Nothing’s guaranteed
No one talks about green shoots any more, they just assume that the worst is behind them. Assumptions are always dangerous, all the more so when billions are involved: just ask the RBS shareholders that hoped that they were getting a good deal when the bank, which had acquired ABN AMRO for $100 billion at the top of the market, asked them for more money. Or the Bank of America shareholders, who many people—including the New York attorney general Andrew Cuomo—believe were denied knowledge of Merrill Lynch’s billion-dollar losses (and guaranteed bonus billions) when they were asked to approve the acquisition of the investment bank famed for its “thundering herd.”
Trillions of dollars need to be raised over the next three years as stricter definitions of Tier I capital push banks to raise new funds. This is going to affect banks all over the world, but it is going to hit the under-capitalised Japanese banks—among the world’s largest by assets—the hardest in Asia. And as government guarantees fall away—Australia and New Zealand are already ending their large deposit and wholesale funding guarantees, while TARP is scheduled to expire on October 3rd—a lot more is going to need to be taken on trust, as well as the assumption that green shoots have taken hold. But how much should banking be about trust and how much should it be about full, transparent access to information?
The game is moving out of the upper strata of power: governments, which took charge in the dark days of 2008, will probably be struggling to guarantee themselves as their deficits take off like another breed of thundering herd. Banks need to come up with the goods on their own now, and without capital they’re as effective as banana smoothie stands that can’t afford bananas.
It’s not just about capital any more, it’s about business models and staying afloat. And even as pundits and politicians weigh in on the concept of “reward”, it’s all to apparent that there is still only a poor understanding of “risk” in banking: most recently an estimate from the Congressional Oversight Panel for TARP found that stress tests on US banks conducted in 2009 completely overlooked $1.4 trillion in commercial real estate loans that will reach the end of their terms by 2014, much of which is already under water. Estimated business losses: $300 billion.
There are further fears of an asset bubble across Asia, and then there’s that other problem: China. Banks in that country have been given capital injections and could easily get them again, but what’s the point of having a commercially run banking system if moral hazard is never paid more than lip service? And like RBS in 2007, how many banks that are getting ready to turn to shareholders today will be turning to the government tomorrow?
