I'm Back In The Saddle Again

I have been gone a week, but not much has changed since I have been away. Actually, not much has changed in the last few months. Yes, some stronger banks have repaid their TARP money, but the troubled banks remain so. In fact, one large bank apparently cannot launch its preferred to equity exchange. As the conversion price of the equity is $3.25, the current price of $3.03 could be a problem. Since the exchange was announced in late February, I have had many people ask my when the prices of this bank's preferreds will trade at parity by moving higher price wise. I stated that they will likely never trade at parity and that any convergence could come in the way of the equity price moving lower. This is exactly what has happened.

I have also warned that the high yield market may have risen too far, too fast. Barron's warns of this this weekend. I have also opined that although I think that, in the long-term, interest rates on the long end of the yield curve will move higher, the gain will likely be modest (and may be yet occur) because of factors such as the activities of our foreign trading partners. Very storng treasury auctions bear this out.

I have been critical of the PPIP (and the benefits of modifying mark to market). Most bank toxicity lies in the form of loans which are not marked to market any way. Because of this banks have not marked down their values much or at all. If they were to do so, some banks (those which have not repaid TARP) could be devastated. The PPIP would require banks to sell loan assets to private investors using cheap government leverage at prices below 100 cents on the dollar. Most banks won't and some cannot do this lest they risk another bank run.

Are their green shoots? Not really. Just as boom economies overshoot to the positive, bust economies overshoot to the negative. All we are experiencing is the economy settling. It could be settling into a new paradigm. One which requires borrowers to prove their creditworthiness. Now there is a novel idea. Now if Congress would only understand (or admit to) why lending will remain muted versus the housing boom and why that is a good thing in the long run.