Forte Financial Blog

Bankers More Pessimisstic than Businesses (American Banker)

In conjuction with its Executive Forum, American Banker (subscription required) reports on two research studies conducted during the second quarter by Greenwich Associates indicating that bankers are more pessimistic than their business customers about the economy.

Courtesy of American Banker:

Economic Outlook

Borrowing:

Learn more:

Executive Forum 2Q '08
Bankers, Clients Views on Cycle Diverge
American Banker (subscription required)
Thursday, July 10, 2008
By Gary R. Crum

Jamie Dimon on Charlie Rose (video)

This is really interesting - filmed last week in Aspen, aired on Charlie Rose Monday and continued on Tuesday.

Jamie Dimon on Charlie Rose (Monday July 7)

Jamie Dimon on Charlie Rose - continued; starts 43 min into the episode (Tuesday, July 8)

Recovery? What Recovery? (The Economist)

Doom and gloom over at The Economist:

If the theme of last year was turmoil in financial services, then 2008 could be the year when financial stress goes on to harm the economy. And it is not too fanciful to imagine a vicious circle: as the economic downturn causes more financial pain, so confidence will crumble further.

Recovery? What recovery?
Jun 5th 2008
From The Economist print edition

Managing Cash in Tough Times / Receivables Strategies

The June CFO Magazine advises corporate treasurers on how to manage cash during difficult times. One specific suggestion is to keep a close eye on receivables:

Encourage quicker payment of accounts receivables by (1) not compensating salespeople until an order is paid for, (2) calling overdue customers when a bill is one day overdue rather than seven days overdue, and (3) using stop shipments with customers who haven't paid.

Yet most A/R departments are struggling to identify what their customers are paying for (because most payments and remittance information remain stubbornly paper based, e.g. checks and printed lists of invoices, deductions, etc.) and have arduous, manual processes to apply payments to their customers accounts. Thus the availability of A/R data is often delayed, making the data difficult to act upon in a timely manner. Many of the companies I know would gladly take the steps recommended in the article, if they could be certain that they had applied their customers payments in a timely manner and weren't calling  to seek payment or cutting off shipments while payment was stacked on an A/R clerk's desk. (Tying sales compensation to paid orders is one surefire way to get funding to revamp AR technology!)

The economic downturn will make these shortcomings painfully clear as corporate finance grapples with the painfully slow receivables process (and the data trapped within it). Perhaps the liquidity crisis is just what is needed to motivate more companies to consider electronic payment.

Economist Special Report on the Future of Banking

I was so preoccupied with NACHA Payments 2008 that I almost missed this special report from The Economist on the future of banking. The emphasis is investment banking and the credit crisis, rather than payments, but it is very interesting nonetheless.

[excerpt from The Economist, emphasis mine:]

Modern finance is under attack. Yet the banking system has done much better than it is given credit for

BANKS have endured a brutal nine months since credit markets froze in August. Losses and write-downs already total $335 billion; many of their best businesses have disappeared. In developed economies, almost all banks are facing economic and regulatory headwinds that will cut revenues and jobs. Yet the biggest danger facing Western finance is not a fall in its earning power but a loss of faith in how it works.

Read more in the The Economist special report on banking:

• Banking's crisis
• Securitisation and its flaws
• Managing risk
• Accounting standards
• Paying the banker
• Banking management
• Regulators and the cycle
• Spain's better way
• The future of banking
• The next crisis
• Audio interview

SF Fed Reserve President Yellen on Credit, Housing, Commodities, and the Economy

SF Federal Reserve President & CEO Janet Yellen addressed the CFA Annual Conference in Vancouver today. Her remarks addressed credit, housing, commodities, and her economic outlook.

Excerpt (emphasis mine):

Financial Markets and the Credit Crunch

[...]

This benign view [of underlying risks] may well have been linked, in part, to rapid transformations taking place in our financial system. Securitization and financial engineering fundamentally changed financial markets in a relatively short period of time, appearing to make it possible to slice and dice and spread risk more effectively—indeed, it appeared that these innovations had made the usual terms of the risk-return tradeoff more favorable.[2] The surge in lending occurred as securitization promulgated the originate-to-distribute business model—that is, underlying loans were securitized and sold to investors. Notably, the main compensation of many participants in the securitization chain came in the form of upfront origination fees. Without the strong incentives to maintain underwriting standards that exist when originating institutions keep loans on their own books, the credit quality of many of the securitized loans deteriorated significantly. Subprime mortgages are a good example, as combined loan-to-value ratios and the percentage of low- or “no-doc” loans rose steadily through 2006. And, in any case, even subprime mortgages looked like a good bet, with house prices seeming to be on an ever-upward march.              

