But BofA isn’t alone. Citigroup kind of got lost in the BofA hubbub today, but it fell nearly as much, down a whopping 16 percent. These are banks with $2 trillion in assets, folks. One-day market moves of 16 percent and 20 percent are enormous for companies of this size, and they’d already been falling sharply in in recent days. Bank of America has lost nearly one-third of its market capitalization in the last three trading sessions, while Citigroup is down a quarter. JPMorgan Chase, also in the $2 trillion TBTF club, fell 9 percent today and is down 15 percent over three sessions.
What’s on their books? That’s the question we’ve wanted to know about our paper-it-over, extend-and-pretend economy for years now. And yet we still don’t know.
Here’s Bloomberg’s Jonathan Weil two weeks ago (note that BofA shares are now at $6.51 a share):
At $9.85 a share, down 26 percent this year, Bank of America finished yesterday with a market capitalization of $99.8 billion. That’s an astonishingly low 49 percent of the company’s $205.6 billion book value, or common shareholder equity, as of June 30. As far as the market is concerned, more than half of the company’s book value is bogus, due to overstated assets, understated liabilities, or some combination of the two.
Now that 49 percent number, “astonishingly low” just two weeks ago, is at 32 percent of book value.
Meantime, five years into its downturn the housing market—the root of this crisis—is still in a shambles with no end in sight.
Watch the bank stocks in the coming days and weeks. They’re signaling that things are not well with the financial system.
The click through on WSJ Twitter: "It is not about yields," said Thomas Roth, executive director in the U.S. government-bond-trading group at Mitsubishi UFJ Securities (USA) Inc. in New York. "People are buying Treasurys because they are afraid to be in anything risky. They will take Treasurys at whatever yield they can get."
Look, in my opinion (I am willing to discuss it), Paul Krugman is tying himself in knots with his emotional reasoning. He obviously needs an involved editor at his NYT blog because he is writing far too much careless text.
Krugman above: [Once again: S&P declared that US debt is no longer a safe investment; yet investors are piling into US debt, not out of it, driving the 10-year interest rate below 2.4%. This amounts to a massive market rejection of S&P’s concerns.]
Paul, you are just not paying attention. You should engage in a careful reading cycle before you offer your opinion. "Piling into" US debt is a comparative judgment, taking into account S&P's action. Which, according to S&P, was not as damning as you suggest.
#1 Posted by Clayton Burns, CJR on Mon 8 Aug 2011 at 09:30 PM
Washington Post: Posted at 08:42 AM ET, 08/08/2011
Don’t call it a recession By Ezra Klein
[This is a conversation that frustrates Ken Rogoff to no end. Rogoff, a Harvard economist, is co-author, with the Peterson Institute’s Carmen Reinhart, of “This Time Is Different: Eight Centuries of Financial Folly.” Their book is perhaps the finest study of financial crises ever published. And when Rogoff hears economists talking about recessions and double-dips, when he sees the markets panic because it just realized we’re not returning to normal anytime soon, he wishes they would have read him more closely.
“The whole mentality of thinking of this as a recession leads to bad forecasts and bad policy,” he says. “It’s just not the right framework.”]
August 6, 2011 Win Together or Lose Together
By THOMAS L. FRIEDMAN, New York Times.
[No one better explains the implications of this than Kenneth Rogoff, a professor of economics at Harvard, who argued in an essay last week for Project Syndicate that we are not in a Great Recession but in a Great (Credit) Contraction: “Why is everyone still referring to the recent financial crisis as the ‘Great Recession?’ ” asked Rogoff. “The phrase ‘Great Recession’ creates the impression that the economy is following the contours of a typical recession, only more severe — something like a really bad cold. ... But the real problem is that the global economy is badly overleveraged, and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation.]
#2 Posted by Clayton Burns, CJR on Mon 8 Aug 2011 at 09:56 PM
LA Times: Treasury bond yields plunge as panicked buyers ignore downgrade
August 8, 2011 | 2:07 pm
[It also helped the Treasury market, of course, that stock prices collapsed worldwide Monday, putting a huge amount of cash in equity sellers’ hands. They had to invest it somewhere fast.]
#3 Posted by Clayton Burns, CJR on Mon 8 Aug 2011 at 10:45 PM
ABC News: Standard & Poor's: Downgrade Backlash Puts Credit Rating Company Under Microscope
[Even as S&P issued new rating downgrades from AAA to AA+ against municipal entities backed by federal leases in Miami, Atlanta and Tacoma, Wash., according to Bloomberg, the Senate Banking Committee was looking at S&P, ABC News has learned.]
Washington Post: How S&P downgraded the government — and itself
By Ezra Klein, Monday, August 8, 3:15 PM
[That said, S&P’s report is a joke. [...]
