monitoring will also be performed over the banks's portfolios. Not sure how much more incremental capital will need to be raised but I assume capital team & FRB will make those decisions probably around July.
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