Furthermore, with the economy booming, investors, including highly leveraged investment banks, hedge funds, and SIVs (structured investment vehicles)—the so-called “shadow banking sector”—were actively seeking projects to finance and willing to increase their leverage. With interest rates so low, they were motivated to reach for higher yields on these projects.[3] Many investors found reassurance in getting involved in many of these complex securities by relying on the evaluations given by rating agencies. Unfortunately, these ratings turned out not to be very reliable.              

So long as house prices kept soaring, as they did until a couple of years ago, these credit problems did not show up. But once house prices flattened out and then began to fall, it became clear that delinquencies and foreclosures on subprime and other mortgages would be far higher than had been anticipated. This arguably was the trigger of a far broader reappraisal of credit market risks and attitudes.              

Clearly, the market discipline that “sophisticated investors” are supposed to provide was lacking. As we saw, even some of the largest, most sophisticated financial institutions inadequately incorporated into their risk-management models the full range of hazards entailed in the originate-to-distribute business and the liquidity risks that would result from a drying up of short-term funding. Also lacking were reliable ratings from the agencies. But financial supervisors and regulators, including the Federal Reserve, were behind the curve, as well. We missed some of the risky developments that were unfolding. Our consumer regulations were unfortunately insufficient to protect households from some egregious and unfair lending practices. And we took too long to ramp up some supervisory policies in the face of mounting risks. On a broader level, the situation exposed holes in the existing regulatory framework for financial services, which allowed some risky activities to flourish, hurting both consumers and financial stability. Significantly, the Fed was compelled to open the discount window to investment banks because of the outsized risks some took and their significant interconnectedness with the financial market infrastructure. Investment banks thus were able to operate with less capital and supervision than such access otherwise entails.

... there is much more.
             

Read transcript here
Download PDF with charts here

Economists Agree: It's going to get worse before it gets better.

It's rare that economists agree with one another, but these are historic times and a lot of unusual things are happening.

The WSJ's latest economic forecast survey indicates that, by a 3-to-1 margin, economists agree that we're in a recession. They also agree that we've yet to hit bottom:

 

In addition to forecasting GDP, inflation, unemployment, interest rates, and housing, the economists were asked to grade Bernanke (he got a C+), assess the Fed's handling of Bear Sterns (80% approval),  when home prices will hit bottom (1st half 2009), inflation risk (moderate), and the biggest downside risk to their forecast (further deterioration of the credit markets).

More at the Wall Street Journal:

• Charts & Data (cool interactive features)
• Article

Funny: Market Madness Fed Rate Cut Bracket

from the St. Louis Post Dispatch, via What I learned Today

Meanwhile, up on Capital Hill the regulators were busy defending their actions, receiving coverage everywhere:

• CNBC Video: Financial All Stars on Capital Hill
• Wall Street Journal
• Bloomberg
• The New York Times
• American Banker

Leveraged Planet - Wall Street's Reluctant Globalization [NYTimes Special Feature]

The New York Times DealBook blog has a special section on globalization & Wall Street:

Wall Street's fate is increasingly linked to far-off locales, whether they be bustling financial hubs like Dubai or emerging markets like Kazakhstan. In some cases, the link is more like a lifeline, such as when foreign money emerged to help shore up big-name financial firms in the United States and Europe.

Select articles (there are many more):

Leveraged Planet:  argues that, although Wall Street makes a show of thinking globally, when it comes to opening up its secret society to foreigners, doing so is often still an afterthought.

Follow the Money: Sovereign wealth funds have emerged in recent months as the world’s power brokers. They have used their tremendous wealth to make big cross-border investments and prop up some of Wall Street’s best-known firms.

See also To Court or Shun the Wealth of Nations a piece exploring the contradicting messages our government sends to Sovereign wealth investors.

The Fine Art of Deal-Making Gathers Dust: The market for mergers and acquisitions is in the doldrums. And according to many deal professionals, that won’t change anytime soon.

The Restructuring Pros Are Back in Business: For restructuring experts, recess is over. Many had found themselves sidelined during the recent buyout boom: cheap and plentiful debt led to some of the lowest default rates in recent memory. But that easy financing has evaporated, roiling the credit markets and shaking up companies as big as Bear Stearns.

Read more:

The New York Times' DealBook blog
Special Section Spring 2008

Corporate Collections Suffer as Economy Worsens

Today the National Association of Credit Management released its monthly Credit Manager's Index. For the first time since the index was calculated in February 2002 the combined manufacturing and services index has fallen below 50, indicating an economic contraction.