The original draft of its report included a section in the executive summary laying out the deficit math for the next decade. When that math proved wrong, S&P simply deleted the section. [...]
The original report says that $900 billion in fresh revenues [expiration of Bush tax cuts] would mean net public debt drops from an estimated 93 percent of gross domestic product in 2021 to 87 percent of GDP.
The second version of the report... revises its estimate for America’s baseline debt path down to “74 percent of GDP by the end of 2011 to 79 percent in 2015 and 85 percent by 2021.” ... S&P’s technical correction improved our deficit outlook by more than letting the high-end tax cuts expire...
Similarly, the firm has previously explained that while a $4 trillion deal could have saved the U.S. credit rating, a $2.4 trillion deal — which is what we got — was insufficient to stabilize the debt. But because their original calculations misplaced $2 trillion, the deal and the correction should have added $2.4 trillion plus $2 trillion to our bottom line. [...]
I spoke with Standard & Poor’s about these concerns. The response wasn’t particularly compelling.]
#4 Posted by Clayton Burns, CJR on Tue 9 Aug 2011 at 01:37 AM
This is a remarkably shaky performance by David Beers of S&P on ABC News. Especially on the issue of the S&P mistake. If Beers performs in this way at the Senate Banking Committee, he will get eaten alive.
http://abcnews.go.com/GMA/video/sand-downgrade-blamed-debacle-washington-14253589
#5 Posted by Clayton Burns, CJR on Tue 9 Aug 2011 at 01:54 AM
Bloomberg: Four Ways Congress Can Upgrade Our Credit Rating: Peter Orszag Aug 8, 2011 [...]
[Expect Slow Growth: Second, in the aftermath of the recent recession, we can expect sluggish economic activity for years, not quarters, and we face the risk of another recession. Those who in January were predicting growth of 4 percent or more for 2011 did not sufficiently appreciate the evidence from the economists Carmen Reinhart and Kenneth Rogoff that what most often comes after a systemic financial collapse is a decade of weak growth.] (This Time Is Different: Eight Centuries of Financial Folly. Carmen M. Reinhart & Kenneth S. Rogoff).
Economics in the Chapters Robson bookstore in Vancouver is just two little shelf sections--as compared to 100 in fiction. Reinhart & Rogoff is available in paper, but mysteriously American high schools are still under the spell of Kaplan--the glossy section of useless SAT manuals represents significant opportunity costs.
Tell me which high schools in America have most successfully taught such books as "This Time Is Different" by producing an inspired live curriculum for politics, economics, geography, and history, backed up by a print media cycle such as the weekend NYT, WSJ, and Murdoch Sunday Times, as well as 20 news websites daily?
S&P is making shaky political judgments without considering such fundamentals. David Beers does not know what to do in a bookstore. His opinions have no credibility. He is just another Kaplan-style thinker.
#6 Posted by Clayton Burns, CJR on Tue 9 Aug 2011 at 12:23 PM
Felix Salmon:
There are some loose ends here. First of all, if the Senate Banking Committee is going to hold hearings on the specific competence of S&P on sovereign debt, it should carefully consider ABC News video of the David Beers interview in which he failed to give a clear explanation of his notorious mistake.
In fact, Beers snapped that he had to be allowed to finish his explanation, but then, after getting so worked up, went on to other matters. As if there is no coherent explanation. Nor do I believe there is one. Ezra Klein at The Washington Post challenged Beers about the incoherence of the versions of the S&P rationale, and the manifest resulting incoherence of the final product, but could not get a sound response.
S&P is notably unqualified to give political advice. Nor is it, out of its own mouth, always capable of functioning rationally in doing its math. Therefore, this is a case of severe dysfunction that must be ameliorated by hearings at the Senate Banking Committee. If S&P’s business must be crushed, so be it. At least, a sharp downgrade is indicated. (Perhaps Portugal could help).
I am surprised that Felix does not have this story in focus. It is a significant turn in events when Klein reverses himself in tone to this degree.
#7 Posted by Clayton Burns, CJR on Tue 9 Aug 2011 at 03:17 PM
Imagine that! For decades, S&P's over-generous rating lent a veneer of credibility to the U.S. Leviathan's Keynesian-monetarist-corporatist-socialist economy. But now that S&P has slightly lowered its rating to more closely reflect reality, Leviathan's dupes and experts (Do I repeat myself?) are on the attack. Shame on the mess.
http://globaleconomicanalysis.blogspot.com/2011/08/decade-of-stimulus-yields-nothing-but.html
http://www.bloomberg.com/news/2011-08-05/decade-of-fiscal-stimulus-yields-nothing-but-debt-caroline-baum.html
The rather predictable mess, that is.
#8 Posted by Dan A., CJR on Tue 9 Aug 2011 at 03:49 PM