qval blog

Anti-procyclicaity

Headline reads "PE firms close big middle-market funds" up 32% from the first quarter of 2007. Hold on a minute, nice eye catcher but the reality is that the largest funds are distressed debt vehicles. Don't be fooled -- private equity is not buying us out of this one. Banks and more importantly S&Ls definitely aren't buying anyone out of anything unless their hand is forced by regulation, which by the way I don't condone.

"Procyclicality" meaning that bank lending fuels economic crisis by loosening credit standards and in reverse fuels economic downturns by clamping down on credit terms. Also known as irrational exuberance and greed. WaMu, of course, is the poster child this week. In 2006, WaMu was recognized as No. 3 in Mortgage Services Category of America's Most Admired Companies, and their CEO was CEO of the Year in the state of Washington. The similarities between WaMu and the S&L crisis of the 80s are striking. Basically, it all comes down to bad loans extended on overinflated values. This time however, most are blaming it on credit terms, while in the S&L crisis one of the main scapegoats was the appraisal industry approving overinflated property values.

Buying an S&L that you know well, as a former board member, whose value has deflated by 66% in the last year, there has to be a term for that ... "anti-procyclicality"?

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Brett Suchor

What's a Bank Run?

This morning as I grabbed a cup of coffee and The Denver Post I was quickly drawn to the headline, "Fed acts to avert run on banks." Worried that my $250 in deposits might be at risk, I quickly read the article and realized that they were of course talking of a "run" of a different kind. According to the all knowing Wikipedia, "A bank run (also known as a run on the bank) is a type of financial crisis. It is a panic which occurs when a large number of customers of a bank withdraw their deposits because they fear it is, or might become, insolvent. This action can destabilize the bank to the point where it becomes insolvent."

In the case of Bear Stearns the facts aren't quite "bank run" facts, considering we are talking primarily about mortgage securities and an investment bank. Readers need to know that this is not a federally regulated bank, although the bailout is by the Fed. Yet, I am sure that my 96 year old grandfather would be happy to say "told you so" after reading today's headlines. He has always spread his money around among regulated financial institutions in case there was another "run." Yes, he remembers the 1930s well.

I wonder how much confusion the Post headline, "Fed acts to avert run on banks" caused those less informed about the world of finance. The same impact could have been made with a more appropriate headline, e.g., the Wall Street Journal headline, "J.P. Morgan Buys Bear in Fire Sale, As Fed Widens Credit to Avert Crisis." I get that the Fed avoid a possible wide spread financial crisis, yet "run on banks" terminology is actually what fuels a financial crisis.

Having set the record straight on what a "bank run" actually is, let's enjoy a Jim Cramer rant as he delivers a prediction that, "Bear Stearns is Fine!" -- Tues, 3/11/08.

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Brett Suchor