[Excerpt from CFO.com] accounts receivable departments have been feeling a major crunch. Credit managers told The National Association of Credit Management (NACM), which conducts the monthly survey, that they've had to send out more late-notice letters to clients, while others report customers asking for more time to pay. "Collecting receivables is becoming more and more difficult," a furniture vendor said. Added a grocer supplier, "Customers just don't want to pay current bills."

Credit Managers Index for the last 12 Months:

As companies struggle to collect cash, pressure to maintain working capital increases just as recent market gyrations and more caution among lenders restricts the availability of credit.

More info

• CFO.com article "It's Getting Much Harder to Receive"
• National Association of Credit Management March 2008 CMI Report (PDF)

Confused by the Credit Crisis? You aren't alone.

In Wednesday's New York Times David Leonhardt attempts to explain in lay terms how trouble with sub-prime mortgages have had such a dire impact on banks and the financial markets. And he attempts to reassure readers that they shouldn't feel bad if they are confused, because there are many seasoned bankers, regulators, and economists who are also confounded. That piece of information is not very comforting!

Read the article:

Can’t Grasp Credit Crisis? Join the Club
By DAVID LEONHARDT
The New York Times
Published: March 19, 2008

A history of bailouts and financial market rescue at JP Morgan

CFO.com provides historical context for JPMorgan Chase & Co's intervention to rescue Bear Sterns:

When J.P. Morgan Chase & Co. swooped in to save Bear Stearns from collapse on Sunday, it was not the first time the big bank had embarked on such a rescue mission. Taking on a balance sheet laden with toxic mortgage securities for $2 a share was bold but in keeping with the tradition of the firm founded in 1861 by the John Pierpont Morgan. After all, the bank has made a habit of bringing a dose of calm during a financial panic, while often managing to make money out of dire predicaments.

"The early House of Morgan was something between a central bank and a private bank," writes Ron Chernow in The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance. "It stopped panics, saved the gold standard, rescued New York City three times, and arbitrated financial disputes."

Time will tell whether this particular deal is a profitable one for JPMorgan Chase.  According to Andrew Ross Sorkin at the NYTimes DealBook: "It will go down either as a heroic rescue of the financial system or grand theft, Wall Street style. Maybe it was a bit of both. Make no mistake: this was one of the greatest corporate euthanizations of all time. And Wall Street played its own gleeful role in it." 

The front page of today's Wall Street Journal has a day by day narrative of the demise of Bear Sterns and there is a cool timeline of market indicators here.

Learn more:

• CFO.com article JP Morgan Returns to its Rescue Roots
• JPMorgan Chase (the bank)
• JP Morgan (the man)
• NYTimes DealBook 03/18/2008
• WSJ complete coverage of Bear Sterns Demise
• WSJ Timeline of a Crisis

The Semantics of Crisis: "Decidedly Wobbly"

This morning, the usually staid financial press have got their thesaurus out - how many different ways can you say "historic"?

"sank" "slipped" "decreased" "fell" "slid" and "slumped" all in one paragraph!

The S&P 500 sank 21.08, or 1.6 percent, to 1,267.06 at 12:59 p.m. in New York. The Dow average slipped 85.08, or 0.7 percent, to 11,866.01. The Nasdaq Composite Index decreased 40.23, or 1.8 percent, to 2,172.26. More than four stocks fell for every one that rose on the New York Stock Exchange. Europe's benchmark index slid to the lowest since November 2005 and Asian shares slumped for a third day. - Bloomberg

"jittery" and "apprehensive"

Wall Street and Corporate America awoke Monday in a jittery and apprehensive mood to analysis of JPMorgan Chase & Co.'s Sunday news that it is acquiring Bear Stearns Companies Inc. for about $2 per share — as close as it comes to an emergency bailout. - CFO.com

"unprecedented scale of the storm "

The historic nature of the steps the Fed has taken reflects what the central bank sees as the unprecedented scale of the storm now sweeping through the markets and the economy. Starting with rising defaults on subprime mortgages a year ago, the crisis now has caused investors to question the ability of once rock-solid firms to repay loans. - WSJ

"Panic is in the air" (headline) and "financial catstrophe"

Now the Fed has extended its area of operation, where will it stop? Investment banks are not the only parts of the financial system showing the strain. Can the Fed afford to get entwined with hedge funds that are big derivatives counterparties or embattled money-market funds? By ditching its longstanding rule about lending only to commercial banks and extending this facility to investment banks, the Fed is in effect admitting that it faces a different sort of financial system—one in which dealers pose as much of a threat to stability as lenders. The regulatory regime for investment banks may now have to be rethought to make them more resilient to financial catastrophe. - The Economist

"decidedly wobbly" (my personal favorite)

