Banking Stress Moves Dollar and Yen
by Hiland Doolittle
Treasury Secretary Timothy Geithner’s stress tests were created to determine the capital needs of the big banks and especially the needs of the country’s 19 biggest banks. Many of these banks are weary of federal intervention and the accompanying public scrutiny. Banks like Wells Fargo and recession powerhouse Goldman Sachs want the fed out of the boardroom and back on the street.
Now that the federal government has done their homework, the government wants to tighten the reins, assess the situation, set a course of action and let the taxpayers and Congress know what is in store. Goldman and Well Fargo have posted profitable first quarters and have used those returns to display their ability to raise money to repay their TARP funds.
Most economists and government officials interpret the results differently and point to stressed assets, elitist compensation practices and questionable accounting to bolster the bank’s fiscal appearance. The bank bailout plan has tied the hands of the game’s biggest players and now those top guns want to put some distance between themselves, the government and the competition.
Goldman Sachs Group, Inc. has bounced back nicely since big November losses. The bank has had some help. The company has only posted one losing quarter. Altering the bank’s fiscal year gave the venerable institution the unique ability to set December alone as a one-time, stand-alone one-month report. Goldman used the opportunity to report more than a $1 billion dollar loss. With the decks cleared, Goldman was able to post a $1.66 billion first quarter gain. Meanwhile, the stock has more than doubled since hitting November lows.
Government Set to Release Some Stress Data
The well-intentioned stress tests were designed to justify the administration’s next request for taxpayer money. Banking has become the focal point of economic recovery and the administration and public need to know how deep the hole is.
Bank’s fear that the stress tests will reveal toxic assets which they will be pressured to unload at under-valued prices. In Goldman’s case, the bank explained their big profits by their ability to correctly analyze and increase risk. In the future, bank regulators may put unwelcome limits on this type exposure.
Goldman’s compensation policy would certainly come under government and public scrutiny if further TARP funds are needed or if existing TARP funds are not repaid. 951 Goldman employees made more than $1 million in 2008 and 2009 first quarter average wages exceeded $160,000 and represented a wondrous 35% increase from 2008 first quarter wages.
According to the 2006 Census, the average American earned $38,000 per year. If more TARP money goes to Goldman, the pay policy would most certainly raise eyebrows and ire.
While Wells Fargo posted a surprisingly profitable first quarter, the bank’s figures have also fallen into question. The bank had aggressive first quarter mortgage business but carries a heavy load of questionable loans. The profit and loss statement may not be able to shoulder the balance sheet.
In light of these mixed messages, the Obama administration is preparing for an early release of the stress test results. While there remains concern that such revelations may create panic at certain financial institutions, the government cannot afford to have certain banks escape regulation only to return later for more taxpayer help. The government view is to correct all the banking woes now and go forward from there.
Financials and Retail Report Drive Investors to Currency
World markets are edgy. U.S. retail sales slumped 1.1% in March and dampened market expectations. Retail sales had posted gains for the two previous months. American producer prices hit surprising lows as levels recorded the largest year-on-year fall since 1950.
John Lonski of Moody’s responded, “I think this serves as a reminder that the recession is still here and that rising unemployment, declining income as well as a deep plunge in household net worth will adversely affect retail sales indefinitely.” While banking gets a lot of attention, jobless Americans are not spending money and the world is coming to realize it.
The DOW fell 137.63 points, the S & P 500 fell 17.23 points or 2.01% and Nasdaq dropped 27.59 or 1.67% on Tuesday. Overnight Hong Kong closed up 89.46 points and India Sensex jumped 2.3% to 11.214.
Dollar and Yen – Risk Safe Havens
Amidst the turbulence, investors are shedding equities and flocking to currency markets as risk aversion tactics become more pronounced. For the sixth time in the last seven sessions, the yen and the dollar both turned gains on Tuesday.
US Treasury debt prices were boosted by $7.3 billion in purchases from the Federal Reserve as the 10-year Treasury note yielded 2.7918% and the 30-year Treasury was up 32/32 to yield 3.6589%. The dollar index rose 0.22% to 84.796 from 84.614. The dollar slid against the yen to 98.95 from 100.03.
The euro continued to fall ending at $1.3261.
Matthew Strauss of RBC Capital summed up the currency markets declaring, “The currency that most benefited from this return of risk aversion was the yen.” Currency markets remain very active and increased activity is expected until equity markets settle.
About the Author - Hiland Doolittle
Hiland is a professional writer with extensive entrepreneurial experience. He is a graduate of St. George’s School Newport, RI and the State University of New York at Albany where he majored in history. He has been active in the real estate business for 30 years and has founded and sold several businesses.
Hiland currently writes for several financial sites and is a published author of the novel The Last Parade. He has recently completed a manuscript for a children’s book entitled Sami and The Minnow Man.
April 22nd, 2009 at 12:39 am
[...] The stress tests are designed to evaluate each of the country’s biggest 19 banks and the bank’s ability to withstand a continued downturn. A close look at first quarter reports seems to highlight the Treasury’s concerns as regulators are closely examining the quality of bank loans. Reportedly, there is great disparity in qualifying procedures used by the banks to consider loans. [...]