The Fed’s decision to introduce loans to brokers as well as regulated banks marks a significant shift in policy, and raises the question of whether the former should now be subject to more stringent regulation in return. But the Fed’s widening role is a sign of its fears that other pins might fall. Merrill Lynch looks decidedly wobbly. Lehman has lots of toxic mortgage securities on its books. Lehman's shares plunged on Monday morning but it is not the only one facing trouble. All the other big investment banks will be under intense funding pressure in the coming days. And when trading partners start to pull away, a rapid chain reaction can begin. In effect, with Bear Stearns being sold for such a low price, including its valuable office property, the price of the securities portfolio is zero. - The Economist

"extraordinary"

To help facilitate the deal, the Federal Reserve is taking the extraordinary step of providing as much as $30 billion in financing for Bear Stearns's less-liquid assets, such as mortgage securities that the firm has been unable to sell, in what is believed to be the largest Fed advance on record to a single company. - WSJ

And, finally, bonus points to Bloomberg for this one:

"Bernanke Plays `Whac-A-Mole' With Turmoil in Markets"

Bernanke has reached deep into the Fed's toolkit to come up with innovative ways to head off a recession and restore some calm in credit markets. While many have initially been greeted with rallies in stocks, cumulatively they haven't yet had lasting impact on bringing down credit costs and setting the stage for economic recovery.

``The Fed has been playing the equivalent of Whac-A-Mole as financial turmoil keeps cropping up in new and unexpected places,'' says former Fed Vice Chairman Alan Blinder, referring to the arcade game where players try to hammer down plastic critters that randomly pop out of holes. ``Yet many of the problems facing us are beyond its reach.''

Latest CFO Outlook: Gloomy

CFO Magazine and Duke University recently concluded their latest quarterly Global Business Outlook survey of more than 1,000 CFOs of private and public companies worldwide. The global CFOs anticipate that inflation will rise to 3% this year and nearly 90% believe the economy will not rebound until 2009.

Here are the "lowlights" from CFO.com

• Fifty-four percent say the United States is now in recession.
• Optimism reached its lowest point since the study launched its optimism index six years ago. Pessimists outnumber optimists by a nine-to-one margin, with 72 percent of finance chiefs more pessimistic than about the U.S. economy they were last quarter. Just 8 percent more optimistic.
• Weak consumer demand and turmoil in the credit and housing markets are the top macro-concerns of top finance executives. The high cost of labor ranked as the top internal concern.
• Credit conditions have directly hurt 35 percent of companies through decreased availability of credit and higher interest rates (up 118 basis points on average). Sixty percent of the companies have put off expansion plans in response to credit market unrest.
• The CFOs expect capital spending to increase only 3.3 percent, while price inflation  rises 3 percent over the next 12 months.
• Only 13 percent think the U.S. economy will hit bottom and begin to rebound in 2008. Another 40 percent say the rebound will occur in the first half of 2009, while 47 percent feel recovery is more than 15 months off.

Darkness Visible: CFOs See Recession Through 2009
David M. Katz
CFO.com | US
March 12, 2008

Detailed results here.

Ouch!

US Recession fears caused markets to tumble world wide today as US markets were closed in honor of MLK. Futures contracts anticipate sharp losses when the US re-opens tomorrow.

(graphic courtesy of WSJ.com)

Read more:

• Wall Street Journal
• New York Times
• Bloomberg
• The Economist

What's Bernanke to do?

Sunday's NYTimes Magazine asks what's a Federal Reserve chief to do when banks won't lend money, oil has reached $100 a barrel and unemployment is up. It's a well reasoned, long discussion that comes out more favorable than not. Highly recommended.

Sunday New York Times Magazine

The Education of Ben Bernanke

By ROGER LOWENSTEIN

Published: January 20, 2008

Added bonus: an informative, graphical history of the Federal Reserve

Economic Blues

Per The Economist: "Whatever your opinion of the health of America’s economy was a couple of days ago, it should now be a lot gloomier."

read more

Fed Retreat: "Very Serious" and "Gloomy"

Bloomberg news reports attendees of the Federal Reserve summer retreat in Jackson Hole are feeling pessimistic. Academics and policy makers attended the symposium where the timely topic was housing and monetary policy. At least one attendee expected that their peers would bolster his outlook - in fact the opposite was true.

``I rather expected that I would come out and find that people weren't quite as gloomy as I was, and I didn't find that,'' said former Fed Governor Lyle Gramley, now a senior economic adviser at Stanford Group Co. in Washington. ``So it confirmed my own concerns about the economy.''

Read more:

Bernanke's Pledge Fails to Dispel Pessimism at Jackson Retreat
By John Fraher and Scott Lanman
Bloomberg News
Last Updated: September 3, 2007 00:01 EDT